De-Risked Litigation Underwriting
Screen legal claims through milestones, economics, collectability, and diversification.
- Difficulty
- Expert
- Time to result
- ~months to results
- Steps
- 7
- Confidence
- 97%
The framework separates litigation underwriting into automated screening, human legal review, conservative sizing, and portfolio construction. Static variables first exclude categorically unsuitable claims, while time-series variables identify procedural developments—such as surviving important motions—that reduce uncertainty. Underwriters then answer three distinct questions: whether the claimant will win, how much the claimant could recover, and whether the defendant can actually pay. Capital is sized against a conservative recovery estimate because investing less in each claim raises the probability of clearing principal and return hurdles. Finally, hundreds of independent cases are pooled so an unpredictable judge, jury, or factual development cannot dominate the fund. Technology increases coverage and timing precision, but lawyers remain responsible for economic plausibility and collectability.
Origin
Eva Shang described how Legalist developed this approach after scraping court records, observing other litigation funders, and learning from hundreds of investments. Extracted from Masters in Business.
Core principles
- 01Fund cases only after meaningful legal hurdles reduce uncertainty.
- 02Separate the probability of winning from the size of the recovery.
- 03Confirm that the defendant can pay before committing capital.
- 04Invest less relative to expected claim value to increase the margin of safety.
- 05Pool many independent cases to dilute idiosyncratic legal risk.
- 06Combine machine screening with human legal judgment.
How to run it
- 1
Apply Static Filters
Use categorical variables to eliminate unsuitable case types and identify claims that meet the strategy's basic requirements.
Pro tip Encode exclusions before ranking attractive cases so obviously unsuitable opportunities never consume underwriting time.
Watch out A technically searchable case is not necessarily an investable case.
- 2
Monitor Procedural Milestones
Track rulings, injunctions, dismissals, and other time-series events that reveal whether a case is becoming stronger or weaker.
Pro tip Prioritize milestones that materially narrow the range of possible outcomes.
Watch out The same procedural event can have different significance across case types.
- 3
Assess Win Probability
Evaluate the surviving claims, evidence, legal theory, venue, and procedural posture to estimate whether the plaintiff will prevail.
Pro tip Compare the case with a large set of previously evaluated matters.
Watch out A strong case can still fail because of idiosyncratic judicial or jury risk.
- 4
Estimate the Recovery
Determine whether the requested damages are legally supportable and economically plausible rather than merely asserted.
Pro tip Build a conservative recovery range instead of relying on the plaintiff's headline demand.
Watch out Winning a case does not guarantee recovering enough to exceed the capital invested.
- 5
Check Collectability
Confirm that the defendant has assets, insurance, or reliable cash flow sufficient to satisfy a judgment or settlement.
Pro tip Treat collectability as an independent underwriting question.
Watch out An uncollectible judgment can turn a legal victory into an investment loss.
- 6
Size for Margin of Safety
Limit the amount advanced relative to a conservative expected recovery so modest settlements can still produce an acceptable result.
Pro tip Stress-test the investment against delays, legal-cost overruns, and reduced damages.
Watch out Funding too much can make an otherwise successful case financially unsuccessful.
- 7
Pool Independent Cases
Diversify across many claims, counterparties, courts, and legal circumstances to reduce the impact of any one unexpected outcome.
Pro tip Measure concentration by shared risk factors, not only by the number of cases.
Watch out Ten large cases may provide far less diversification than hundreds of smaller claims.
In the wild
A software company alleges that an acquirer withheld a contractual earnout. Legalist's system monitors the docket and detects that the plaintiff has survived summary judgment. A lawyer then validates the damages model and confirms that the defendant has ample assets. The fund advances only a fraction of the conservative recovery estimate and adds the claim to a diversified portfolio.
→ The case becomes investable only after legal risk, recovery economics, and collectability pass separate tests.
A patent claimant has already won at trial and seeks financing during an appeal. Although the headline result appears attractive, the strategy excludes the case because patent judgments face substantial appellate reversal risk and no procedural stage provides the required degree of de-risking.
→ The categorical filter prevents an apparently strong but structurally unpredictable investment.
Common mistakes
Equating a Legal Win With an Investment Win
A claimant may prevail yet recover less than the funder's principal and legal costs. Underwriting must assess profitability separately from the verdict.
Ignoring the Defendant's Ability to Pay
A valid claim against an insolvent or unreachable defendant may produce no collectible return.
Concentrating in a Few Attractive Cases
Individual lawsuits retain unpredictable judicial and factual risks, so a small number of large positions can overwhelm otherwise sound analysis.
Is it for you?
Best for
It is best for litigation funders and alternative-credit investors evaluating large volumes of commercial claims.
Not ideal for
It is not ideal for investors without legal expertise, reliable docket data, patient capital, or sufficient deal volume to diversify.
From the transcript
“there are three elements to underwriting it. There's will it win? How much will it win? And if they do win, can the defendant even…”
“we're really looking for preliminary motion hurdles that de risk a case.”
“the less money you can invest in each claim, the higher the likelihood of success.”
From the episode
Eva Shang on Litigation Finance Funds
Eva Shang