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Written by: Balqis Capital
Family offices are a key part of the global wealth landscape, serving ultra-high-net-worth families by managing and preserving their fortunes. They have long been attached to traditional portfolios of equities, bonds and property, but a shift is occurring among those looking to enhance returns and weather economic cycles more effectively.
Two alternative asset classes have emerged as notable contenders in this reshaping of strategy: litigation funding and private credit. For wealthy families, whose primary investment goals are capital preservation, long-term growth and intergenerational wealth transfer, the attraction of such alternatives lies in their potential for large returns and relative protection from market volatility.
Balqis Capital is as specialist in sourcing litigation funding and private credit investment opportunities for its clients. The team at Balqis, with more than 30 years of experience in its leadership team, are seeing more and more family offices diversify their portfolios with litigation funding and/or private credit.
Alan Graham, Director of Balqis Capital, said: “If family offices want to sustain wealth across generations, building litigation funding and private credit investments into the family portfolio is an important consideration.
“Times have changed and traditional investments are not what they used to be. The benefits of litigation funding and private credit to wealthy families and their long-term financial goals are incredible. We would urge any family offices who have not yet investigated options to diversify their portfolios to reach out and find out more,” he added.
What are Litigation Funding and Private Credit?
Litigation funding, also known as third-party legal financing, involves investing in legal claims in exchange for a portion of any financial recovery. A funder assesses the merits of a case and agrees to cover legal costs, such as solicitors’ fees, court expenses or expert witnesses. If the case is successful, the funder receives a pre-agreed share of the damages. If the claim fails, the loss is absorbed by the funder.
Private credit is lending that occurs outside traditional banking channels. It includes direct lending to mid-sized companies, mezzanine finance, distressed debt and real estate-backed loans. Investors effectively act as lenders, negotiating tailored terms with borrowers who can’t access support from commercial banks.
Why Traditional Options Are Losing Their Shine
Historically, family offices have relied heavily on blue-chip stocks, government bonds, and prime real estate to deliver stable, long-term returns. While these options continue to form the bedrock of many portfolios, they are no longer delivering the kinds of performance that once made them unassailable.
Global bond yields remain subdued despite recent interest rate hikes, and inflation continues to erode real returns. Equities, while offering long-term upside, are increasingly volatile amid geopolitical unrest, tightening monetary policy and sectoral disruptions. Commercial property, another long-standing investment option for many, is no longer a safe bet with the growth of remote working and changing consumer behaviours.
Litigation funding and private credit offer practical, calculated avenues for diversification and an alternative to other uncorrelated assets.
The Case for Litigation Funding
One of the most compelling features of litigation funding is its non-correlation with financial markets. Legal claims are driven by the merits of the case, the quality of legal representation and the jurisdiction in which the dispute is heard. These factors are largely unaffected by interest rate movements or equity market downturns.
The returns can be significant. Successful claims can generate rates of return exceeding 20 to 30 percent, especially when cases settle quickly or in the funder’s favour. Some family offices are now backing litigation finance funds, while others are investing directly in select cases, often with the help of intermediaries or legal advisers.
There’s also a growing social impact dimension to this type of investment. Litigation funding can help under-resourced claimants, such as SMEs or whistleblowers, to access justice against powerful entities. For family offices with philanthropic aims, this combination of profit and purpose is a compelling proposition.
The Case for Private Credit
Private credit is gaining traction as high yielding investment. While public debt markets remain volatile, private lending can offer predictability in cash flows, thanks to negotiated interest rates, covenants and collateral arrangements. Family offices, with their long-term horizons and flexibility, are particularly well placed to benefit.
Direct lending to small and mid-sized enterprises (SMEs) is one of the most common forms, particularly in sectors where traditional banks have withdrawn. These loans often carry interest rates of 8 to 12 percent, with relatively low default rates.
As well as offering great returns, private credit gives investors control. They can select the borrowers, structure deals to fit the risk they feel comfortable with and incorporate covenants that protect the capital.
Tax and Structuring Benefits
Bespoke structuring options available in alternative investments are a big appeal to family offices. Investment structures that can offer tax efficiency, asset protection and regulatory advantages means that returns can be managed in a way that aligns with the family’s overall financial planning. This is particularly important for those seeking to manage estate planning, generational transfers or cross-border holdings.
In some jurisdictions, recoveries from litigation funding may be treated as capital gains rather than income, potentially offering tax advantages. Similarly, private credit can be structured to defer or smooth out income recognition, subject to local tax rules.
A New Frontier for Family Capital
While not without risk, the allure of litigation funding and private credit lies in their ability to generate attractive returns in a diversified portfolio. For family offices navigating an era of economic uncertainty, regulatory change and market disruption, these alternatives offer a means to stay ahead of the curve.
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