Funds that buy inheritances in legal disputes offer returns of up to 20% per year

Heirs of large fortunes who fight in court to receive the amounts they deem owed have found a way out of the problem in the financial market in recent years.

Still a relatively new type of investment in Brazil, funds that buy legal disputes involving litigation between heirs for assets left by the patriarch or matriarch of the family are gradually gaining more and more space in the local market.

These funds usually make an offer to the heirs to buy the right to receive the expected amount a few years ahead, at a discount in relation to the total amount due to the risk of the payment of the inheritance being delayed or, eventually, not even occurring, depending on of the paths trodden in the legal environment.

Partner responsible for the origination and structuring areas of the manager specializing in stressed assets Jive Investments, Guilherme Ferreira says that the discount offered varies from case to case, depending on the degree of complexity involved.

According to Ferreira, in addition to analyzing aspects such as the time it may take to effectively receive the money involved in the dispute, what is the probability of winning the case and what is the value of the right under discussion, in many cases it is also necessary to carry out an investigation of goods that are not listed within the inventory, such as cash, jewellery, works of art or assets held abroad.

“Many times the heir who comes to us understands that he is being harmed, brings us information to track the money”, says Ferreira.

The manager of Jive —created in 2010 to participate in the Lehman Brothers bankruptcy estate auction in Brazil— claims that, for an investment of this type to be worth considering, the value of the claim needs to be R$ 50 million or more, given the analysis work required to enter such a process. “In cases involving lawsuits, time is a very unpredictable element.”

Because it involves lawsuits that are under secrecy in family courts, it is not possible to reveal in which cases the manager invested, says Ferreira. “People don’t want to air their dirty laundry in public,” says the expert, adding that Jive must have invested between BRL 100 million and BRL 150 million in legal disputes over the last few months.

Already from the perspective of the investor who accepts the risk of waiting for the course of the process to receive the amount involved in the dispute, the expectation of return of funds from stressed assets of Jive, which also include precatorios, defaulted credit portfolios of large banks and real estate , is 20% per year.

Given the degree of sophistication of the operation, the manager’s funds are aimed only at investors classified by market legislation as professionals, which are those with R$ 10 million in financial investments.

At Root Capital, a management company founded in early 2022 and which also invests in legal disputes of this nature, the target return is 15%, in dollars, given that around 80% of the client base is made up of large foreign investors.

Partner and director of investments at Root Capital, Rafael Fritsch says that, in a scenario of high interest rates, the funds represent a good alternative to unlock liquidity for the heirs, who can take advantage of the current macroeconomic moment to make investments with low risk and attractive return.

Among the operations carried out recently, Fritsch points to the investment in a precatório held by the heirs of an estate, who agreed to sell the title at a discount and wait for the amount owed to be received.

He adds that, in operations involving legal disputes, a common investment to be made is to provide financing so that one of the parties in the process can acquire the participation of the others involved to end the imbroglio.

“Sometimes there are heirs with a better financial situation than the others, and the one who is in a worse situation may want to dispose of the asset to which he is entitled”, says the manager.

The Root Capital partner, who has worked for large international banks such as JP Morgan and Bank of America, says that he plans to raise funds in 2023 to take advantage of the opportunities that may arise in the coming months.

The macroeconomic environment forecast for next year, with low economic growth and high interest rates, tends to be conducive to the emergence of operations for funds focused on investing in distressed assets, even if not necessarily involving legal disputes, says Fritsch.

Founding partner of the Candido Martins Advogados law firm, Alamy Candido states that situations of dispute over inheritance between members of a family often result from the lack of estate and succession planning.

“Equity planning is super relevant, and this is not something that is done overnight”, says the expert.

The formation of a reserve through a provident fund or life insurance are affordable options that can serve as an alternative for succession planning among family members over a few years, says Candido.

Previous meetings between the participants, with each one expressing their wishes and concerns, is also recommended in order to avoid possible disputes in court later on, says the lawyer. “There are several examples of inventories with a term of more than five years, or even more than that, because an agreement is not reached, with many people involved in the process, in which the notifications are endless.”