In litigation funding, some of the worst economic decisions look like wins when they are made.
The percentage is lower. The budget is tighter. The legal fee is protected. The capital exposure is reduced. A settlement is rejected because the claim is said to be worth more. The transaction closes and someone walks away believing they secured the better deal.
On paper, the result looks positive.
But the positive may be false.
False economics arise when a claimant, law firm, funder, insurer or adviser protects the number directly in front of them while weakening the wider value on which that number depends.
Each position may appear rational when considered alone. Litigation funding, however, does not create value through isolated decisions. Its economics depend on how capital, time, evidence, execution, risk and relationships work together.
The visible number may improve while the real economics deteriorate.
A claimant may have a firm view of what a claim is worth. That figure may reflect the loss suffered, the seriousness of the defendant’s conduct, the amount pleaded or what the claimant believes justice requires.
The emotion behind that position is understandable. Someone who believes they have been wronged does not naturally begin by discounting the value of that wrong.
But the highest possible judgment is not the present economic value of the claim.
Its real value must account for the prospects of success, the quality of the evidence, the amount that can actually be proved, the likely duration, the cost of the litigation, the possibility of appeal, enforcement risk and the price of the capital required to reach the outcome.
It must also account for the possibility of recovering nothing.
A claimant can therefore weaken the economics of a strong matter by treating any outcome below the highest theoretical amount as a loss. A settlement may be rejected without properly considering how many years may pass before judgment, how much additional capital will be consumed, what risks remain and what the claimant will ultimately retain.
That does not mean strong claims should be settled cheaply. It means the decision must be grounded in commercial reality rather than an emotional and binary view of winning or losing.
A properly assessed settlement may convert uncertain future value into an actual recovery. A larger judgment obtained many years later may deliver less economic value once time, cost, risk and enforcement are properly considered.
False economics also arise when a law firm protects its hourly fees without considering the wider value of securing and successfully executing the mandate.
Law firms sell professional time. It is natural that they focus on rates, fees billed and fees collected. The problem begins when preserving immediate payment becomes more important than enabling the litigation or producing the outcome from which those fees must ultimately be paid.
A law firm may resist a budget cap because it believes the cap limits what it can earn. A properly structured cap, however, may simply determine how much is paid during the litigation and how much is deferred until the outcome. That can create cost discipline, improve certainty and make a matter fundable that might otherwise not proceed.
Protecting 100% of an hourly rate has limited value if the result is no mandate, no fees and no future work.
The opposite is equally important. A funder can require so much risk participation from the legal team that the firm no longer has the cash flow or resources needed to execute properly.
Alignment without execution capacity is not alignment.
The right balance must keep the matter investable while leaving the legal team capable of doing the work required. The same applies where a funder agrees to finance future costs but leaves a material historical funding hole unresolved. Future funding may support the litigation plan while the team responsible for delivering it remains financially weakened by the costs already carried.
Not every retrospective cost should be reimbursed. It is reasonable to test whether it was necessary, properly documented and connected to the development of the matter. But treating historical expenditure as irrelevant can create an apparent saving that compromises future execution.
The treatment of front-loaded budgets can produce the same mistake.
Funders are understandably cautious when a matter requires substantial capital early. More money is exposed sooner and, if the matter fails shortly afterwards, the loss may be larger than under a slower deployment model.
But drip-feeding capital is not automatically safer.
Slow deployment can delay factual investigation, expert evidence and trial readiness. It can weaken momentum, reduce settlement pressure and extend the period for which the funder’s capital remains tied up.
The funder may deploy less in the first year but remain invested for several additional years. That can produce worse economics even where the total amount invested is lower.
Where earlier expenditure resolves key uncertainties, develops the evidence properly or brings the matter to an earlier outcome, the funder is not simply taking more risk sooner. It is purchasing speed, clarity and execution.
Front-loading is not always better. The expenditure must genuinely change the path of the matter. The relevant question is what earlier deployment buys and what delayed deployment costs.
Time forms part of the economics. So does capital velocity. Capital recovered sooner can be redeployed. Capital trapped in a slowly moving matter may produce a weaker return even if the initial cheque was smaller.
Insurance and alternative capital structures create another area in which the visible economics can mislead.
The presence of adverse costs insurance may give a claimant the impression that a sophisticated insurer has validated the expected outcome. In reality, the insurer is protecting a defined downside.
In a loser-pays jurisdiction, the policy may protect against the risk that the claimant becomes liable for the defendant’s costs. That does not guarantee the claimant’s preferred quantum, the enforceability of a judgment or the amount the claimant will ultimately receive.
The insurer is pricing a defined risk. It is not guaranteeing the claimant’s preferred upside.
Insurance can still create considerable value. It may protect the claimant from a serious adverse costs exposure, satisfy a security-for-costs requirement or make a meritorious matter investable.
The commercial question is who benefits, who pays and whether the protection creates more value than it costs. That requires closer scrutiny where the premium materially improves the funder’s downside but is paid from the claimant’s recovery or added to the capital on which the funder earns its return.
The same discipline is needed when comparing traditional litigation funders with direct investors, family offices and other forms of capital.
A lower percentage does not necessarily mean cheaper capital.
A lower headline return may be accompanied by capital protection premiums, monitoring charges, servicing fees, minimum returns, transaction costs and greater risk participation from the legal team.
Sometimes the price has not been reduced. It has simply moved.
The only meaningful comparison is the all-in cost, the risk retained by each participant and the claimant’s final net recovery.
This is where complexity can become dangerous.
Litigation finance can be technically complicated. It combines legal risk, budgets, premiums, funding waterfalls, returns, controls and contingent outcomes. There is nothing inherently wrong with that.
The warning sign appears when repeated explanation still cannot make clear who pays, who benefits, who carries the remaining risk and what each participant receives under realistic outcomes.
Good economics may be sophisticated, but their commercial logic should remain understandable.
What problem does each layer solve? Who receives the benefit? Who pays for it? How does it change the final outcome?
Complexity should solve a problem. It should not conceal who benefits from the solution.
Strong senior counsel can take a difficult matter containing many facts, legal issues and competing arguments and identify what will actually determine the result. They do not make the matter simple by ignoring its complexity. They make the path clear by identifying the decisive issues, the evidence that must be secured and the steps that must be taken.
A good litigation finance adviser should perform the same function commercially.
The role is not to negotiate every point because it appears in the documents. It is to identify the terms that genuinely affect value, the risks that must be addressed and the compromises that preserve the transaction rather than weaken it.
This is where Wild Dog plays its role. We reduce complicated funding structures to their real commercial drivers and focus negotiations on the terms that determine whether the transaction will work in practice.
Getting the deal signed is not enough.
A transaction may close and still be poor economics.
Perhaps the greatest false economics arise when someone believes they have won because they secured the strongest immediate terms.
The funder may have achieved the highest return. The law firm may have protected every rand of its fees. The claimant may have persuaded the other participants to carry more risk. The adviser may have completed the transaction.
The result is recorded as a success.
But the commercial opportunity cost is not found in the transaction they said yes to.
It lies in everything they are no longer given the opportunity to say yes to.
The completed deal appears in the accounts, the legal fees, the return calculation and the distribution waterfall.
The next matter that is never introduced creates no entry.
The referral that goes elsewhere is not recorded.
The adviser who never brings another opportunity does not send an invoice for the value that disappeared.
The law firm that stops calling does not explain which future mandates it took elsewhere.
The funder that is no longer approached may never know that the next portfolio existed.
That is the false positive at the heart of false economics.
The quick win is counted. The opportunities it prevents are not.
There may be no argument, no formal ending and no announcement that the relationship has changed. People simply fade into the distance, taking their trust, networks and future opportunities with them.
Years later, someone may wonder what happened to the adviser who once brought an exceptional matter but never returned.
The answer may lie in a deal that someone believed they had won.
Sustainable economics do not require equal rewards. Different risks, responsibilities and contributions justify different returns.
They do, however, require balance.
The claimant must retain a meaningful recovery. The legal team must remain capable of executing. The capital provider must earn a return appropriate to the risk it actually carries. The structure must leave enough value and trust for the participants to remain willing to work together again.
The cost of an unbalanced transaction does not always arrive as an invoice.
It often arrives as silence.
The greatest false economics may therefore lie not in what the deal costs today, but in everything it quietly prevents tomorrow.
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