Traditionally, litigation has been viewed as a cost center—a necessary but undesirable expense to enforce rights or defend against external threats. However, this narrow understanding has evolved over the past decade with the emergence of litigation finance, which has redefined how both litigation and value creation are approached within investment strategies.
Litigation finance—also known as litigation funding—involves third-party funding of legal claims in exchange for a portion of the recovery. This funding may be deployed on a case-by-case basis or across a portfolio of claims. These investments are attractive because they are largely uncorrelated with traditional financial markets, positioning them as alternative assets with potentially high returns independent of economic cycles.
Beyond litigation finance, however, lies an even more innovative frontier: litigation as a proactive investment tool. Increasingly, investment managers across sectors should look at litigation as a way to not merely protect existing investments but unlock latent value, improve returns, and even drive primary fund strategies.
Below are three major investment categories where litigation can be used to generate alpha:
Distressed Debt and Credit Funds
Distressed debt and credit funds typically invest in assets trading below par due to financial distress, legal complications, or other impairments. These funds often acquire debt instruments at steep discounts and pursue various strategies to extract value. Litigation can be central to this effort. For instance:
- Enforcement of Contractual Rights: If a debtor defaults, litigation can be used to enforce covenants, accelerate repayment, or seize collateral.
- Control-Oriented Litigation: When the investment strategy involves taking control of a company or its assets, lawsuits may be filed to gain access to secured assets or equity via restructuring processes.
- Value Extraction: If taking control isn’t the objective, litigation can be used to force outcomes such as settlements, bankruptcies, or buyouts that yield financial returns.
In this context, litigation becomes not just a response to risk but a deliberate mechanism to generate alpha.
Real Estate Investment Funds
Real estate funds—whether focused on residential, commercial, or mixed-use properties—can use litigation to access undervalued or otherwise inaccessible assets. This is particularly effective when targeting properties with distressed mortgages or title issues. Key applications include:
- Foreclosure Litigation: Funds can purchase non-performing loans, initiate foreclosure proceedings, and acquire the underlying properties at a discount.
- Accessing Off-Market Assets: Litigation may be used to resolve disputes involving property ownership, zoning, or liens, thereby unlocking investment opportunities that are not otherwise available through traditional channels.
- Strategic Asset Rotation: For funds with active turnover strategies, litigation can help expedite the liquidation or sale of properties by resolving legal bottlenecks.
Through these mechanisms, litigation enhances real estate deal flow and portfolio optionality, expanding the investable universe.
Private Equity and Portfolio Companies
Private equity funds are uniquely positioned to benefit from litigation-driven value creation, both in managing risks and in generating new revenue streams. Common litigation strategies include:
- Portfolio Cleanup: Litigation may be necessary to resolve legal liabilities, IP disputes, or shareholder conflicts, thereby making companies more attractive for exit.
- Value Creation via Claims: Many companies underutilize litigation due to resource constraints or strategic hesitation. PE funds can finance or directly pursue claims—such as breach of contract, IP infringement, or antitrust violations—unlocking unrecognized value.
- Control Through Litigation Funding: Funds may negotiate partial control or board representation in exchange for funding significant litigation efforts, especially when the legal claims are material to the company’s valuation.
In some cases, funds structure their investments to act as de facto litigation financiers within the portfolio, blending traditional PE strategies with elements of litigation finance.
Conclusion: Litigation as Alpha
Litigation is no longer merely a defensive tool—it is increasingly becoming a sophisticated, proactive instrument for value creation. Investment managers who recognize and harness this potential can access hidden value, improve portfolio returns, and differentiate themselves in a competitive asset management landscape. For forward-thinking managers, litigation is not just a cost—it is capital.