What Happens When Investors Cut Out the Litigation Funder?
Bloomberg reported that investors are increasingly bypassing litigation funders altogether, putting capital directly into law firms and case portfolios instead. The appeal is straightforward — more control, more of the proceeds, lower fees. The question worth asking is whether that appeal survives contact with what litigation finance actually requires investors to underwrite.
Cutting out the general partner changes more than the fee structure. It changes who is responsible for pricing risk. Traditional litigation funders exist specifically to underwrite two distinct and difficult variables: outcome risk (will the case resolve favorably) and duration risk (how long will resolution take). Bloomberg's own reporting makes the point directly — Westfleet Advisors' founder told the publication that underwriting litigation is fundamentally different from underwriting credit, and considerably harder to do well. If experienced funders find this difficult, it is worth asking plainly what gives a first-time direct investor confidence they will do better.
The MOIC Problem
Much of the capital moving toward direct investing has historically been drawn to litigation finance GPs by headline target returns — the multiple on invested capital funders advertise. At Tower 3, we have long believed that MOIC is the wrong starting point. The more important question is the risk profile of the underlying asset, priced accordingly, before any return target is discussed. Skipping the intermediary doesn't remove that pricing problem. It just relocates it to an investor with less practiced judgment for solving it.
The Irony in the Insurance Layer
Bloomberg's reporting surfaces a telling detail: many direct investors are now leaning heavily on insurance products to protect against the very outcome and duration risk they chose to underwrite themselves. That is worth sitting with. An investor cuts out the funder to reduce cost, then pays a premium to hedge the risk that funder used to manage as part of its underwriting discipline. The cost reduction is, at minimum, partially undone by the cost of the hedge — and the underlying risk still has to be correctly assessed for the hedge itself to be priced sensibly.
Zombie Assets: What Mispriced Duration and Outcome Risk Produces
We have written previously about the "zombie asset" problem that emerges when duration and outcome risk are underpriced at the outset. Cases extend well beyond their intended terms. Investors face difficulty collecting or recouping capital. Management fees continue to accrue on positions that have effectively stopped moving. For LPs, the consequences compound: capital stays trapped, and realized returns erode against the return that was originally modeled.
This is not a hypothetical concern. Bloomberg has separately reported quantifiable evidence that litigation finance valuations have run ahead of fundamentals, with a restructuring wave now underway in the secondary market for these assets. That dislocation is direct evidence of what happens when outcome and duration risk are mispriced at scale — by professionals who do this for a living.
The Case for Disciplined, Experienced Capital
None of this means direct investing is inherently unsound. It means the underwriting discipline that litigation finance requires doesn't disappear because the fee structure changes. Investors considering this path should ask whether they are equipped to underwrite binary legal uncertainty and timing variability simultaneously — the same two variables that have already produced a distressed secondary market among professional funders.
Our own approach reflects a different starting point. Disciplined portfolio construction is rarely achieved by adding complexity — it is achieved by removing unnecessary risk. Post-settlement/judgment funding is not speculative legal exposure. It is an advance against a legal receivable, underwritten on a loan-to-value basis against a known recovery pool. The outcome variable is already resolved; only the duration variable remains, and it is materially more measurable than the combined risk direct investors are now taking on unresolved cases.
For investors evaluating where to deploy capital in this asset class, the more durable answer isn't going it alone. It's partnering with capital that understands the difference between pre- and post-settlement/judgment risk — and prices each one accordingly.
About Tower 3 Investments
Tower 3 Investments delivers consistent returns through post-settlement and post-judgment litigation investments, serving institutional investors and sophisticated allocators seeking uncorrelated, asset-based lending alternatives.
Ready to explore post-settlement/judgment litigation finance opportunities? Contact Tower 3 Investments to learn how our specialized approach to funding settled or post-judgment cases can enhance your alternative investment portfolio.
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.
