Legal finance is a niche investment sector offering the potential for attractive returns and a low correlation to traditional investments like stocks.

Imagine being able to profit from legal cases — without being a lawyer or even stepping into a courtroom. Legal finance, also known as litigation finance, is a growing market that allows investors to fund legal cases in exchange for a share of the settlement or judgement awarded. 

For investors looking to diversify their portfolios, investing in legal finance presents a unique opportunity to earn attractive double digit annual percentage returns while diversifying with an investment that is largely uncorrelated from other investments, protecting your portfolio.

What is Legal Finance?

Legal finance involves third-party lenders — or investors — providing capital to law firms or claimants to fund the costs of litigation, allowing legal cases to proceed without the financial burden falling solely on the parties involved.

These costs can include attorney fees and court fees which can accumulate into significant amounts, especially in longer term complicated cases. 

‍For example, imagine a law firm representing a client in a case against a major corporation. The case could drag on for years, requiring significant resources. Legal finance allows the firm to secure funding and pursue the case to its conclusion without worrying about the financial strain.

Legal finance is a niche sector within the investment category known as private credit, or private lending. In simple terms, private credit is a type of lending where investors provide loans directly to companies or individuals without using a bank as a middleman. 

It’s ‘private’ because the loans aren't traded publicly, and the capital is used for specialised situations, like funding legal cases or other unique business needs that banks aren’t well equipped to manage.

Understanding Legal Finance’s Risks

Just like all other investment areas from property to stock market investing, you have higher risk and lower risk legal finance investment opportunities.

Higher Risk — Specialist legal finance investors, who are comfortable taking on extremely high levels of risk, invest in a specific case or series of cases with the ability to earn a portion of any financial award the case generates. The return potential on a high risk investment like this can be anywhere from 50% to 500% returns. However, if a case is lost, the investor usually loses all of their capital making the investment an ‘all-or-nothing’ high risk bet.

Lower Risk — Legal finance investors can instead become lower-risk lenders, entering into fixed term loans with law firms offering lower returns of 9% to 14%. Just like any other loan, the capital is borrowed by a law firm with agreed terms covering its duration, interest, security, and more. The loan and interest is then repaid regardless of the outcome of the legal case. However, there is always a risk that the law firm that borrowed the capital defaults and doesn’t repay the lender on time requiring additional security measures to be put in place.

In established markets like the UK, the risk of law firms defaulting on loans for smaller consumer claims can be significantly reduced with a specialised insurance policy known as After-the-Event (ATE) insurance. ATE insurance covers all legal costs if a case is unsuccessful, allowing law firms to repay their loans and reducing the risk for legal finance lenders.

For example, let's say a legal finance investor, Emma, lends $50,000 to Lawson & Co., a UK law firm, to pursue a series of smaller, procedural claims involving breach of contract cases involving homes being sold in the UK without their doors or windows, which of course were meant to be included in the sale. Based on historic case precedent, the chances of winning the case are high as there’s a clear breach of contract and so Lawson & Co. have decided to borrow from Emma themselves with a fixed annual rate of 12%. The law firm then takes out ATE insurance of up to $50,000.

Winning Outcome — Lawson & Co. win the cases and earn fees alongside a large payout for their clients. The ATE insurance policy is not utilised and the legal finance lenders are repaid in full. 

Losing Outcome — Lawson & Co. unexpectedly lose the cases and aren’t able to charge fees or provide any payout to their clients. Lawson & Co. may struggle to pay Emma back. However, the ATE insurance kicks in, covering the legal costs owed to the opponent and partially reimbursing Emma’s investment, reducing her loss significantly.

This way, Emma’s investment is partially protected, so she isn’t left bearing the full brunt of the loss.

Why Legal Finance is a Game-Changer for Investors

Legal finance is unique and offers returns that are uncorrelated from traditional markets.

Attractive Returns With Measured Risk

Banks are often hesitant to lend in legal finance because the collateral in a default isn’t a tangible asset like property or machinery but rather a portfolio of legal cases. This gap creates a role for specialist legal finance partners, who provide the capital and expertise needed to evaluate these cases. By partnering with these specialists, investors can unlock double-digit returns with a more controlled level of risk, capitalising on high-yield opportunities without bearing excessive exposure.

Non-Correlated Asset Class

Unlike stocks or property, legal finance is unaffected by economic cycles. Case outcomes depend on legal merit rather than market conditions, offering a hedge against economic downturns. This makes it an appealing option for diversifying portfolios and balancing out market volatility.

Risk Mitigation Insurance

After the Event (ATE) insurance allows legal finance investors to protect their capital, minimising the downside risk if cases are lost. ATE policies cover costs if the case fails, shielding investors from adverse losses. This layer of security eliminates the typical all-or-nothing risk in legal finance. 

‍Fenchurch Legal: A Proven Partner in Legal Finance Lending

Fenchurch Legal is a specialised legal finance funder who lends directly to vetted UK law firms. The company was founded in 2020 by Louisa Klouda, who identified an opportunity to support smaller UK law firms that faced challenges in covering pre-litigation expenses. 

Fenchurch Legal’s lending model stands out by exclusively funding vetted UK law firms handling small consumer claims with strong legal precedents, each backed by ATE insurance. This strategy ensures that, if a case fails, the insurance covers all disbursements to Fenchurch, reducing their investment risk while securing a fixed return on their capital, independent of case outcomes.

In order to meet the growing demand and to capitalise on this lucrative investment opportunity, Fenchurch Legal raises its own capital from investors by periodically issuing fixed rate bonds.

‍A New Era of Access — Investing in Legal Finance 

Sean Sanders, the CEO & Founder of Altify, elaborates on their partnership with Fenchurch Legal and the launch of the ALFI token: 

“Fenchurch Legal has an exceptional track record in lending to UK law firms and delivering stable investor returns making their bonds well suited to be listed on the Altify investment platform.

To capitalise on this opportunity, we at Altify partnered with them to introduce the world’s first legal finance security token, called ALFI — short for the Altify Legal Finance token. 

Each ALFI token is backed 1:1 by Fenchurch Legal USD bonds, offering investors quarterly interest payments, an attractive 11% annual yield, and access to one of the most impressive diversification investment options out there.

Historically, minimum investments into legal finance have been $250,000 to $500,000, and investor funds have been locked away for 2 to 4 years. This is why we elected to tokenise Fenchurch Legal’s bonds on the Bitcoin Liquid network (learn more about our process here).

In doing so, we’ve lowered the minimum starting investment amount for our clients to just 100 USDT and unlocked 14-day investor liquidity, giving Altify investors the flexibility to redeem their investments early, subject to an early redemption fee.

The old saying, ‘only the lawyers win in legal disputes,’ no longer holds true—now, both the lawyers and ALFI investors come out on top.”

Whether you're an experienced investor or just starting out, Altify’s ALFI tokens provide access to an attractive income-generating investment denominated in USD that is uncorrelated with other investment markets. 

For those seeking diversification and a steady income stream, this could be an opportunity worth exploring.”

ALFI Token Investment Highlights 

‍

Balancing Risk and Reward in Legal Finance

Legal finance presents opportunities for high returns but carries risks tied to the unpredictability of case outcomes.

At Altify, we help you manage these risks with our 1-to-5 risk rating system, designed to help you find the right balance between risk and reward in your legal finance investments. 

Read more about our risk rating system.

‍

* You can apply to redeem your ALFI tokens before the maturity date with 14 days' notice. However, early redemptions are subject to market conditions and cannot be guaranteed. If your request is approved, a 5% early redemption fee will apply to the total invested amount, including accrued interest.