Litigation is increasingly being deployed by sophisticated asset managers not merely as a defensive cost center but as an active driver of capital appreciation. Whether as a value-unlocking tool within an existing portfolio or the cornerstone of a specialized investment strategy, legal claims are emerging as a credible—and often underpriced—source of alpha.
Here are five litigation-driven strategies that can turn legal conflict into investment opportunity:
Third-Party Litigation Financing
Third-party litigation funding involves providing capital to claimants in exchange for a portion of any financial recovery, whether through settlement or court judgment. Commonly deployed in commercial, intellectual property, and antitrust cases, this strategy offers non-correlated returns, often structured on a milestone or tranche basis. Outcomes are high-variance but can yield private equity-like returns, especially in jurisdictions where courts enforce strong plaintiff protections and where legal merit is high, but claimants lack resources.
Shareholder Litigation and Activist Legal Action
Use litigation as a tactical component of activist investing. This may include initiating derivative suits against boards or executives, engaging in securities class actions, or using legal action as leverage in contested M&A scenarios. Litigation can prompt corporate governance reforms, reverse value-destructive decisions, or recover losses tied to fraud, mismanagement, or regulatory breaches.
Distressed Asset & Enforcement Litigation
In distressed credit investing, litigation can be a core value realization tool. Investors may acquire defaulted loans, mortgages, or trade claims and use litigation to enforce rights, foreclose collateral, or compel settlements. The legal process can convert illiquid or impaired instruments into high-yielding assets or allow for control of undervalued hard assets at a discount.
Bankruptcy & Insolvency Litigation
Acquire legal claims or contested positions in bankrupt estates, aiming to monetize litigation assets. Claims in bankruptcy proceedings—such as fraudulent conveyance, preference actions, or director/officer liability claims—are often overlooked or mispriced due to legal complexity. Sophisticated investors can acquire these claims directly or via a fund vehicle, targeting non-core or residual litigation assets in bankrupt estates.
Insurance Recovery Litigation
Insurance-related litigation is a potent but underutilized strategy. Insurance contracts are fertile ground for litigation, and successful recovery can materially enhance portfolio company valuations or fund returns. Whether recovering denied business interruption claims, enforcing D&O coverage, or litigating against non-payment by health insurers, successful outcomes can materially enhance portfolio company valuations or fund performance.
Final Thought: Turning Conflict into Capital
Litigation is capital-intensive, adversarial, and complex—but also mispriced, underexplored, and capable of producing non-correlated, asymmetric returns. For asset managers willing to navigate its nuances, litigation can deliver non-correlated, asymmetric returns and transforming conflict into a powerful lever for performance.
For funds seeking new sources of alpha, especially in a high-rate, uncertain macro environment, litigation is an asset class worth litigating for.
