Two corners of the alternative asset landscape that used to feel orthogonal -- litigation finance and distressed/special situations credit -- are starting to rhyme. In 2026, both are being pulled in the same direction: toward more disclosure, more standardized process, and more emphasis on who controls the outcome when things break.
For LPs, the practical point is not that every cycle produces attractive entry points (it does), but that the shape of opportunity is changing. The next tranche of returns is less about broad macro timing and more about microstructure: transparency regimes, creditor coordination, and the legal plumbing that determines who gets paid first.
1) Litigation finance is moving from 'dark pools' to disclosure
Litigation funding has grown into an institutional market, but it still sits inside a legal system that was not designed for outside capital. That mismatch is now the subject of explicit policy attention. In February, Senate Judiciary leadership introduced the Litigation Funding Transparency Act, which would require public disclosure of third-party litigation funding in federal mass tort and class action proceedings, including foreign funding, and would prohibit funders from influencing litigation strategy or settlement negotiations.
Whether or not this specific bill becomes law in its current form, the direction is clear: courts and legislators are increasingly treating third-party funding as a potential governance issue, not merely a financing decision. The market implication is straightforward: higher transparency typically compresses information asymmetry, reshapes pricing, and can push underwriting toward scale players with compliance infrastructure.
That said, transparency is not inherently 'anti' litigation finance. In many jurisdictions, standardization has historically expanded institutional participation by clarifying enforceability and reducing reputational risk. If disclosure rules harden, expect second-order effects: more emphasis on portfolio construction, clearer separation between capital providers and case-control decisions, and more use of structured terms that look less like 'participation' and more like risk transfer.
2) Bankruptcy filings are rising again -- a signal that the unwind is underway
Distressed opportunity sets ultimately require catalysts. One of the most reliable is volume: more stressed situations create more forced sellers, more refinancing cliffs, and more legal events that reset bargaining power. Recent U.S. Courts data points to that volume building. Total bankruptcy filings rose 11% in the twelve-month period ending December 31, 2025 (to 574,314), with business filings up 7.1% (to 24,737).
Importantly, this is happening from historically low levels relative to the post-2008 peaks -- but the trend matters. After years where liquidity was abundant and maturities could be extended with minimal pain, the system is re-learning what 'risk premium' means. The 'higher for longer' era does not need a recession to generate distress; it only needs time.
3) The capital stack is getting more negotiable (and more litigious)
The most consequential changes in distressed credit are often not headline bankruptcies but what happens before them: covenant resets, priming debt, liability management exercises, and amendments that quietly reallocate value among creditor groups. When credit documents become battlegrounds, the line between distressed investing and litigation risk blurs.
From an LP perspective, this is where manager selection starts to dominate. In a market where outcomes depend on documentation nuance and creditor coordination, the value-add shifts toward teams with restructuring experience, legal sophistication, and the ability to operate across jurisdictions. The dispersion between 'good' and 'average' underwriting widens when the playbook is not just buy-and-hold, but negotiate-and-enforce.
4) What this means for underwriting in 2026
The common thread between litigation finance and distressed/special situations is that both are increasingly governed by rule sets: court procedures, disclosure mandates, intercreditor agreements, and creditor rights. The asset is not only a claim; it is a claim inside a process.
In practice, that suggests three underwriting questions LPs should keep front-of-mind when evaluating exposure to these strategies:
(i) Process advantage: Does the manager have repeatable sourcing and diligence workflows (data, legal review, scenario trees), or is the strategy dependent on one-off brilliance?
(ii) Control points: Where does the manager sit in the decision graph -- senior secured, fulcrum, litigation claim control, or passive participant? Control is often the hidden driver of realized IRR dispersion.
(iii) Regulatory/compliance readiness: If disclosure or procedural rules tighten, does the strategy become easier to institutionalize, or does it rely on opacity that will be competed away?
Bottom line
2026 is shaping up as a year where alternative return streams increasingly depend on governance: who can enforce, who must disclose, and who gets to steer the outcome when negotiations replace growth. Rising bankruptcy volumes expand the playground. Potential transparency rules in litigation finance could reduce tail risk tied to hidden counterparties while also changing competitive dynamics. For LPs, the opportunity is real -- but the edge is shifting from macro calls to execution: documentation, process, and control.