Litigation Finance: Understanding Investment Pathways and Return Mechanisms
- Roni Dersovitz
- Nov 2
- 2 min read
The litigation finance ecosystem operates through a structured capital flow network that determines both investment risk and potential returns. Understanding this flow is essential for investors seeking to optimize their litigation finance portfolio.
Figure 1. The flow of capital between the litigation funding partners
Tracing the Investment Journey of Litigation Funding
The capital journey in litigation funding follows a defined path:
Initial Capital Deployment: Investors provide funds to specialized litigation finance companies that possess expertise in legal case evaluation and risk assessment.
Strategic Capital Allocation: These litigation funders then distribute capital to:
Law Firms: Providing working capital for case development, expert witnesses, and operational expenses
Plaintiffs: Offering financial support during lengthy litigation processes to cover living expenses or medical costs
Case Acquisition: Funding marketing campaigns to identify potential claimants in mass tort scenarios
Capital Utilization: In pre-settlement scenarios, deployed funds primarily support litigation processes from filing through trial preparation and negotiations. Post-settlement capital serves broader strategic functions, enabling law firms to maintain operations while awaiting distributions.
Return Pathways and Risk Factors
The return journey of invested capital follows one of two distinct paths, highlighting the fundamental risk-return relationship in litigation finance:
Successful Resolution Pathway
When litigation concludes favorably through either settlement or court judgment:
Award Distribution: The defendant pays the settlement or judgment amount to the plaintiff/law firm.
Priority Repayment: Litigation funders typically receive priority repayment from these proceeds.
Return Multiplication: Funders collect their initial investment plus a predetermined return multiple or percentage.
Investor Distribution: The litigation finance company then distributes returns to its investors according to the investment agreement.
Unsuccessful Outcome Scenario
When litigation results in an unfavorable outcome:
Non-Recourse Structure: Most litigation funding agreements are non-recourse, meaning neither the plaintiff nor the law firm bears responsibility for repaying the investment.
Complete Capital Loss: Investors typically lose their entire investment in the specific case.
Portfolio Impact: This highlights the importance of diversification across multiple cases to mitigate individual case failure risk.
Post-Settlement Advantage: The Risk-Reduced Alternative
The post-settlement funding model presents a distinctive advantage in the capital flow ecosystem:
Verified Liability: By investing only after settlements or judgments are established, the most significant risk factor—case outcome uncertainty—is eliminated.
Defined Payment Streams: Post-settlement investments involve purchasing established payment rights from plaintiffs or law firms who prefer immediate liquidity over waiting for structured settlement payments.
Reduced Intermediary Risk: With a settlement in place, the primary remaining risk factors involve payment timing rather than payment occurrence.
Post-settlement funding carries lower risk than pre-settlement investments. This significantly altered risk profile makes post-settlement funding particularly attractive for investors prioritizing capital preservation while still seeking attractive returns in the alternative investment space.
Roni Dersovitz is the founder of Tower 3 Investments, LLC, a firm offering investment opportunities in Post-Settlement/Judgment Litigation Funding. Mr. Dersovitz has 14 years of experience as a practicing personal injury attorney and has managed portfolios of litigation-based receivables since 1998. To learn more about access to differentiated returns through litigation finance, visit www.Tower3Investments.com or contact us at info@Tower3Investments.com.
