A Timely Guide for Legal Professionals
As litigation finance rebounds from a challenging 2025 and new capital sources flood into the market, understanding why these deals fail has never been more important. At Lawtechnology.ai, we track developments that reshape how legal services are funded and delivered, and McDermott Will & Emery’s latest analysis—co-authored with Rebecca Berrebi, co-CEO of Litigation Finance Advisors—offers practical guidance for navigating this expanding sector.
The litigation finance market faced uncertainty in 2025 as potential tax changes in the Trump administration’s One Big Beautiful Bill Act threatened returns. When those provisions failed to survive parliamentary review, Q4 2025 saw a significant activity spike, setting the stage for a busy 2026.
Why Litigation Finance Deals Are Different
Litigation finance sits at the intersection of law and finance. While it shares characteristics with private credit and equity models, these transactions carry unique complexities. They offer investors attractive returns largely uncorrelated to other asset classes, but they frequently collapse due to preventable causes.
The typical deal begins with term sheets outlining material economic and non-economic terms—though not all particulars. These term sheets are heavily negotiated, often include exclusivity periods, and sometimes carry break fees. Once executed, funders begin spending on documentation and diligence, and the clock starts ticking.
Some deals die for unavoidable reasons: diligence doesn’t meet expectations, economics can’t work, or business conflicts emerge. But many transactions collapse due to three preventable causes.
The Three Deal-Killers
1. Lack of Trust
Deal documents can outline obligations and consequences, but no transaction is riskless—at some level, there’s always a leap of faith. Since litigation finance deals often last three to six years, building trust during negotiation is essential.
For financed parties: Disclose known flaws upfront. No opportunity is perfect, and funders don’t require perfection—but they do expect forthrightness. If material negative facts affect the case’s merits, weaker claims exist, or likely recovery has decreased, disclose immediately.
For funders: Lay out complete economics and signal expected sticking points early. There’s nothing more likely to create problems than a late-stage unwelcome surprise in deal terms.
2. Misunderstood Terms
Recipients of litigation funding often don’t engage in these deals regularly, making term sheet provisions easy to misinterpret. Well-developed term sheets save deals—it’s better to have hard conversations before fees rack up and time ticks away.
Funders should share economic models to promote understanding. Discussions of ongoing obligations and events of default can ward off difficult conversations later. Since legal transaction structures are fluid and document templates rare (each deal is highly tailored), understanding each participant’s motivation is crucial for alignment.
Financed parties must understand their ongoing obligations: reporting on case progress, cooperating with prosecution, providing information to experts, preparing for depositions and testimony, and avoiding actions that could adversely affect success likelihood. These obligations can seem daunting—a clear understanding of required internal resources helps avoid foot faults.
3. Time
Time is the ultimate deal-killer. People lose conviction and motivation as transactions drag. Other opportunities distract funders; funded parties get cold feet about negotiated terms.
Setting and communicating realistic timelines—and meeting them—is essential. Efficiently responding to diligence requests and clearly communicating deliverable timing creates a positive working relationship.
Practical tool: A time and responsibility schedule laying out each deliverable, the responsible party, and expected delivery date keeps everyone on track. While timeframes might be aspirational, parties should aim for achievable goals.
The 2026 Regulatory Landscape
Several new pieces of legislation are poised to impact US litigation finance:
- State registration requirements: New rules in various states oblige litigation funders to register and make funding agreements discoverable
- California fee-sharing prohibition: A new law prohibits lawyers from sharing contingency fees with “alternative business structures”
- Jurisdiction-specific implications: All parties must understand regulatory requirements depending on investment jurisdiction and underlying matters
Strategic Takeaways
For law firms considering litigation funding:
- Be forthright about case weaknesses from the outset
- Understand all ongoing obligations before signing
- Dedicate appropriate internal resources to compliance
- Move efficiently—delays breed deal fatigue
For funders entering the market:
- Provide complete economic pictures upfront
- Share models that promote recipient understanding
- Signal potential sticking points early
- Establish clear timelines with responsibility assignments
For both parties:
- Build goodwill throughout negotiation
- Resist opacity—it breeds distrust
- Set the right tone early for a multi-year relationship
- Understand new regulatory requirements by jurisdiction
As new capital continues entering the litigation funding market, activity should rebound strongly in 2026. The unique structure of these deals creates challenges, but keeping common causes of failure in mind can mean the difference between a collapsed transaction and a successful multi-year partnership.
Access the complete McDermott Will & Emery analysis for additional context on the 2026 private markets outlook.