Confession: I have shiny object syndrome.
For the unfamiliar, shiny object syndrome (SOS) is when you have a tendency to bounce from one new thing to another.
As soon as something new and shiny comes along, you get sucked into it. Usually to the detriment of whatever you had been working on (which was likely a former shiny object itself).
Millions suffer from this tendency, so I take some solace in knowing I’m not alone. In fact, it’s notably prevalent among entrepreneurs.
Although it's been a challenge for years, I've learned to manage it better and even use it to my advantage. Now, instead of being completely derailed for weeks by something new, I know how to satiate my natural curiosity, file the knowledge away for later, and get back to what I was working on.
Case in point: a business partner called me last weekend with a new business idea, a classic SOS-triggering event. The idea was related to an area of finance I’d seen referenced before, but had never seriously looked into.
So, with this now being a shiny object and all, I stopped what I was doing and proceeded to spend several hours diving into the subject, soaking up as much info as I could.
And while we concluded that this business is too far afield to focus on right now (see? SOS under control!), it remains an exciting future possibility. And not only because it’s super interesting, but because it offers very unique benefits to passive investors.
So today, I want to share the fruits of my most recent bout of shiny object syndrome:
Legal Finance: Give Your Investment Portfolio Its Day in Court
Legal finance involves the funding of legal claims or processes, where the returns are based on the success of cases or settlements.
There are a myriad of investment opportunities in the legal finance realm. But to keep things short, let’s examine two.
Litigation Finance: The Speculative Path
In what’s known as litigation finance, investors fund pursuit costs for a lawsuit, receiving a share of the financial recovery if the case succeeds.
The most analogous investment in the real estate world is ground-up construction. You’re starting at the very beginning - no work has been done and hundreds of things could potentially go wrong before an eventual happy ending.
This more speculative nature means that returns can be substantial if the case is successful. But it’s a binary outcome - the investment is lost if the case fails.
Pre-Settlement Funding: A Lower-Risk Approach
With pre-settlement funding, investors fund cash advances to plaintiffs against their expected settlements. When the final settlement is received, investors receive the advance amount back plus a fee or interest (depending on how the advance is structured).
By the time these are funded, the underlying legal cases are usually more-or-less complete, with a higher probability of a successful settlement outcome. Accordingly, the returns here are lower than in litigation finance, but also more predictable.
In the real estate world, this is like buying a turnkey rental property - most of the hard, really risky work has already been done.
Non-Correlated Returns
From an investment perspective, the single best thing about investing in legal finance is that the returns are comparable to other “alternative” private assets like real estate, but they’re not correlated to anything in the broader financial markets.
Interest rates, housing prices, the Fed, whatever…none of these have a direct impact on the returns in legal finance investments.
Final Thoughts
For passive investors, legal finance makes a compelling case to help stabilize volatility within an investment portfolio while not sacrificing above-average gains.
Are you intrigued by legal finance? Would you consider exploring or investing in this area? I’d love to hear your thoughts!
(Disclaimer: I’m not an attorney. I’m still learning about this area and don’t claim to be an expert. This was meant to be a high-level, simplified overview of an investment realm I find fascinating.)