What does merits risk mean in litigation finance?

It is the chance the funded claim loses on liability, so the funder recovers nothing from it. Assessing it means testing the legal theory, the evidence that supports each element of the claim, the defenses, and how the case looks at its current procedural stage. It is distinct from the other ways a funded claim can fail: on jurisdiction or time limits, on damages, on appeal, or in collection.

How do funders assess the merits?

Through legal diligence and, at larger funders, modeling. Burford's 2025 10-K describes 'extensive in-house due diligence' with 'comprehensive legal and factual analysis,' 'quantitative probabilistic modeling' using third-party and proprietary data collected since 2009, and approval by a Commitments Committee. Its guide says it values cases led by counsel with experience, strong track records and a clear strategy. GAO found most funders fund a small share of requests: about 5% of formal requests at two funders.

Why do several strong stages still add up to a weak chance?

Because the chances multiply. A claim that has an 80% chance of surviving a motion to dismiss, a 75% chance at summary judgment, a 60% chance at trial and an 85% chance on appeal has about a 31% chance of a final win if every stage is fought. Most cases settle before the end, and settlements are priced off those odds, which is why funders model the whole path.

Does the procedural stage change the risk?

Yes. Each ruling removes some uncertainty. Burford's guide notes that 'matters with fewer unknowns (e.g., matters on appeal) require the least time' to underwrite while 'yet-to-be-filed matters require more time.' Summary judgment under Federal Rule of Civil Procedure 56 is granted where 'there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law,' so surviving it is a meaningful milestone, and Burford's valuation policy adjusts value by 'case milestone.'

Can a claim lose without losing on the merits?

Yes. Silver Bull Resources' arbitration against Mexico was dismissed on May 29, 2026 because the ICSID tribunal concluded it lacked jurisdiction and/or the claim was time-barred, after a full hearing, and Silver Bull was ordered to pay about $998,000 of Mexico's costs. Burford's $16.1 billion YPF judgment was won at trial and reversed on appeal in March 2026. Merits are necessary, not sufficient.

What do funders' win and loss records show?

That losses are routine even after diligence. AltStreet's Omni Bridgeway review reports 179 losing investments out of 822 completed, 17% of capital deployed, and a 21% loss rate in the company's track record comparison. AltStreet's Legalist review reports a two-thirds win rate across 248 realizations. Burford's 2025 10-K reports gross realized losses of $70.2 million in 2025.

Merits Risk

Litigation Finance & Legal Claims

Definition

Merits risk is the risk that a claim fails on its substance: that the claimant cannot establish liability under the law, cannot prove the facts, or loses to the defendant's defenses. It is the first thing commercial funders assess. GAO found six of seven commercial funders it interviewed considered the merits of a potential case, and Burford requires that 'the case must have strong merits with a tested legal theory.'

Why it matters

Merits risk is the core of litigation underwriting, but an investor rarely sees the analysis: funding agreements and case memos are confidential, and funders disclose results only in aggregate. What an investor can check is how the manager underwrites (who reviews, what data, what share of requests are funded), how losses have run by count and by capital, and whether the portfolio's cases depend on the same legal theory. Strong merits also do not protect against the other routes to a loss, from jurisdiction and time limits to appeals and collection. Treat a funder's win rate as a property of its whole process, and ask how often it has lost after a favorable early ruling.

Common misconceptions

•Strong merits are not a likely win on their own, because the chances at each stage multiply, and three or four likely stages can compound to well under 50%.
•A win at trial does not end merits risk, because appeals courts can reverse on the law, as the Second Circuit did with the YPF judgment in March 2026.
•Losing on jurisdiction or a time bar is not a merits loss, but it costs the funder the same, as Silver Bull's dismissed ICSID claim shows.
•A high win rate is not a low loss of capital, because losing cases can be larger or longer; Omni Bridgeway's losers used 17% of capital deployed.
•Diligence does not transfer control, because funders such as Burford say decision-making stays with the client and counsel, so the merits are argued by the client's lawyers.

Technical details

Worked example (illustrative): stage probabilities compound

Survive a motion to dismiss: 80%.

Survive summary judgment: 75%; cumulative 60%.

Win at trial: 60%; cumulative 36%.

Hold the judgment on appeal: 85%; cumulative about 31%.

A case that looks likely at every step has under a one-in-three chance of a final win if fought to the end, which is why settlement value and timing drive the funder's model.

What merits diligence covers

Liability theory: is it tested in this court, or novel?

Evidence: documents and witnesses for each element of the claim.

Defenses and counterclaims, including limitation periods and jurisdiction.

Procedural posture: filed or not, motions decided, discovery done, trial set, on appeal.

Counsel: experience with this claim type and forum, and their own stake in the outcome.

What AltStreet's reviews and filings show

GAO-23-105210: six of seven commercial funders considered the merits, five the legal team and five the defendant's ability to pay; about 5% of formal requests at two funders were funded.

Burford 2025 10-K: in-house diligence, probabilistic modeling on a dataset built since 2009, Commitments Committee approval; most matters reach a negotiated settlement, and since June 2021 it has seen a higher share of pre-adjudication settlements.

Silver Bull Resources' funding agreement with Bench Walk Advisors (September 5, 2023) committed up to $9.5 million for legal, tribunal, expert and defined corporate costs of its ICSID arbitration against Mexico; on May 29, 2026 the tribunal dismissed the claim, concluding it lacked jurisdiction and/or the claim was time-barred, and ordered Silver Bull to pay about $998,000 of Mexico's legal costs, and Bench Walk then terminated the agreement (Silver Bull 10-Q for July 31, 2026).

AltStreet's Omni Bridgeway review: 179 of 822 completed investments lost (17% of capital, 0.15x recovered); AltStreet's Legalist review: two-thirds win rate across 248 realizations.

Questions for a funder about merits underwriting

Who reviews each case, and is there an independent committee?

What share of requests did you fund last year?

How have cases performed after surviving summary judgment, compared with those funded before filing?

How many losses came on jurisdiction, time bars or appeal rather than at trial?

How many cases in the portfolio rest on the same legal theory?

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

What does merits risk mean in litigation finance?: It is the chance the funded claim loses on liability, so the funder recovers nothing from it. Assessing it means testing the legal theory, the evidence that supports each element of the claim, the defenses, and how the case looks at its current procedural stage. It is distinct from the other ways a funded claim can fail: on jurisdiction or time limits, on damages, on appeal, or in collection.
How do funders assess the merits?: Through legal diligence and, at larger funders, modeling. Burford's 2025 10-K describes 'extensive in-house due diligence' with 'comprehensive legal and factual analysis,' 'quantitative probabilistic modeling' using third-party and proprietary data collected since 2009, and approval by a Commitments Committee. Its guide says it values cases led by counsel with experience, strong track records and a clear strategy. GAO found most funders fund a small share of requests: about 5% of formal requests at two funders.
Why do several strong stages still add up to a weak chance?: Because the chances multiply. A claim that has an 80% chance of surviving a motion to dismiss, a 75% chance at summary judgment, a 60% chance at trial and an 85% chance on appeal has about a 31% chance of a final win if every stage is fought. Most cases settle before the end, and settlements are priced off those odds, which is why funders model the whole path.
Does the procedural stage change the risk?: Yes. Each ruling removes some uncertainty. Burford's guide notes that 'matters with fewer unknowns (e.g., matters on appeal) require the least time' to underwrite while 'yet-to-be-filed matters require more time.' Summary judgment under Federal Rule of Civil Procedure 56 is granted where 'there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law,' so surviving it is a meaningful milestone, and Burford's valuation policy adjusts value by 'case milestone.'
Can a claim lose without losing on the merits?: Yes. Silver Bull Resources' arbitration against Mexico was dismissed on May 29, 2026 because the ICSID tribunal concluded it lacked jurisdiction and/or the claim was time-barred, after a full hearing, and Silver Bull was ordered to pay about $998,000 of Mexico's costs. Burford's $16.1 billion YPF judgment was won at trial and reversed on appeal in March 2026. Merits are necessary, not sufficient.
What do funders' win and loss records show?: That losses are routine even after diligence. AltStreet's Omni Bridgeway review reports 179 losing investments out of 822 completed, 17% of capital deployed, and a 21% loss rate in the company's track record comparison. AltStreet's Legalist review reports a two-thirds win rate across 248 realizations. Burford's 2025 10-K reports gross realized losses of $70.2 million in 2025.