Different Risks, Different Returns: Why Litigation Finance Performs When Private Credit Doesn't

Private credit has crossed $1.3 trillion in assets under management, and the cracks are beginning to show. Default rates have climbed to approximately 5%, nearly double the 2–2.5% historical average. Morgan Stanley has projected that figure could reach 8%. Redemption gates are being imposed, spread compression is reversing, and mark-to-market dispersion is capturing attention across institutional portfolios.

For allocators with meaningful private credit exposure, the question is no longer whether to reassess. It is where to find a genuine hedge.

What Is Driving the Private Credit Stress

Three forces are converging simultaneously. Redemption pressure is creating liquidity stress at funds that relied on subscription capital to finance exits. Slowing deal flow is compressing new deployment. And mark-to-market dispersion is exposing the opacity that private markets have long relied upon to smooth volatility.

US banks have made approximately $300 billion in loans to private credit providers, according to Moody's. When redemption pressure, slowing deal flow, and valuation dispersion hit at the same time, the usual subscription momentum simply may not be there to absorb it.

There is also a sector concentration problem. Morgan Stanley has estimated that software exposure in direct lending runs approximately 26% of portfolios. AI disruption is not being kind to that segment, and funds with heavy SaaS exposure are already feeling it.

Why Litigation Finance Carries Zero Correlation to These Risks

Litigation finance, also called litigation funding, is an alternative investment that provides capital to claimants or law firms in exchange for a share of proceeds from a successful legal outcome. Returns are driven by legal merit, evidence quality, judicial decisions, and settlement dynamics. Not by interest rates, credit spreads, GDP growth, or whether a portfolio company's SaaS metrics are deteriorating.

"The risks in litigation finance are real, but they are categorically different from the risks driving dislocations in traditional capital markets," says Roni Dersovitz, founder of Tower 3 Investments. "When private credit is stressed, our portfolio is not. Not because we are risk-free, but because we are exposed to an entirely different kind of risk."

That independence has held across every major stress period. During COVID-19, private credit NAVs fell 20–40% while litigation finance portfolios remained largely intact. During the rate shock of 2022–2024, true defaults rose and amend-and-extend structures became widespread, while litigation finance returns were structurally unaffected. The current environment, with its redemption gates, software defaults, and escalating default rate warnings, presents no direct exposure risk to a litigation finance portfolio.

The Five Risk Disconnects That Matter for Portfolio Construction

Litigation finance carries no interest rate sensitivity. There are no debt covenants to breach, no floating rate obligations, and no interest coverage ratios to maintain. The stress hitting leveraged borrowers at elevated rates is irrelevant to a litigation portfolio.

It carries no sector concentration risk. Case outcomes in commercial litigation, intellectual property, antitrust, or arbitration are not affected by whether agentic AI disrupts a SaaS business model.

It carries no refinancing risk. Capital is deployed against a discrete legal event with a defined resolution path, not an ongoing debt service obligation facing a maturity wall.

It carries no mark-to-market volatility. There is no liquid secondary market creating daily pricing pressure. Cases either resolve or they do not.

It carries no redemption mechanics. Capital is committed to discrete legal investments with defined timelines, not subject to the subscription and redemption dynamics creating liquidity stress across private credit.

The Tower 3 Approach: Post-Settlement Litigation Finance

Not all litigation finance carries the same risk profile. Strategies that fund unresolved cases carry binary outcome risk. Tower 3 Investments focuses exclusively on post-settlement and post-judgment investments, where the legal outcome risk is already gone. What remains is managing the time value of money: conservative underwriting of how long it will take to receive proceeds from a case that has already been decided.

Risks in litigation finance are real and identifiable, including duration, pro rata dilution, mass tort timeline extensions, fee accumulation, and settlement delays. Tower 3 has built its approach around understanding exactly where value is destroyed and underwriting those risks with discipline.

For institutional investors seeking an alternative investment that is structurally uncorrelated to the forces currently stressing private credit, litigation funding deserves a serious look.

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.

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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 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.