The Perils of Pre-Settlement Funding — Lessons from Hernia-Mesh Mass Torts

When institutional investors evaluate alternative investment opportunities in litigation funding, default risk typically dominates the conversation. However, a more insidious challenge lurks beneath the surface: duration risk. Understanding this distinction isn't just academic—it's the difference between meeting return targets and watching IRR deteriorate over years of trapped capital.

Recent mass tort cases reveal a troubling pattern. Portfolio financing that underwrites on 36-month assumptions frequently extends to 72, 96, or even 120 months in reality. This timeline expansion doesn't just delay returns; it fundamentally restructures the risk-return profile of the entire investment.

Real World Duration Risk: The Hernia-Mesh Litigation Timeline

The hernia-mesh mass torts provide a stark illustration of how duration assumptions can diverge from reality. Consider two comparable cases:

The Kugel Hernia Patch Litigation spanned roughly a decade, distributing approximately $184 million across 2,600 claims. While lengthy, this case at least reached full resolution.

By contrast, the Bard Hernia Mesh litigation (MDL 2846) has now entered its seventh year with a Settlement Agreement reached and a Settlement Program established for the 33,000 claimants.  The total value of settlement and payment schedule was negotiated to a maximum of $1.3B to resolve up to 33,000 filed and served cases.  The settlement amount is being paid by Bard in periodic installments of specified amounts with the first installment having been paid into the Settlement Fund on September 30, 2024 with the final installment scheduled to be paid on November 15, 2028.  The settlement options provided each eligible claimant three options: Voluntary Discontinuation, a Quick Pay Program, and a Traditional Pay Program.  

Key Comparative Metrics

While both cases reached first bellwethers within 2.5-3 years, both have required 4-6 years to even enter settlement phases. The operational complexity of lien resolution, medical audits, and plaintiff tiering creates bottlenecks that extend well beyond any initial underwriting model.

How Extended Timelines Destroy Value in Litigation Funding

When resolution timelines stretch beyond initial projections, law firms commonly face cash flow constraints. This triggers restructuring or refinancing—trapping investors' capital in aging, underperforming assets.

The consequences for limited partners are severe:

• Capital Lock-Up: Committed capital remains unavailable for redeployment, crushing fund-level IRR even if individual case outcomes prove favorable.

• Fee Compression: Multiple refinancing cycles layer additional fees on top of existing positions, effectively throwing good money after bad just to preserve collateral.

• Dilutive Terms: Restructurings often require investors to accept dilutive terms or make additional advances simply to keep law firms operational.

• Alignment Breakdown: As fees compound over extended timelines, the alignment between general partners and limited partners fractures, with GPs collecting management fees while LPs absorb duration penalties.

"When duration extends two or three times beyond underwriting assumptions, even strong case outcomes can't overcome the IRR compression," notes Roni Dersovitz, founder of Tower 3 Investments. "Duration risk is the silent killer of returns in pre-settlement litigation finance."

Pre-Settlement vs. Post-Settlement/Judgment: A Critical Distinction in Asset-Based Lending

Pre-settlement portfolio financing has historically marketed equity-like returns—targeting 20-40%+ IRR based on assumed 3-4 year maturities. The pitch sounds compelling: strong return potential, diversified case exposure, and robust origination volume.

The reality proves far messier. Unpredictable litigation timelines can push those maturities out indefinitely, transforming what looked like a 30% IRR opportunity into a low-double-digit return over seven to ten years.

Post-settlement/judgment receivables offer a fundamentally different risk profile. Once liability is resolved and settlement amounts approved, the remaining variable is timing—not outcome. This shift from outcome risk to duration risk may sound subtle, but it's transformative for institutional capital.

Key Structural Differences

• Risk Profile: Pre-settlement funding carries high exposure to both case outcome and timeline uncertainty. Post-settlement/judgment funding isolates duration as the primary risk factor, with liability already resolved.

• Collateral Quality: Pre-settlement assets represent future claim values subject to negotiation and judicial discretion. Post-settlement/judgment receivables generally represent approved settlement or judgment amounts with defined distribution mechanisms.

• Duration Expectations: Pre-settlement investments typically project 1.5-5+ year hold periods but frequently extend further. Post-settlement/judgment receivables target 6-18 month expected durations with materially less variance.

• Return Characteristics: Pre-settlement strategies target equity-like returns (20-40%+ IRR) to compensate for outcome and duration risk. Post-settlement/judgment strategies deliver fixed income-style returns (mid-single to low-double digit IRR) with greater predictability.

• Underwriting Focus: Pre-settlement underwriting evaluates case merits, legal strategy, and attorney quality—inherently subjective analysis. Post-settlement/judgment underwriting assesses distribution certainty and payment timing—more quantifiable factors.

Strategic Positioning in the Litigation Finance Market

For discerning investors, the structural differences between pre-settlement and post-settlement/judgment strategies create distinct portfolio applications. Pre-settlement financing suits investors seeking aggressive growth with high risk tolerance and long capital lock-up acceptance. The strategy requires deep legal expertise, extensive due diligence capabilities, and patience for multi-year hold periods.

Post-settlement/judgment funding aligns more naturally with institutional mandates emphasizing capital preservation, liquidity visibility, and repeatable returns. By entering later in the litigation lifecycle, investors achieve stronger underwriting and shorter hold periods without assuming the structural duration risk that burdens earlier-stage financing.

This positioning also addresses a market inefficiency. As mass tort complexity continues to grow—along with the time required for law firms and plaintiffs to receive their fees and awards—the performance divergence between pre-settlement and post-settlement/judgment strategies widens. Operational bottlenecks in plaintiff outreach, medical records verification, and lien resolution create extended timelines that predominantly impact pre-settlement positions.

Engineering Duration Downward: A De-Risked Approach

Duration risk can never be fully eliminated from litigation finance. Legal systems inherently involve procedural complexity, administrative delays, and coordination challenges across multiple parties. However, duration exposure can be engineered downward through strategic asset selection.

Tower 3 Investments intentionally focuses on post-settlement/judgment receivables, targeting historically shorter time-to-payment windows. This approach delivers consistent, reliable outcomes within a less crowded, more institutional-grade segment of the legal finance market. By avoiding the structural duration risk of pre-settlement financing, the strategy maintains return predictability while offering meaningful yield premiums over traditional fixed income.

Implications for Alternative Investment Portfolios

As institutional investors increasingly explore litigation finance as an alternative investment, understanding duration risk becomes essential. The lessons from hernia-mesh mass torts and similar protracted cases underscore a fundamental principle: in litigation funding, time is the enemy of returns.

When building diversified alternative investment portfolios, post-settlement/judgment receivables offer a compelling risk-return profile. The strategy provides:

• Defined collateral with approved payment amounts

• Shorter expected hold periods reducing capital lock-up

• Lower correlation to traditional fixed income and equity markets

• Attractive risk-adjusted returns without equity-level volatility

• More predictable cash flow characteristics for liability matching

The litigation finance market continues to create opportunities for investors who understand the nuanced differences between strategy types and duration profiles. Tower 3 Investments specializes in post-settlement/judgment receivables, delivering institutional-grade legal finance investments. Connect with our team to explore how post-settlement/judgment litigation funding can strengthen your alternative investment portfolio.

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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 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.