As in other fund structures, the litigation funds are paid a management fee and then take a hefty cut of the settlement, depending on the success of the case. With litigants, the funds negotiate their return up front. In some cases, it’s a percentage of the settlement; in others, it’s a multiple of the money they invest depending on how long it takes for the case to settle. If it takes three years, for example, they might ask to be paid back three times their money.
In all cases, the investment is nonrecourse financing, meaning if the company or lawyers lose the case, they don’t owe the investors anything. This aspect is appealing because law firms and companies can minimize some of their risk while still having access to working capital. It’s also why investors need to ensure that they spread their money across many cases.
“There isn’t any case I’d put more than $25,000 in,” Mr. Parizek said. “There are some I liked and thought it would be great to put in $250,000 and win big, but you never know.”
Peter Suarez, who runs a marketing and lead generation company in San Diego, began investing in single cases, building a diversified portfolio. But, he said, as more investors began seeking high-quality cases, he turned to funds.
“It was already getting more difficult to invest individually,” he said. “I didn’t want to lose out on the opportunities.”
Of the 47 cases he has invested in since 2015, Mr. Suarez said, his return was 38 percent. But he is paring back his investment in litigation finance.
“I’ve only had five losses, but when you lose, you lose everything,” he said.
His other complaint is that there is no way to roll these investments into something longer term. The case pays its returns, and the investor is left with that money to reinvest. There is not the same cash flow he gets from, say, real estate investing.
Article source: https://www.nytimes.com/2020/06/19/your-money/lawsuits-litigation-finance-coronavirus.html
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