Does the funder recover its investment before sharing profits?

Usually. Burford's 2025 10-K describes its typical single-case structure as 'the return of our deployed capital, plus' a time-based return, a multiple or a percentage. AmBase's 10-Q describes funding agreements as generally structured so that the funder 'would receive back their initial funding amount first (i.e. before any recovery is received by the Company), plus an additional multiple ranging from 1.0 times to 3.5 times the amount funded.' Silver Bull's agreement offered 'a return of 1.0x Bench Walk's capital outlay plus 30%' as one option.

A step after the preferred return in which the manager receives most or all of the next distributions until it has its full carry share of total profit. With an 8% preferred return and a full catch-up to 20% carry, investors receive their capital and pref first, then the manager catches up, then profits split 80/20. The worked example on the waterfall page shows the arithmetic.

Does capital-first protect the investor?

It protects against partial outcomes, not losses. If a case recovers more than the funder's capital, capital-first terms make sure that capital comes back before the claimant shares. If the case loses, there is nothing to repay. At the fund level, a whole-fund preferred return protects investors only if carry is calculated after losses; under an American (deal-by-deal) waterfall, carry can be paid on early winners.

Who guarantees the claimant anything?

Only the agreement. Some give the claimant a preference: AmBase's 2019 amendment paid the company the first $7.5 million of proceeds before its funder's 25% share of the excess. Without such a term, a small recovery can go entirely to the funder's capital and return.

Capital Repayment and Preferred Return

Litigation Finance & Legal Claims

Definition

Capital repayment is the return of the money a funder deployed, usually paid from proceeds before any return or profit share. A preferred return is a minimum return, often expressed as an annual rate or hurdle, that one party receives before another shares in profits. In litigation finance both appear twice: in the funding agreement between funder and claimant, and in the fund's waterfall between investors and the manager.

Why it matters

Capital-first terms and preferred returns decide who is protected when results are modest. At the case level they protect the funder against a recovery that only just covers its outlay; at the fund level they are meant to protect investors against the manager earning carry before investors have made a return. Both work only as far as the money and the structure allow: a deal-by-deal waterfall can pay carry before losses arrive, and a time-based tier can make a slow case very expensive for the claimant. Ask where capital and preferred returns sit at both levels. Then check whether the preferred return is measured across the whole fund.

Common misconceptions

•A preferred return is not a guaranteed return, because it is paid only from proceeds the fund actually receives.
•Capital-first does not protect against a losing case, because there is nothing to repay when the claim produces nothing.
•A whole-fund hurdle and a deal-by-deal hurdle are not the same, because the second can pay carry on winners before later losers are counted.
•Time-based tiers do not only reward the funder, because they also compensate it for duration risk that would otherwise lower its annual return.
•The claimant is not protected by default, because a minimum share exists only if the agreement grants one, as AmBase's 2019 amendment did.

Technical details

Worked example (illustrative): AmBase-style time tiers on $7.0 million

Fund amount $7.0 million.

Proceeds by September 30, 2026: funder entitled to $7.0 million + 50% = $10.5 million.

Within 12 months of funding: $7.0 million + 1.0x = $14.0 million.

Within 24 months: $7.0 million + 1.5x = $17.5 million.

After 24 months: $7.0 million + 1.8x = $19.6 million. The tiers are AmBase's; the $7.0 million is used for illustration and the entitlement is limited to the proceeds available after any amounts ranking ahead.

Worked example (illustrative): fund-level preferred return

Investors contribute $100.0 million; proceeds $180.0 million after four years.

Capital first: $100.0 million.

8% compounded preferred return: about $36.0 million.

Full catch-up to 20%: about $9.0 million to the manager.

Rest split 80/20: investors receive $164.0 million in total, the manager $16.0 million, before management fees; if proceeds were $130.0 million, investors would take all of it and the manager no carry.

What AltStreet's reviews and filings show

Burford's 2025 10-K says a basic single-case deal typically returns its deployed capital plus 'one or a combination' of a time-based return such as an interest rate, a multiple of deployed capital 'that may increase over time,' and a percentage of the net realization 'that may increase or decrease over time or may depend on the size of the total resolution amount'.

AmBase's March 2026 funding agreement with its chief executive (10-Q for June 30, 2026) pays the funder first until it has received the fund amount plus 50% if proceeds arrive by September 30, 2026, plus 1.0x within 12 months of funding, plus 1.5x within 24 months and plus 1.8x after that, with the company receiving the rest; its 2019 amendment gave the company the first $7.5 million.

Bench Walk was entitled to 'a share of any proceeds arising from the Claim ... of up to 3.5x Bench Walk's capital outlay (or, if greater, a return of 1.0x Bench Walk's capital outlay plus 30% of Claim Proceeds),' secured by a security interest in the claim, its proceeds and rights under any appeal bond.

AltStreet's Omni Bridgeway review (October 31, 2026): the newest funds charge about 2% a year on active commitments and transaction fees targeted at 2.5% to 3.0% of commitments, with an 8% hurdle, catch-up and carried interest of 20% up to a 20% IRR and 30% above it, on an American (deal-by-deal) waterfall; Fund 6 used a 10% hurdle.

Questions about capital repayment and hurdles

Is the funder's capital repaid before any return, and before counsel's success fee?

Does the claimant have a preference amount?

Do the funder's terms step up with time, and at what dates?

Is the fund's preferred return compounded, and is it measured across the whole fund?

Is there a catch-up, and does carry clawback apply if later cases lose?

How investors apply the term

Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.

The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.

Frequently asked questions

Does the funder recover its investment before sharing profits?: Usually. Burford's 2025 10-K describes its typical single-case structure as 'the return of our deployed capital, plus' a time-based return, a multiple or a percentage. AmBase's 10-Q describes funding agreements as generally structured so that the funder 'would receive back their initial funding amount first (i.e. before any recovery is received by the Company), plus an additional multiple ranging from 1.0 times to 3.5 times the amount funded.' Silver Bull's agreement offered 'a return of 1.0x Bench Walk's capital outlay plus 30%' as one option.
What is a preferred return in a litigation fund?: A hurdle investors must reach before the manager earns carried interest. AltStreet's Omni Bridgeway review (October 31, 2026): the newest funds charge about 2% a year on active commitments and transaction fees targeted at 2.5% to 3.0% of commitments, with an 8% hurdle, catch-up and carried interest of 20% up to a 20% IRR and 30% above it, on an American (deal-by-deal) waterfall. Omni Bridgeway's Fund 6 used a 10% hurdle, per the same review. A preferred return is a priority in the waterfall, not a guaranteed payment: it is paid only if the fund's cases produce enough.
How do time-based returns work?: The funder's entitlement grows the longer the case takes. AmBase's March 2026 agreement pays the fund amount plus 50% if proceeds arrive by September 30, 2026, plus 1.0x within 12 months of funding, plus 1.5x within 24 months and plus 1.8x after that. Burford's 10-K says some assets 'have time-based terms that increase our absolute returns as time passes,' which protects it on duration risk.
What is a catch-up?: A step after the preferred return in which the manager receives most or all of the next distributions until it has its full carry share of total profit. With an 8% preferred return and a full catch-up to 20% carry, investors receive their capital and pref first, then the manager catches up, then profits split 80/20. The worked example on the waterfall page shows the arithmetic.
Does capital-first protect the investor?: It protects against partial outcomes, not losses. If a case recovers more than the funder's capital, capital-first terms make sure that capital comes back before the claimant shares. If the case loses, there is nothing to repay. At the fund level, a whole-fund preferred return protects investors only if carry is calculated after losses; under an American (deal-by-deal) waterfall, carry can be paid on early winners.
Who guarantees the claimant anything?: Only the agreement. Some give the claimant a preference: AmBase's 2019 amendment paid the company the first $7.5 million of proceeds before its funder's 25% share of the excess. Without such a term, a small recovery can go entirely to the funder's capital and return.