Litigation finance
Portfolio financing
status: draft
Portfolio financing
Portfolio financing funds multiple cases through a single structure, using diversification to smooth the binary outcomes inherent in individual cases. Cross-collateralization allows gains from winners to offset losses from losers.
Why portfolios exist
For funders:
- Variance reduction: a 15% loss rate doesn’t matter if the portfolio still returns 1.8x
- Capital efficiency: one diligence process covers a diversified pool
- Investor appetite: institutional capital prefers diversified risk profiles
- Return predictability: portfolio-level returns are more modelable than single-case outcomes
For plaintiffs/law firms:
- Relationship financing: ongoing capital availability across multiple cases
- Better terms: portfolio economics support lower per-case pricing
- Flexibility: draw capital as cases require rather than case-by-case negotiation
Structure
Core mechanics:
| Element | Typical Terms |
|---|---|
| Committed capital | $50M-$500M per portfolio |
| Deployment period | 2-3 years |
| Minimum cases | 10+ for meaningful diversification |
| Maximum single-case concentration | 10-15% of committed capital |
| Cross-collateralization | Yes—portfolio-level return calculation |
| Advance rate | 30-60% of modeled recovery value |
How cross-collateralization works:
Without cross-collateralization (case-by-case accounting):
- Case A: $3M deployed, wins $9M → funder takes $9M
- Case B: $3M deployed, loses → funder takes $0
- Plaintiff gets nothing from Case A (funder already made target); absorbs full loss on Case B
With cross-collateralization (portfolio accounting):
- Combined deployment: $6M
- Combined recovery: $9M
- Portfolio return calculated on blended basis
- Losses are absorbed by gains; both parties share portfolio-level economics
Cross-collateralization benefits both parties by smoothing outcomes. The funder gets a more predictable return stream; the plaintiff/firm gets downside protection from single-case losses.
Economics
Portfolio returns are lower per-case than single-case funding—that’s the trade-off for diversification.
| Metric | Single-Case | Portfolio |
|---|---|---|
| Target MOIC (wins) | 2.5-4.0x | 1.6-2.2x blended |
| Target IRR | 25-50%+ | 18-30% |
| Loss ratio | 10-20% | 8-15% |
| Duration | 2-5 years | 2-4 years average |
Worked example
Portfolio profile:
- 15 commercial cases
- Total committed: $30M
- Total deployed: $25M over 2 years
- Average case size: $1.67M
Assumed outcomes:
- Win rate: 85% (13 wins, 2 losses)
- Average MOIC on wins: 2.0x
- Average duration: 3 years
Return calculation:
| Component | Calculation | Amount |
|---|---|---|
| Winning cases | 13 × $1.67M × 2.0x | $43.4M |
| Losing cases | 2 × $1.67M × 0x | $0 |
| Total proceeds | $43.4M | |
| Total deployed | $25M | |
| Portfolio MOIC | $43.4M / $25M | 1.74x |
| IRR | Over 3-year average | ~20% |
Sensitivity analysis
Portfolio returns are sensitive to loss rate and win multiple:
| Loss Rate | Win MOIC | Portfolio MOIC |
|---|---|---|
| 10% | 2.0x | 1.80x |
| 15% | 2.0x | 1.70x |
| 20% | 2.0x | 1.60x |
| 15% | 1.8x | 1.53x |
| 15% | 2.2x | 1.87x |
Illustrative pricing. See pricing disclaimer.
A 5% change in loss rate has roughly the same impact as a 0.2x change in win MOIC.
Diversification requirements
Portfolio construction is how funders manage binary case risk.
Dimensions of diversification:
| Dimension | Target | Rationale |
|---|---|---|
| Case type | No >25% in single type | Contract, IP, securities, antitrust have different risk profiles |
| Jurisdiction | Spread across circuits/states | Avoid concentration in courts with unfavorable precedent |
| Defendant | No >15-20% single counterparty | Defendant bankruptcy impairs all claims against it |
| Law firm | No >40% with single firm | Firm financial distress affects all cases |
| Resolution timing | Staggered maturities | Avoid J-curve concentration |
Correlation analysis:
Even “diversified” portfolios can have hidden correlations:
| Correlation Risk | Example | Mitigation |
|---|---|---|
| Same defendant | 5 cases against Company X | Defendant concentration limits |
| Same legal theory | Multiple antitrust cases relying on same precedent | Theory diversification |
| Same jurisdiction | All cases in Delaware Chancery | Geographic spread |
| Same judge | Multiple cases before Judge Y | Docket analysis |
| Same industry | All tech IP cases | Industry diversification |
An adverse ruling on a common legal theory can impair multiple positions simultaneously. True diversification requires independence across all dimensions.
Distribution mechanics
Timing options:
| Approach | How It Works | Trade-offs |
|---|---|---|
| Interim distributions | Proceeds distributed as cases resolve | Better LP liquidity; more administrative complexity |
| Pooled until wind-down | All proceeds held until portfolio matures | Simpler; worse LP liquidity |
| Hybrid | Interim distributions above capital return; final true-up at wind-down | Balances liquidity and simplicity |
Waterfall structure:
1. Return of deployed capital (pro rata across LPs)
2. Preferred return (if any)—typically 8-10%
3. Catch-up to GP (if any)
4. Carried interest split (typically 80/20 or 75/25)Reserve and follow-on funding
Portfolios require capital reserves beyond initial case commitments.
What reserves cover:
| Purpose | Typical Reserve |
|---|---|
| Cost overruns | 15-25% of committed capital |
| Case extensions | 5-10% for appeals, retrials |
| Opportunistic additions | 10-20% for new cases during fund life |
Stress testing:
What happens if multiple cases need additional funding simultaneously?
- Conservative portfolios maintain 25-30% of committed capital in reserve
- Liquidity stress tests model scenarios where 3-4 cases need follow-on funding in same quarter
- GP capital call policies should accommodate sudden funding needs
Portfolio vs. law firm facilities
Both provide diversified exposure, but the structures differ:
| Factor | Portfolio Financing | Law Firm Facility |
|---|---|---|
| Counterparty | Funder deals with multiple plaintiffs | Funder deals with one firm |
| Recourse | Non-recourse to case outcomes | Limited recourse to firm |
| Security | Interest in case proceeds | Contingent fee receivables |
| Control | Funder approves each case | Borrowing base formula |
| Pricing | Return share (equity-like) | SOFR + spread (debt-like) |
| Duration | Case-dependent | Stated maturity with extension |
Law firm facilities are more debt-like; portfolio financing is more equity-like. Different risk/return profiles for different investor preferences.
Diligence for portfolio investments
Portfolio diligence operates at two levels: sampling individual cases and analyzing portfolio-level construction.
Case sampling
Deep dive on a representative sample (typically 20-30% of cases by value):
- Full legal merit review on sampled cases
- Damages analysis and recovery expectations
- Counsel evaluation
- Defendant ability to pay
Portfolio-level analysis
| Focus Area | What to Assess |
|---|---|
| Diversification | Does the portfolio actually achieve independence across dimensions? |
| Concentration | Any single-case, defendant, or law firm concentration above limits? |
| Correlation | Hidden correlations that could cause multiple losses? |
| Track record | Historical win rate, MOIC, IRR by vintage |
| Reserves | Adequate capital for overruns and follow-on funding? |
| Duration mix | Staggered resolution timing or concentrated? |
Manager evaluation
For portfolio exposure, manager selection matters as much as case selection:
- Investment team credentials and litigation background
- Case selection process and approval governance
- Historical approval rate vs. win rate
- Valuation methodology and reporting
- GP commitment and alignment
status: draft
Related: Single-Case Funding · Law Firm Finance · Diligence Guide
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