IRR (Internal Rate of Return)

IRR is the annualized discount rate at which the net present value of all cash flows from a litigation investment equals zero — effectively, the time-adjusted return on deployed capital. IRR is sensitive to case duration: a 3.0x MOIC returned in 18 months generates an IRR above 100%, while the same MOIC over five years produces an IRR closer to 25%. For litigation finance fund managers, IRR is the primary performance metric used in LP reporting and fund benchmarking, as it accounts for the fact that litigation timelines — and therefore capital cycle times — vary enormously across the portfolio. Funders targeting institutional LP capital typically underwrite to IRR thresholds (often 20-30%+ net) and model downside scenarios that account for case losses, adverse costs awards, and settlement delays.

Because case duration compresses or inflates IRR independent of the underlying MOIC, funders underwriting to an IRR threshold — often 20–30% net — model expected duration as carefully as they model expected recovery size, since a mispriced timeline assumption can turn an attractive-looking multiple into a mediocre fund-level return. Funders build downside duration scenarios explicitly into IRR modeling, since litigation delay, not case loss, is often the more common way a well-underwritten investment underperforms.