Calculating the Claim Purchase Price
Litigation finance is, at its core, a pricing problem. Before any capital is deployed, the funder must assign a fair value to the legal claim — one that accounts for the probability of success, the expected recovery amount, the timeline to resolution, and a suite of structural risks that are unique to the litigation asset class.
At Five Rivers Capital, we approach claim valuation through a multi-factor framework that draws on actuarial methods, legal due diligence, and comparative transaction data. The process begins with an assessment of legal merit: what is the probability, expressed as a percentage, that the claimant will prevail on the primary issues? This is not a binary judgment but a weighted distribution of possible outcomes — from full recovery to partial settlement to adverse award.
The second variable is quantum — the expected recoverable amount. In practice, this requires careful analysis of the pleaded claim, the evidentiary basis for damages, the track record of comparable claims before Indian tribunals, and any counterclaims that might erode the net recovery. Funders who rely solely on pleaded quantum systematically overvalue claims, as courts and arbitral tribunals routinely award materially less than the full claimed amount.
The third major variable is time. Litigation finance involves deploying capital today in exchange for a return that may not materialise for three to seven years. The time value of money demands that longer-dated claims command a higher expected return to justify the same investment. Our models apply a duration-adjusted discount rate that reflects both the risk-free rate and the illiquidity premium appropriate to the asset class.
Finally, counterparty risk — the ability of the defendant to satisfy any judgment or award — is a critical but often underappreciated factor. A claimant may have an excellent case, and an award may be made in their favour, yet recovery will fail if the defendant has dissipated assets or entered insolvency by the time the enforcement stage is reached. Five Rivers integrates counterparty credit analysis into every investment decision, treating enforcement probability as a distinct variable in the pricing model.
The result is a multi-dimensional probability-weighted return model that allows us to compare claims across case types, jurisdictions, and timelines on a consistent basis — and to price our capital accordingly.
