Litigation Funding Meets Private Credit: Is the New Money Here to Stay?
Key Takeways:
- Private credit is reshaping litigation funding as traditional investors retreat due to higher interest rates.
- Funders must adapt to credit-style expectations: structured returns, collateralisation, and clear liquidity pathways.
- Regulators may increase scrutiny, particularly after the PACCAR judgment and the rise of “yield-bearing” legal assets.
- Industry veterans warn of financial engineering and inexperienced entrants distorting the market.
- The future depends on responsible structuring, transparency, and maintaining trust between investors, funders, and claimants.
As traditional sources of investment dry up, litigation funders are increasingly turning to the private credit market for capital. But as the sector evolves, experts warn that unless funders adapt to the discipline and structure of private lending, this influx of cash could be short-lived.
The Shift: From Pension Funds to Private Credit
At Brown Rudnick’s recent European Litigation Funding Conference, the spotlight was on how the sector’s financial lifeblood is changing.
Historically, litigation funding—the business of financing legal claims in exchange for a share of the proceeds—has drawn heavily from institutional investors such as pension and endowment funds. These investors were attracted to the high potential returns and the “uncorrelated” nature of litigation outcomes compared to wider market movements.
But that landscape is shifting fast. With global interest rates at decade highs, many traditional investors now prefer safer, faster-yielding opportunities in bonds or fixed-income products. Litigation, by comparison, ties up capital for years and carries inherent risks of total loss.
As a result, funders have begun seeking a new ally: private credit.
What Is Private Credit—and Why Now?
Private credit refers to non-bank lending, where professional investors and specialist lenders provide loans directly to companies or projects. This market has ballooned since the 2008 financial crisis, as banks retreated from riskier lending and investors hunted for higher returns outside traditional channels.
According to Brian Roth, CEO of Rocade LLC, the appeal lies in complexity:
“The private credit market has exploded since the financial crisis. We’re looking for assets that are complex or hard to source—things that require expertise to manage. That’s what creates a ‘complexity premium’, which allows us to achieve higher risk-adjusted returns.”
Roth explained that private credit could support the litigation finance market in multiple ways—by lending directly to funders, underwriting portfolios, or even backing insurance-wrapped case portfolios to balance risk.
“If you can segment the yield and risk properly, private credit can attach to the lower end of the spectrum. It’s already here, and it’s growing.”
The Rise of the “Private Credit Beast”
Few people know the funding landscape better than Neil Purslow, co-founder of Therium Capital Management, one of the UK’s best-known litigation funders. Therium famously backed the Post Office Horizon scandal group litigation, one of the defining cases in UK legal history.
Earlier this month, Purslow launched Therium Capital Advisors, an independent advisory firm aimed at helping funders access more diverse capital sources. His move came after Therium Capital Management entered runoff, having laid off its 30 staff earlier this year due to tightening capital availability.
Purslow believes private credit will dominate the next phase of litigation funding:
“I see the private credit beast playing a huge role. There’s so much money sitting in those funds—it’s waiting to be deployed. But this pool of investors is very diverse and highly bespoke. They think carefully about their underwriting strategy and appetite for risk.
So tapping into that capital requires a much more sophisticated approach.”
The Challenge: Aligning Legal Risk with Lender Expectations
While private credit brings deep pockets, it also brings discipline—and not every litigation funder is prepared for that.
Michael Gulliford, co-founder of Soryn IP Capital Management, offered a note of caution:
“A true private credit investor is allergic to lack of solid collateral packages, allergic to deals that take too long, and allergic to deals that don’t generate return during the life of the investment.
Right now, it’s an attractive place for that capital to flow to, but whether it continues will depend on whether the industry can create structures that deliver on these hallmarks.”
In other words, private credit investors are used to predictable income streams secured by tangible assets—quite unlike the binary nature of litigation outcomes, where even a strong case can fail in court.
To bridge that gap, funders are exploring new structures, such as:
- Portfolio-level lending, where returns from multiple cases smooth overall performance.
- Insurance wraps or after-the-event (ATE) coverage, to reduce downside exposure.
- Hybrid financing, combining traditional equity-style investments with interest-bearing tranches.
These innovations could help litigation funding resemble a more structured, credit-compatible asset class—but they also introduce new regulatory and transparency challenges.
Warning Signs: The Risk of Financial Engineering
Not everyone is convinced the sector is evolving responsibly.
Robert Rothkopf, managing partner of Balance Legal Capital, warned of questionable fundraising practices emerging in the market:
“On recent fundraising trips, I found the seat was always warm from some outfit that had been pushing a structure I frankly didn’t understand.
They were offering investors a percentage yield on their commitment—seeing an interest rate ticking up nicely, and even a year’s notice to get their money back.
My question was: from what liquidity? The cases aren’t generating that yield, so it’s a totally artificial IOU. There’s financial dressing-up going on that doesn’t match the underlying asset.”
This kind of “financial engineering”, Rothkopf warned, risks undermining the credibility of the entire sector—especially if newer, less experienced entrants overpromise returns that can’t be sustained by actual case outcomes.
Market Integrity at Stake
Echoing this concern, Susan Dunn, founder of Harbour Litigation Funding—one of the UK’s oldest and most respected funders—said she’s worried about the direction parts of the market are heading.
“I’m seeing a lot of people getting attention from funds with less experience, investing in things where people like us would say ‘hell, no’.
Things that really shouldn’t get off the ground are getting off the ground. And if and when they go wrong, that reflects badly on all of us.”
Dunn’s warning highlights a long-standing tension in the litigation funding sector: while innovation is welcome, too much risk-chasing behaviour can lead to collapse—or regulatory backlash.
Legal Oversight and Regulation
In the UK, litigation funding remains lightly regulated, but that may change. The Civil Justice Council (CJC) and the Ministry of Justice (MoJ) are already reviewing aspects of the market following controversies such as the PACCAR judgment, which ruled that many litigation funding agreements (LFAs) were unenforceable unless they complied with Damages-Based Agreement (DBA) regulations.
As funders begin courting private credit lenders, regulators may take a closer interest in the marketing and disclosure of these investments. The risk is that litigation finance becomes seen less as a legal service and more as a financial product, potentially drawing scrutiny under the Financial Services and Markets Act 2000 (FSMA).
Funders that market “yield-bearing” products to lenders could even be classed as offering collective investment schemes, triggering FCA oversight.
A Global Market in Transition
The shift isn’t confined to the UK. Across Europe and the US, private credit firms are experimenting with litigation-linked strategies, seeing them as a hedge against wider market volatility.
But international differences in legal cost recovery, enforceability of LFAs, and class action regimes create additional complexity for investors. While some jurisdictions—like the Netherlands and Australia—offer mature group litigation frameworks, others remain legally uncertain, deterring mainstream credit providers.
The Road Ahead: Partnership or Collision?
For litigation funders, private credit offers a much-needed lifeline of liquidity. For lenders, it’s a rare chance to earn high returns from a niche, uncorrelated asset. But the marriage of law and credit will only work if both sides understand each other’s languages.
Funders must learn to:
- Build transparent reporting structures;
- Quantify and diversify litigation risk more effectively;
- Deliver predictable yield profiles where possible.
Lenders, meanwhile, will need to embrace legal uncertainty—acknowledging that even the best-funded case can hinge on a single judge’s decision.
As Neil Purslow summed it up:
“There’s absolutely the money available in the space, but it’s very bespoke. The question is: can funders evolve quickly enough to meet that sophistication?”
Final Thoughts
Litigation funding once thrived as a contrarian investment, thriving in the legal shadows while offering rich rewards to those with patience and legal acumen. As it steps into the glare of the private credit spotlight, the industry faces a critical question: can it grow up without losing its integrity?
The next few years will determine whether litigation finance becomes a mature, regulated financial class—or collapses under the weight of its own innovation.
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