In my prior blogs I examined “implied probability of loss” as a way of analysing the risk and price of transactions in the litigation funding market.
Let’s take for example (and with all the usual caveats about being reductive) a funder that determines that a case has, say, a 2/3 chance of winning and generating for both the claimant and the funder lots of money, and a 1/3 chance of losing with an attendant destruction of the funder’s entire investment. When pricing this case that funder must charge, on a win, $1.5 for every $1 invested just to break even. This is because the funder has a 1 in 3 chance of losing 100% and a 2/3 chance of winning 150%, which yields, on average, 100% (that is, a mere return of the funder’s investment).
This analysis requires a few assumptions, including that:
- The funder has a diversified book of investments of this sort and all of those are single-case investments (portfolios and other funkier deals complicate the picture).
- The funder’s operating costs are zero.
Now I want to quantify the impact of operating costs by looking at two hypothetical funders with different cost structures.
