Litigation financing has quickly grown from a fledging concept into a robust industry. The concept is simple: in exchange for a share of any proceeds, a financing firm agrees to pay all or a portion of the plaintiff’s legal fees. The industry focuses on corporate claims, and the range of subject matter of the underlying cases is wide, from intellectual property disputes to standard breach of contract matters. Deal structure and sizes vary, particularly with regard to parameters around the percentage of recovery and the amount of the total fees contributed (including caps).

There are at least four different opportunities for PE firms in this area. First, PE firms have invested in litigation financing companies. Second, PE firms can arrange for a financing firm to back a litigation for one of its portfolios companies, thus resulting in significant cost savings. Third, a secondary market is emerging in which the financing firms sells shares of a particular investment or case. Fourth, PE firms can use financing sources to reduce the price of a target company by carving out the liability for ongoing legal fees.

Many of the fundamental issues and questions surrounding the industry have been resolved by various courts (though there still may be some room for challenge), including: (1) matters of attorney-client privilege; (2) control of the litigation strategy and any settlement; and (3) arcane rules against investments in litigation.

But certain issues are critical in assessing a PE investment at any stage of the process, including: (1) comprehensive due diligence on the strength of the underlying claims; (2) confidence in the law firm handling the litigation for the plaintiff; (3) a full understanding of the opposing party, its counsel and the court; and (3) a thorough investigation as to the ability to collect on any verdict.