Litigation finance—once one of the fastest-growing segments of alternative investing—is now confronting a sharp contraction as capital providers, regulators, and courts reevaluate the risks tied to the business. After years of predicting outsized returns and market expansion, funders are instead dealing with shrinking deal pipelines, tighter regulation, and declining investor appetite. The reset has raised concerns that individuals and companies pursuing claims of environmental, labor, or corporate misconduct could be left with fewer avenues to hold powerful entities accountable.

A Market Losing Momentum as Investors Pull Back

The global litigation finance industry, valued at roughly $20 billion, is designed to channel institutional capital into lawsuits that would otherwise be too expensive for plaintiffs to pursue. But conditions have deteriorated rapidly since early 2024. Hedge funds, private equity firms, and alternative asset managers—the industry’s most important capital sources—are retreating amid increased risk aversion and heightened demands for more predictable returns.

Executives say fundraising efforts are being delayed or canceled altogether. Firms are increasingly turning to insurance-backed structures to reduce risk, but even these have not fully restored investor confidence. At Harbour Litigation Funding, chief investment officer Ellora MacPherson notes that capital scarcity is affecting all alternative markets, but litigation funding is especially exposed because returns often depend on multi-year legal processes with uncertain outcomes.

Regulatory Pressure and Legal Setbacks Reshape the Landscape

Regulatory developments across multiple jurisdictions have further complicated the outlook for funders. In the U.K., the Civil Justice Council recommended new oversight measures requiring funders to disclose capital sources and adequacy. That followed a 2023 Supreme Court ruling forbidding funders from collecting a percentage of damages—once a core economic principle of the industry—and forcing them to shift toward fixed multiples of capital deployed. The impact has been severe: only four group cases were filed in the U.K.’s Competition Appeal Tribunal through September, compared with 17 just two years earlier.

In the U.S., lawmakers are pushing to revive legislation that would impose a 41% tax on industry profits. Meanwhile, the European Union has moved to weaken corporate liability rules under the Corporate Sustainability Due Diligence Directive, reducing future opportunities for large-scale claims.

Even firms with strong reputations are being forced to adjust. Therium Capital Management handed management of a substantial portion of its portfolio to Fortress Investment Group in October to cut costs and stabilize its returns. Litigation Capital Management paused fundraising for a new vehicle amid U.S. tax uncertainty. And Pogust Goodhead, involved in high-profile environmental litigation against BHP Group, laid off 20% of its staff as financial pressures mounted.

Lower Payouts and Longer Trials Undermine Economics

The industry’s economics are also being tested by shrinking payouts and prolonged trial timelines. A recent example frequently cited by funders is the 2016 Mastercard class action, once estimated at £14 billion but ultimately settled for just £200 million—a fraction of expectations and a reminder of how unpredictable returns can be.

Even Burford Capital Ltd., one of the industry’s most established players, has struggled. Its shares are down more than 25% this year, despite winning a landmark case tied to Argentina’s 2012 nationalization of YPF SA. The company awaits payment while the matter remains tied up in U.S. courts.

Analysts warn that few funders have consistently generated strong returns as managers. Data from Westfleet Advisors shows that commercial litigation finance deal volume in the U.S. fell 16% in 2024, bringing the market to nearly 30% below 2022 levels.

The Path Forward

While industry leaders acknowledge the downturn, many argue that litigation finance remains essential—particularly for cases involving environmental harm, corporate fraud, and consumer protection. The challenge now is adapting investment models to a new environment defined by regulation, reduced payouts, and investor scrutiny. With more legal precedents and standardized deal structures, funders hope the market will eventually stabilize, though the timeline remains uncertain.