Evaluating Collateral in Patent/Litigation Portfolios

Many accredited investors on our platform are looking to better understand Patent/Litigation Finance; an Investment product with which they may have little to no experience. Here, we outline a couple of important points to give investors a basic understanding of how a typical opportunity is assessed.

Evaluating the Borrower

The first thing an investment team will look at is the Obligor’s credit rating. Since the borrower is the financially liable party, an investment team needs to make sure that the Obligor –  an institution or entity who is contractually bound to make all principal repayments and interest payments on an outstanding debt – is financially stable and able to pay the plaintiff’s award or settlement amount.

Evaluating Collateral

We want to ensure that the portfolio is not too heavily concentrated on any one Obligor, in other words, we want to avoid having a single Obligor who has accountability for a high percentage of the portfolio. However, it is possible to consider Obligors with the highest possible credit rating to have more concentration within a portfolio.

Finally, we will look at the LTV (loan-to-value) of a portfolio. This is similar to the LTV you will see on a real estate investing opportunity, as it measures the a ratio of how much has been advanced to plaintiffs vs. the estimated total case settlement value.

Typically, the largest litigation originator, as a matter of policy, will not advance more than 10% of an overall case value and 15% of a net case value.

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