Portfolio Finance & Structured Products Glossary

A fund-level carry structure in which the general partner receives its carried-interest share of profits on each individual investment as it is realized, rather than waiting until the entire fund's capital has been returned to limited partners, typically subject to a preferred return calculated on that specific deal and sometimes a clawback provision requiring the manager to return excess carry if later investments in the fund underperform. In litigation finance, a deal-by-deal structure can pay the manager meaningful carry on an early, successful case resolution even while other funded matters in the same fund are still pending or ultimately prove unsuccessful, which is why investors negotiating this structure typically insist on a robust clawback mechanism and often an escrow holdback of a portion of distributed carry to secure it. More →

A contractually defined event or performance threshold that, when breached, converts a structured legal-asset facility from its revolving or recycling phase into an amortization phase in which all portfolio proceeds are applied to repaying investors rather than being reinvested into new assets. Common amortization triggers in legal-asset structures include a decline in the overcollateralization ratio below a specified level, an increase in the rate of adverse case outcomes or write-offs beyond a defined threshold, a sponsor or servicer default, or the expiration of the negotiated recycling period regardless of performance. Because amortization triggers are typically designed to activate automatically upon breach of an objective, measurable test rather than requiring a subjective determination or investor vote, they function as a self-executing protection that does not depend on investors identifying and acting on a problem in real time. More →

A set of structuring features designed to ensure that an SPV holding legal-asset interests will not be consolidated into the bankruptcy estate of its sponsor or originator if that sponsor becomes insolvent, thereby protecting investors in the SPV's notes or interests from claims by the sponsor's other creditors. Bankruptcy-remoteness features typically include independent directors with fiduciary duties running to the SPV rather than the sponsor, restrictions preventing the SPV from filing its own voluntary bankruptcy petition without independent director consent, separateness covenants requiring the SPV to maintain its own books, contracts, and formalities distinct from the sponsor, and a properly documented true sale of the underlying assets into the vehicle. Courts assessing whether an SPV should be substantively consolidated with its sponsor in a bankruptcy proceeding examine whether these formalities were actually observed in practice, not merely recited in the governing documents, making disciplined ongoing compliance as important as the initial structuring. More →

A calculated ceiling on the amount a sponsor or fund manager may draw under a structured legal-asset credit facility at any given time, determined by applying a discount or advance rate to the value of eligible assets currently pledged as collateral, with the calculation refreshed periodically as the underlying case portfolio changes through new additions, resolutions, or valuation adjustments. Borrowing base certificates, typically delivered monthly or quarterly, itemize the eligible collateral and the resulting available borrowing capacity, and a facility's governing documents specify precisely which assets qualify as eligible — often excluding cases below a certain stage of development, cases involving a single overrepresented defendant, or cases past a certain duration without resolution. If the outstanding facility balance exceeds the recalculated borrowing base at any measurement date, the sponsor is typically required to either pledge additional eligible collateral or repay the facility down to the permitted level. More →

A formal notice issued by a fund manager to limited partners requiring payment of a portion of their previously committed capital, typically triggered by an upcoming investment opportunity or an operating expense obligation, under the drawdown mechanics specified in the fund's governing documents. Litigation finance funds generally call capital incrementally over an investment period rather than requiring the full commitment upfront, both because case-by-case deployment timing is inherently uncertain and because calling capital only as needed improves the fund's overall return by minimizing the period during which committed but undeployed capital sits uninvested. Failure by a limited partner to fund a capital call on time typically triggers default remedies specified in the fund agreement, which can include dilution of the defaulting investor's interest or forfeiture of prior distributions, reflecting the operational importance of reliable capital availability to a fund actively underwriting and deploying against time-sensitive case opportunities. More →

A waterfall provision requiring that some or all of the cash otherwise available for distribution to subordinated or residual investors be redirected instead toward accelerated repayment of senior obligations upon the occurrence of a specified trigger event, such as a failed overcollateralization test or an early-amortization event. Cash sweeps function as an intermediate protective measure between normal waterfall operation and a full default remedy, allowing a structure to self-correct in response to early signs of underperformance without requiring a formal event of default or investor enforcement action. Once the triggering condition is cured — for example, once the overcollateralization ratio is restored above its required threshold through portfolio recoveries — the cash sweep typically terminates and normal waterfall distributions to subordinated and residual holders resume. More →

A contractual restriction limiting the maximum percentage of a structured legal-asset pool that may consist of claims sharing a specific characteristic — the same defendant, the same case type, the same originating law firm, or the same jurisdiction — designed to prevent a single correlated event from disproportionately impairing the entire portfolio. Concentration limits are set based on the sponsor's and investors' joint assessment of how correlated outcomes are likely to be within a given category, with narrower limits applied to categories where a single adverse legal or factual development could affect many claims simultaneously, such as claims all turning on the same untested legal theory or all asserted against the same defendant. Facilities typically test concentration limits at each borrowing base recalculation or new-asset addition, treating a breach similarly to an eligibility failure requiring a cure. More →

The collective set of structural features in a legal-asset-backed facility designed to protect senior investors from portfolio losses, including subordination, overcollateralization, reserve accounts, and performance-triggered cash sweeps, each of which absorbs or redirects risk in a different way and at a different point in the loss sequence. Structurers typically layer multiple forms of credit enhancement together rather than relying on any single mechanism, since each addresses a distinct type of risk — subordination absorbs ultimate credit losses, reserve accounts smooth timing mismatches, and cash sweeps provide an early, automatic response to deteriorating performance before losses are realized. The total level of credit enhancement required for a given rating or investor return threshold is calibrated against the specific risk characteristics of the underlying case portfolio, meaning a pool of higher-variance commercial litigation claims requires materially more enhancement than a pool of more predictable, lower-variance claims to achieve the same senior-tranche protection. More →

The specific, contractually defined characteristics a legal-asset interest must satisfy to be included in a structured facility's collateral pool or borrowing base, typically addressing case type, jurisdiction, procedural stage, defendant concentration, expected duration to resolution, and the absence of specific disqualifying facts such as an adverse ruling already issued or a defendant in financial distress. Eligibility criteria function as the primary quality-control mechanism in a revolving or borrowing-base facility, since they constrain what a sponsor can add to the pool without requiring investor or lender approval of each individual addition. Because case quality is harder to standardize than conventional receivables, eligibility criteria in legal-asset facilities are typically more detailed and more heavily negotiated than in comparable asset-backed structures for other asset classes, often running to multiple pages of specific inclusion and exclusion tests. More →

A fund-level carry structure in which the general partner's or fund manager's share of profits is calculated only after all limited partner capital across the entire fund has been returned along with a preferred return, meaning the manager typically does not receive carried interest until the fund as a whole — not just individual successful investments — has cleared this threshold. In a litigation finance fund context, the European waterfall aligns the manager's incentives with overall portfolio performance rather than with any single case's early success, since a string of early wins cannot generate carry payments to the manager if the fund's aggregate capital has not yet been returned to investors. This structure is generally viewed as more investor-favorable than a deal-by-deal alternative, since it prevents a manager from being paid on individual winning cases while investors are still underwater on the fund as a whole. More →

A structural feature of a litigation finance fund or facility in which proceeds from successful cases within the fund are available to support obligations or losses associated with other cases in the same fund, rather than each case's proceeds being isolated and applied only to that specific investment's own return. Cross-collateralization is what makes portfolio-level diversification actually functional at the cash-flow level, since without it a fund could report an attractive blended return on paper while individual investors in a single underperforming case tranche experience an actual loss. The scope of cross-collateralization — whether it operates across the entire fund, only within a defined sub-pool, or not at all in a single-case side-car vehicle — is a fundamental structuring decision that directly shapes how portfolio diversification translates into investor-level outcomes. More →

A committee composed of representative limited partners in a litigation finance fund, typically convened to review and approve matters requiring investor input under the fund's governing documents, including conflicts of interest, valuation methodology disputes, and certain material changes to fund strategy or key-person provisions. Advisory committee members generally do not participate in individual investment decisions, preserving the fund manager's investment discretion, but they serve as a structured forum for addressing governance issues that arise over a fund's multi-year life, particularly in an asset class where portfolio valuation is inherently judgment-dependent and conflicts between fund-level and manager-level economics can arise around waterfall timing and carry calculation. More →

The practice of valuing illiquid legal-asset interests using an internally or independently developed probability-weighted model of expected recovery, discounted for time and risk, rather than relying on an observable market price, since litigation and funding claims generally do not trade in a liquid secondary market with regular price discovery. Mark-to-model valuations typically incorporate case-specific inputs — procedural stage, jurisdiction, comparable historical outcomes for similar claims, and any interim rulings — combined with portfolio-level assumptions about correlation and duration, and are updated periodically as cases progress or new information emerges. Because these models are inherently more judgment-dependent than mark-to-market valuation of liquid securities, investors and auditors scrutinize model governance closely, including how frequently assumptions are updated, who has authority to override model outputs, and whether the model has been independently validated against actual historical resolution outcomes. More →

A credit-enhancement technique in which the face or estimated value of the legal-asset pool backing a structured facility exceeds the amount of notes or interests issued against it, providing a cushion that absorbs portfolio underperformance before investors experience any loss. Overcollateralization is typically expressed as a ratio or percentage — for example, a pool valued at 130% of the issued note balance — and structures commonly include an overcollateralization test that must be maintained throughout the facility's life, with cash otherwise available for subordinated or residual distributions instead trapped and used to pay down senior notes if the ratio falls below the required threshold. Because legal-asset valuations are themselves estimates rather than observable market prices, overcollateralization in this asset class is typically calculated against a conservatively haircut valuation of the pool rather than its full modeled expected value, building a second layer of conservatism into the credit enhancement. More →

The contractually defined sequence in which cash recovered from a portfolio of legal claims is applied to expenses, fees, and each class of investor, typically running from servicing costs and administrative expenses, to senior tranche interest and principal, to subordinated tranche interest and principal, and finally to any residual equity holder. The waterfall governs not just who gets paid but in what order and under what conditions — many structures include performance triggers that redirect cash flow toward faster senior repayment if portfolio performance falls below a specified threshold, diverting cash away from subordinated and equity holders even before an actual default occurs. Waterfall mechanics are drafted with significant precision because litigation-asset recoveries arrive irregularly and in unpredictable amounts, unlike the more even payment streams typical of conventional securitized assets, requiring the structure to specify exactly how lumpy, uneven proceeds are allocated across the payment period in which they arrive. More →

A debt instrument issued by an SPV against a pool of legal-asset interests and assigned a credit rating by a nationally recognized statistical rating organization, reflecting that agency's independent assessment of the likelihood the noteholder will receive scheduled interest and principal payments in full and on time. Obtaining a rating for legal-asset-backed notes requires the rating agency to develop or apply a methodology suited to litigation outcomes specifically, since conventional consumer or corporate default and recovery data do not translate directly to case-level legal risk, and agencies active in this space typically require extensive historical performance data on comparable case types before assigning an initial rating. A rated structure generally commands a lower cost of capital for the rated tranche than an unrated equivalent, since the rating expands the pool of institutional investors — many of whom are restricted by their own investment mandates to rated instruments — who can participate. More →

The defined period in a revolving structured legal-asset facility during which proceeds from resolved cases may be reinvested into new eligible claims rather than distributed to investors, after which the facility typically converts to an amortization phase in which all proceeds are applied to paying down outstanding notes or interests. The length of the recycling period is negotiated based on the sponsor's expected deployment pace and the investor's desired overall facility duration, and recycling is usually subject to the same eligibility criteria and concentration limits that govern the initial pool, ensuring reinvested capital maintains the portfolio's original risk profile rather than drifting toward lower-quality assets over time. Facilities commonly include an early transition to amortization — ending the recycling period ahead of schedule — if portfolio performance tests are breached, giving investors a mechanism to stop reinvestment and begin recovering capital if the underlying assets are underperforming. More →

A cash account established and funded as part of a structured legal-asset facility to cover specific anticipated costs or shortfalls — commonly servicing fees, interest payments during periods of low portfolio cash generation, or a buffer against expected near-term expenses such as case costs on funded matters — separate from the general waterfall of portfolio proceeds. Reserve accounts are typically funded at closing from initial proceeds or built up gradually from early cash flows, and their required minimum balance is specified in the transaction documents, with a shortfall in the reserve triggering a cash-trapping mechanism similar to an overcollateralization test. Because legal-asset portfolios generate cash unevenly, with long stretches of no recoveries followed by lumpy settlement inflows, reserve accounts serve a liquidity-smoothing function distinct from the loss-absorption role that subordination and overcollateralization play. More →

A structured legal-asset facility in which proceeds from resolved cases during a defined revolving period are reinvested into new, eligible legal-asset interests rather than distributed immediately to investors, allowing the facility to maintain a relatively constant outstanding balance and case-portfolio composition over a longer period before eventually converting to an amortization phase in which proceeds are paid out rather than reinvested. Revolving structures require detailed eligibility criteria governing what kinds of new claims can be added to the pool during the revolving period, since investors are effectively delegating ongoing case-selection discretion to the sponsor within those defined boundaries rather than underwriting a single fixed set of assets. Because the composition of the pool can change during the revolving period, these facilities typically include concentration limits and portfolio-quality tests that must be satisfied with each new addition, with a breach triggering an early transition to the amortization phase. More →

A regulatory requirement, originating from post-financial-crisis securitization reform, obligating a sponsor of certain asset-backed securities to retain a specified minimum economic interest in the underlying pool — commonly a percentage of the fair value of the securities issued — rather than transferring the entire risk of the assets to investors. The purpose of risk retention is to align the sponsor's incentives with those of investors by ensuring the sponsor bears meaningful loss exposure if the underlying assets underperform, discouraging the origination of low-quality assets purely for sale into a structure. Whether and how risk retention rules apply to a given legal-asset securitization depends on the specific structure and jurisdiction, and sponsors structuring novel legal-asset transactions typically obtain a specific regulatory analysis before assuming an exemption applies, since a mistaken assumption about non-applicability can create compliance exposure discovered only after closing. More →

The transfer of an existing investor's or fund's economic interest in a funded litigation claim or portfolio to a new buyer prior to the underlying case's resolution, allowing the original investor to achieve liquidity without waiting for the litigation to conclude. Secondary transactions in this asset class remain less common and less standardized than in more established alternative asset classes such as private equity, both because case-level valuation is inherently uncertain and because many funding agreements include consent or notification requirements governing any transfer of the funder's interest, reflecting the underlying claimant's and counsel's interest in knowing who ultimately holds an economic stake in their matter. Pricing in a secondary sale is typically negotiated at a discount to the seller's own internal mark, reflecting both the buyer's independent diligence costs and the inherent illiquidity premium attached to an asset with no established trading market. More →

The most common tranching architecture in structured legal-asset finance, consisting of a senior class entitled to be paid first from portfolio proceeds and a subordinated class that absorbs the first losses and is paid only after the senior class's principal and contractual return are satisfied in full. The subordination level — typically expressed as the subordinated tranche's percentage of total facility size — functions as a credit-enhancement cushion for the senior holder, since portfolio losses must exceed that entire cushion before the senior class experiences any impairment. Because legal-asset pools lack the extensive historical default data available for conventional consumer or corporate receivables, subordination levels in litigation-finance structures are typically set well above what a comparably sized conventional asset-backed structure would require, reflecting both thinner historical loss data and the fatter tail risk inherent in binary case outcomes. More →

A contract governing the ongoing administration of a portfolio of legal-asset interests held by an SPV, under which a servicer — often the original fund manager or a specialized third party — handles case monitoring, collection of proceeds, lien and waterfall administration, investor reporting, and enforcement of the underlying funding agreements on behalf of the SPV and its investors. Servicing agreements specify the servicer's standard of care, typically requiring the servicer to act in accordance with practices it would apply to similar assets held for its own account, and they define the servicing fee, usually calculated as a percentage of assets under management or of proceeds collected. Because the servicer often has ongoing relationships with the underlying law firms or claimants and detailed knowledge of individual case status, replacing a servicer mid-facility is operationally difficult, which is why servicing agreements typically specify a limited set of default triggers — such as fraud, gross negligence, or insolvency — that permit removal rather than allowing termination for ordinary underperformance. More →

A supplemental agreement between a fund manager and an individual limited partner that modifies or supplements the terms of the fund's main governing documents as applied to that specific investor, commonly covering matters such as most-favored-nation rights to terms given to other investors, additional reporting or transparency commitments, co-investment rights, or specific regulatory or tax accommodations the investor requires. Side letters are typically kept confidential between the manager and the specific investor, subject to most-favored-nation provisions that may give other investors the right to request comparable terms, and managers must track the cumulative effect of multiple side letters carefully to ensure obligations to different investors do not conflict with one another or with the main fund agreement. More →

A legally distinct entity, typically a limited liability company or similar structure, formed for the sole purpose of holding a defined pool of legal-asset interests and issuing interests or notes against that pool to investors, isolating the assets from the operational and credit risk of the fund manager or originator that assembled them. The SPV holds the litigation claims or funding receivables as its only assets, has no employees or independent business operations, and is structured with restrictions on its activities — no additional debt, no merger, no asset disposition outside the ordinary course — specifically to preserve the predictability investors require when their return depends solely on the performance of the assets inside the vehicle. Because the SPV is bankruptcy-remote from its sponsor, investors in the SPV's notes or interests are protected from the sponsor's own creditors even if the sponsor itself becomes insolvent, provided the SPV was properly structured and the asset transfer into it satisfies the legal requirements for a true sale. More →

A structured legal-asset facility in which the underlying pool of case interests is fixed at closing and does not change over the life of the transaction — no new claims are added and proceeds from resolved cases are distributed to investors according to the waterfall rather than reinvested into new matters. Static pool structures are simpler to underwrite and rate than revolving structures because the entire universe of risk is known and fixed at the outset, allowing investors to model expected performance against a defined, unchanging set of cases rather than having to underwrite the sponsor's future case-selection discipline. The tradeoff is that a static pool amortizes down over time as cases resolve, meaning the facility naturally winds down and investors must be redeployed into a new transaction once the pool is exhausted, rather than the facility continuing indefinitely. More →

The division of a structured legal-asset facility into two or more classes of interests, each carrying a different priority of payment and a different risk-and-return profile, so that losses on the underlying case portfolio are absorbed first by the most junior tranche before reaching more senior classes. In a typical litigation-asset structure, a senior tranche receives the first priority claim on recoveries and the lowest contractual return, a subordinated or mezzanine tranche sits behind it with a higher return to compensate for absorbing losses first, and an equity or residual tranche captures any remaining upside after all senior obligations are satisfied. Tranching allows a single pool of heterogeneous, illiquid legal claims to be sold to investors with very different risk appetites from the same underlying collateral, since a conservative institutional buyer can hold the senior tranche while a return-seeking specialist investor holds the junior piece. The relative sizing of each tranche — how much subordination sits beneath the senior class — is set based on modeled loss scenarios across the pool, not on any single case's expected outcome. More →

A legal opinion, typically required by investors and rating agencies before closing a structured legal-asset facility, confirming that the transfer of claims or funding receivables from the originator to the SPV constitutes a genuine sale rather than a secured borrowing that would leave the assets exposed to the originator's creditors in a subsequent bankruptcy. Courts distinguish a true sale from a disguised financing by examining factors including whether the transferor retained a right to repurchase the assets, whether the transferor bears ongoing risk of loss on the assets after transfer, whether the sale price reflected a fair market value rather than a formulaic loan-like amount, and whether the parties' own documentation and accounting treatment consistently describe the transaction as a sale. Because the consequences of a recharacterization are severe — the assets could be pulled back into the originator's bankruptcy estate, defeating the entire purpose of the SPV structure — true sale opinions are drafted conservatively and updated whenever the underlying transfer mechanics change. More →