Third-Party Litigation Financing: New Asset Type for Institutional Investors
- MD Finance Team
- Oct 31
- 3 min read
Litigation financing, a concept that dates back to the medieval period, has evolved into a major market over the last 30 years. The model returned to life in the 1990s when the Australian state of New South Wales repealed its outdated champerty laws and enabled class-action lawsuits that often had been too expensive for ordinary plaintiffs. The reform allowed making external investment in legal claims and covering litigation costs by funders in exchange for a share of potential winnings.
From Australia, this practice spread to England and the United States, where it matured into a separate industry. Today, third-party litigation finance is both a tool for access to justice and a high-yield asset class for institutional investors.
Litigation financing model
Third-Party Litigation Funding (TPLF), also known as legal finance, allows an external investor – the funder – to provide capital to a plaintiff to cover legal expenses.
The investment typically finances lawyer fees, court costs, and expert witnesses. Its distinctive feature is the non-recourse principle: if the case is successful, the funder receives a share of the proceeds or a multiple of the investment; in other case, the claimant owes nothing, and the funder bears the full loss.
TPLF's main advantage for investors is high returns in the case of success. However, these investments entail high risk and can take up to several years to yield a return.
There are three types of litigation funding:
- Consumer legal funding to support individual plaintiffs, allowing them to cover living or medical expenses while their claims proceed.
- Commercial litigation funding for SMEs or large companies, which supports them in large-scale disputes, arbitration, or class actions.
- Attorney portfolio financing for law firms, especially contingency-based practices.
In the USA, the pre-settlement market is mature and competitive, represented by over 200 active funders. Funding amounts are modest and valued at 10-15% of each case. Investors' returns are estimated at 25-35% IRR on a 1-3-year horizon.
In Europe, there are around 300 funders in commercial TPLF. Funding covers 5-15% of the case value, with deals ranging up to €1-9M. Funders can achieve strong returns of 15-30% IRR.
Global market size and regional dynamics
In 2025, the value of the litigation financing market is going to reach $19.3 billion. Growing at a CAGR of 10.7%, it is projected to hit $29 billion by 2029.
Market growth is driven by a rise in the number of legal disputes involving complex economic issues and intellectual property problems, as well as growing corporate awareness of litigation funding’s advantages.
Advanced markets host the largest share of TPLF cases:
USA accounts for 50% of the global share, where funders managing $16B in assets and investing $2.3 billion in new deals in 2024.
Europe have nearly 300 funders (15% of the global amount), operating simultaneously in several countries. The most active states are Germany, the Netherlands, Belgium, France, Austria, Spain, Portugal, Denmark, Sweden and Italy.
Asia-Pacific is the fastest-growing region, driven by the main players in China, India, and Vietnam.
Other rising markets include Brazil and Mexico.
Regulation: Fragmented but evolving
In the world, there is no specific or detailed regulatory framework for litigation financing. This absence of strict licensing or oversight allows companies to function under general contract and civil law, keeping low entry barriers.
United States: Regulation operates at the state and federal court levels, the state and federal legislative levels, regulatory agencies, and bar associations. In October 2025, California’s Consumer Legal Funding Act was signed, creating a licensing framework and consumer protections in one of the largest states.
European Union: There is no specific regulation, except for the implementation of Directive (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers. For instance, Romania implemented it through Law No. 414/2023, officially introducing TPLF into its legal system.
Common-law jurisdictions: In countries such as Canada, the UK, and Switzerland, there is no specific regulation except the common law and a case-by-case basis.
Despite the regulatory patchwork, professional associations such as the International Legal Finance Association (ILFA) and the European Litigation Funders Association (ELFA) are shaping best practices, transparency, and standards to support the sector’s development.
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