This Seven Stars Legal Fixed Rate Litigation Finance Bond review examines not only the terms of the investment but also the company behind it and the litigation finance industry as a whole.
Rather than focusing on the advertised returns, this review takes a closer look at the significant risks, uncertainties, and potential drawbacks that investors should carefully consider before committing capital.
Litigation finance can produce attractive returns in some circumstances, but it is also a speculative asset class that exposes investors to legal uncertainty, illiquidity, and the possibility of substantial or even total losses.
Understanding these risks is essential before deciding whether this investment is appropriate for your portfolio.
This article covers:
- What is Seven Star Legal Funding and how does it work?
- What is the Seven Stars Legal Fixed Rate Litigation Finance Bond?
- Is litigation finance regulated?
- What are the pros and cons of litigation funding investments?
Key Takeaways:
- Seven Stars Legal specializes in litigation funding in the UK.
- Its former 14% bond offered high advertised returns but carried significant investment risk.
- Litigation finance investments are illiquid and outcomes depend on successful legal claims.
- Investors should carefully assess the legal, operational, and counterparty risks before investing.
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What is litigation finance?
In exchange for contributing the capital, they will receive an agreed upon share of the claim’s net proceeds, plus interest. The “no win, no fee” principle requires someone to front the costs of pursuing a claim until a settlement is achieved while working with a lawyer.
Many large financial institutions are wary of providing funds in these situations because they could be named in a lawsuit as a defendant. Their capacity to take part may also be constrained by limits imposed by maintenance and champerty regulations.
Due to the risk of being named as a defendant in such cases, many institutional funders are hesitant to provide funds in such circumstances. They may be hampered in their efforts because of maintenance and champerty rules.
Litigation financing has grown in popularity alongside the whole industry. The value of the litigation funding market is expected to hit 45 billion pounds by the end of 2023, according to projections. Unlike traditional investment returns, lawsuit funding returns are not affected by changes in the prime interest rate or the stock market.
History of Litigation Finance
Modern litigation finance emerged in Australia during the mid-1990s after insolvency reforms allowed legal claims to be treated as business assets, according to the Harvard Law School Center on the Legal Profession.
The industry expanded alongside the growth of class action lawsuits, particularly after the Australian High Court ruled in 2006 that third-party litigation funding arrangements were lawful.
The UK developed its litigation finance market on a similar timeline.
A key milestone was the decriminalization of maintenance and champerty under the Criminal Law Act 1967, which removed longstanding legal barriers to third-party funding.
Since then, litigation finance has evolved into a global industry, with funders backing commercial disputes, arbitration claims, and class actions across multiple jurisdictions.
Who is Seven Stars Legal?
Seven Stars Legal is a UK-based litigation funding company founded in 2022. It provides funding to regulated law firms and FCA-regulated claims management companies pursuing legal claims, with a focus on precedent-led litigation.
The company had reached £25 million in assets under management by 2024 and has since expanded its fundraising activities internationally.
While Seven Stars states that it uses due diligence, case selection, and diversification to manage risk, litigation funding remains a specialized alternative investment.
Returns ultimately depend on the successful resolution of legal claims, which means investors remain exposed to legal, operational, and counterparty risks.
What are the terms of Seven Stars Legal 14% Fixed Rate Litigation Finance Bond?
The Seven Stars Legal 14% Fixed Rate Litigation Finance Bond was a sterling-denominated investment backed by litigation-related assets.
According to the offering documents, it offered a fixed return of 14% per year, with interest accruing daily from the day after subscription until its stated maturity date of March 31, 2025.
While a 14% fixed annual return may have appeared attractive, investors should have considered why the bond offered a yield significantly higher than traditional fixed-income investments.
Higher advertised returns typically reflect higher investment risk, including the possibility of delayed repayments or capital losses.
How does Seven Stars Legal Funding work?
Investor funds are used to finance multiple legal claims that Seven Stars believes have a high probability of success.
Its strategy focuses on precedent-based cases, where previous court decisions may make legal outcomes more predictable, as well as claims against defendants that are considered financially capable of paying successful judgments.
The company argues that diversifying across numerous cases, requiring After the Event (ATE) insurance, and funding claims against well-capitalized defendants helps reduce investment risk.
However, litigation remains inherently uncertain. Court decisions can differ, cases may take longer than expected to resolve, and legal or regulatory developments can affect outcomes.
As with any litigation finance investment, these risk management measures may reduce certain risks but cannot guarantee returns or protect investors from losses.
Is litigation funding regulated?
Yes, but the level of regulation varies significantly by jurisdiction. Litigation finance is subject to different legal frameworks around the world, with some countries imposing greater oversight than others.
While established litigation funders may follow industry codes of conduct or regulatory guidance, there is no single global regulatory framework governing the sector.
As a result, investors should understand the legal and regulatory environment in the jurisdictions where a funder operates before investing.
What are the benefits of litigation finance investments?
Litigation finance can offer the potential for higher returns than many traditional fixed-income investments, although those returns are accompanied by substantially higher risk.
Because litigation outcomes are driven primarily by legal proceedings rather than stock or bond market performance, the asset class may provide diversification within a broader investment portfolio.
Professional litigation funders also typically conduct legal and commercial due diligence before financing claims.
While this may improve case selection, it does not eliminate the possibility of unsuccessful claims or investment losses.
What are the risks of litigation finance investments?
Litigation finance is a high-risk alternative investment. If a funded claim is unsuccessful, investors may lose part or all of their capital, particularly where investments are structured on a non-recourse basis.
Legal proceedings can also take years to conclude, making litigation finance relatively illiquid.
Investors may have limited opportunities to exit before a case is resolved, and settlements may produce lower returns than originally anticipated.
Although funders often diversify across multiple claims, litigation outcomes remain uncertain and can be affected by adverse court decisions, legal costs, regulatory changes, or operational issues.
For these reasons, litigation finance is generally considered suitable only for investors who understand the risks and can tolerate the potential loss of their investment.
FAQs
Is litigation finance a good investment?
Litigation finance can be a suitable investment for experienced investors who understand and can tolerate the significant risks involved.
Can you lose money investing in litigation finance?
Yes. Investors can lose part or all of their capital if funded legal claims are unsuccessful, take longer than expected to resolve, or generate lower-than-anticipated recoveries.
High advertised returns should not be interpreted as guaranteed outcomes.
Is a 14% fixed annual return realistic?
Yes, but investors should exercise caution. While some alternative investments may advertise double-digit returns, higher expected returns generally reflect higher levels of risk.
Investors should carefully evaluate how those returns are generated and whether the risks align with their investment targets.