As investors search for new ways to reduce systematic risk in their portfolios, the ongoing interest in emerging alternative asset classes should come as little surprise. Litigation finance, highlighted by its general lack of correlation to public capital markets, is among a handful of alternative investment options to experience recent growth.

In the United States, litigation finance investments have proliferated at a rapid clip, fueled by rising attorney usage of third-party funding and the promise of achieving potentially strong returns via an uncorrelated asset class. The market for litigation finance has expanded in parallel, with a rising number of dedicated litigation funding firms being joined by investment banks, multi-strategy hedge funds, and other institutional players.

To this point, however, market participation has been relatively muted among private equity (PE) investors--this despite litigation finance’s potential to benefit PE-backed portfolio companies involved in a lawsuit, according to LexShares Co-Founder and Chief Executive Officer Jay Greenberg.

“[Litigation finance] is underutilized by private equity,” Greenberg said during an appearance on Frazier & Deeter’s Private Equity 360 podcast. “A lot of times the largest asset private equity-backed companies might have on their balance sheet--and they might not even know it--could be a piece of litigation funding. Prior to commercial litigation finance being democratized, they may have had no way to monetize that asset.”

Companies eyeing an exit strategy, for instance, could improve balance sheet health and valuation by using third-party capital to monetize otherwise illiquid commercial legal claims, which could ultimately facilitate M&A activity. In contrast, a traditional bank or funder is typically unequipped to properly underwrite litigation risks.

Dedicated litigation finance investment firms (such as LexShares) commonly rely on teams of former litigators to expertly assess the merits and potential value of a particular case.

In the 25-minute podcast linked below, Bob Woosley (National Practice Leader, Frazier & Deeter), Douglas Gruener (Partner, Levenfeld Pearlstein), and Greenberg discuss litigation finance as an asset class, including:

  • How investment deals are typically structured
  • What makes litigation finance particularly appealing to private equity investors
  • How investment bankers and attorneys view litigation finance
  • Why the asset class is experiencing rapid growth in the U.S.

LISTEN: Private Equity 360: What is Litigation Finance?