status: draft

Secondaries and liquidity

The secondary market for litigation finance allows investors to buy and sell existing case or portfolio positions before resolution. This market provides liquidity to an otherwise illiquid asset class and creates investment opportunities at different risk/return profiles than primary deployment.

Market structure

Who sells

Sellers come to the secondary market for various reasons:

Seller Type	Motivation
Funds at end of life	GP must liquidate remaining positions before fund wind-down
Funders rebalancing	Reduce concentration in specific case types, jurisdictions, or defendants
Distressed sellers	Need liquidity due to LP redemptions, fund financial stress, or capital calls elsewhere
Strategy changers	Exiting litigation finance or shifting to different case types

Who buys

Buyer Type	Investment Thesis
Secondary litigation finance funds	Specialists who underwrite de-risked positions at discounted prices
Credit funds seeking exposure	Fixed income investors attracted by litigation’s uncorrelated return stream
Insurance companies	Long-duration capital with appetite for legal risk
Strategic buyers	Law firms, corporates, or individuals with specific interest in the underlying case

Transaction size

Position Type	Typical Size
Single-case	$1M-$20M
Portfolio	$5M-$100M+

Smaller single-case positions (under $1M) rarely trade—transaction costs don’t justify the effort. Larger portfolios ($100M+) trade but require specialized buyers with significant capital.

Intermediaries

The secondary market is intermediated, not exchange-traded. Westfleet Advisors is the leading placement agent specializing in litigation finance secondary transactions. They maintain buyer relationships, run confidential auction processes, and provide valuation guidance.

Other advisors and broker-dealers participate, but the market remains concentrated among a small number of specialists who understand litigation-specific diligence requirements.

Pricing and discounts to NAV

Secondary positions trade at discounts to estimated net asset value (NAV). The discount reflects case stage, liquidity premium, and buyer diligence costs.

Discount by case stage

Case Stage	Typical Discount to NAV	Rationale
Early stage (pre-discovery)	30-50%	Maximum uncertainty; discovery can reveal fatal weaknesses
Mid-stage (post-discovery, pre-summary judgment)	15-30%	Key facts known; legal outcome still uncertain
Late stage (post-summary judgment, pre-trial)	10-20%	Survived SJ; trial risk remains
Post-verdict, pending appeal	5-15%	Judgment exists but appeal risk remains
Portfolio (diversified)	10-25%	Diversification reduces risk; discount reflects illiquidity

Why discounts exist

Factor	Impact on Discount
Illiquidity	No active market; buyer sets price for immediate liquidity
Information asymmetry	Seller knows more about case developments than buyer can diligence
Diligence costs	Buyer incurs legal fees to underwrite—must be compensated
Duration risk	Time to resolution is uncertain; discount compensates for capital lock-up
Adverse selection	Sellers may be exiting for negative reasons not disclosed

When discounts narrow

Certain events compress secondary discounts:

Favorable rulings: Summary judgment denied for defendant, motion to dismiss denied
Active settlement talks: Mediation scheduled or ongoing negotiations signal resolution
Imminent trial: Case on trial calendar reduces duration uncertainty
New evidence: Documents or testimony strengthen the case
Defendant financial events: Defendant raises capital, sells assets, or shows ability to pay

Discounts widen on adverse rulings, case delays, defendant bankruptcy risk, or plaintiff-side developments (counsel withdrawal, key witness issues).

Transaction process

Timeline

Transaction Type	Typical Timeline
Single-case	4-8 weeks
Portfolio	8-16 weeks

Complex portfolios with multiple case types, jurisdictions, or counsel relationships take longer. Expedited sales (distressed sellers) can close faster but accept deeper discounts.

Process steps

1. Confidential Marketing (Week 1-2)

Seller engages placement agent or approaches buyers directly under NDA. Marketing materials include:

Position summary (case type, stage, expected recovery, current investment basis)
Original diligence materials (redacted as appropriate)
Current status and recent developments
Seller’s NAV estimate

2. Preliminary Diligence (Week 2-4)

Interested buyers conduct initial review:

Case docket analysis
Public filings and court records
Independent legal assessment of case merit
Defendant financial analysis

3. Deep Diligence with Counsel Access (Week 3-6)

Serious bidders request:

Access to plaintiff’s counsel for case briefing
Expert reports and deposition transcripts
Settlement demand history and defendant responses
Budget and remaining cost estimates

This requires plaintiff consent and counsel cooperation. Cases where counsel is uncooperative or plaintiff resists disclosure are harder to trade.

4. Bid and Negotiate (Week 5-7)

Buyers submit binding or indicative bids. Negotiations cover:

Purchase price
Assumption of future funding obligations (if any)
Representations and warranties
Indemnification scope

5. Documentation (Week 6-8)

Purchase agreement addresses:

Assignment of funding agreement rights
Consent from plaintiff and counsel
Representations about case status
Post-closing cooperation obligations

6. Closing

Funds transfer; assignment becomes effective. Buyer steps into seller’s position with all rights and obligations under the original funding agreement.

Most litigation funding agreements require plaintiff consent to assign the funder’s position. Key considerations:

Consent Type	Implication
Blanket consent	Plaintiff pre-approved assignment to any buyer—easiest to trade
Consent not to be unreasonably withheld	Plaintiff can object only for good reason—some friction
Affirmative consent required	Plaintiff must approve specific buyer—can block deals
No assignment	Position cannot be transferred without renegotiating funding agreement

Sophisticated funders build in assignment rights when structuring the original investment. Lack of assignment rights significantly impairs liquidity.

Liquidity considerations for initial investment

Secondary market dynamics should inform primary investment structuring:

Build in assignment rights upfront

Negotiate broad assignment rights when funding cases:

Blanket consent to assignment
Right to transfer to affiliates without consent
Right to pledge position as collateral
Notice-only requirement (no consent needed)

These rights cost nothing at origination but are difficult to negotiate later.

Understand exit universe before investing

Before committing capital, assess:

Who are potential secondary buyers for this case type?
Does the case profile (size, jurisdiction, case type) match buyer preferences?
Is the position large enough to attract buyer attention?
Will the litigation agreement terms permit assignment?

Cases that are too small, too idiosyncratic, or have restrictive transfer provisions will be illiquid regardless of merit.

Price in illiquidity discount

Assume a 15-25% illiquidity discount when modeling primary investments.

Even if you plan to hold to resolution, forced exits happen. Fund wind-downs, LP redemptions, rebalancing needs—circumstances change. The secondary discount should be factored into your IRR expectations.

Portfolio exposure is more liquid than single-case

Secondary buyers prefer diversified positions:

Portfolio risk is more modelable
Due diligence scales better across multiple cases
Single-case binary risk is harder to underwrite without deep expertise

If liquidity matters, favor portfolio exposure over concentrated single-case positions.

Fund structure matters

Closed-end fund structures create natural secondary supply:

Fund life forces liquidation of unresolved positions
GP incentive to realize carried interest drives exit activity
LP secondary market provides another liquidity layer (selling fund interests, not individual cases)

Evergreen or open-ended structures have different liquidity dynamics. Understand how your fund structure affects exit options.

Secondary market investment strategy

The secondary buyer’s edge

Secondary buyers have structural advantages:

Advantage	How It Creates Value
De-risked positions	Cases have progressed; early-stage uncertainty resolved
Distressed seller dynamics	Forced sellers accept discounts above fair value
Information from case progress	Discovery complete, rulings on record, settlement history visible
Shorter duration	Less time to resolution reduces capital lock-up
Negotiating leverage	Illiquid market gives buyers price-setting power

Risks specific to secondary

Risk	Mitigation
Adverse selection	Understand why seller is exiting; diligence recent developments intensively
Stale information	Require current case status; speak directly with counsel
Assumption of obligations	Understand remaining funding commitments; budget for overruns
Relationship challenges	New funder inherits existing relationships; counsel/plaintiff may resist
Documentation gaps	Review original funding agreement carefully; verify assignment mechanics

Building a secondary practice

Requirements for systematic secondary investing:

Sourcing relationships with placement agents and direct sellers
Legal team capable of rapid case diligence
Valuation capabilities for diverse case types
Capital available for opportunistic deployment
Relationships with counsel who will cooperate with buyer diligence