A topic that invariably comes up in discussions is the common case of wide dispersion between gross and net returns in commercial litigation finance (this is not typically an issue within consumer litigation finance). It’s a problem that is somewhat unavoidable and somewhat explainable!

As I interface with investors and fund managers in the legal finance market, I am constantly on the lookout for new investing strategies that can either provide a better risk-reward outcome than traditional legal finance investments, or add an element of ‘edge’.

In part 1 of this article I explored some of the basic concepts of secondary investing, specifically in the context of the commercial litigation finance asset class. This article continues the discussion and explores some of the unique aspects and characteristic of the ‘tail’ of a litigation finance portfolio, why now is a particularly good time for secondary transactions and other investment considerations with respect to secondary investing.

In my discussions with litigation finance institutional investors, the topic of secondary investments has been raised a number of times by those who understand the economics of the asset class and are seeking to take advantage of some of the longer duration cases and portfolios in existence. In this article, I explore why there is interest in the secondary market, why now, and how best to approach investing in secondary investments, as well as some watch-outs.

Portfolio risk is generally influenced by three main factors: volatility of results, correlation (of outcomes within a given portfolio) and the size of the portfolio.  For the purposes of this article, I have assumed that correlation within a portfolio is non-existent, as each case stands on its own and is not influenced by others in the portfolio.

I am often asked about the size of the commercial litigation finance market by individual and institutional investors alike, whether relative to the US market or other large global markets. I often hesitate to answer the question …

There is no other way to express it; the US commercial litigation finance industry is under assault from a variety of different interest groups and the industry lacks a homogenous voice to counter the opposition and to communicate its strong benefits.