Pricing Leakage — Where Funders Systematically Misprice

Duration underpricing is the most common and the most expensive

The single most common structural leak is pricing return against an optimistic point-estimate duration rather than the full duration distribution, discussed at length elsewhere in this series. The pricing consequence deserves its own emphasis here: because duration enters the IRR calculation as an exponent, a fund that consistently underestimates the tail of the duration distribution — even by a modest margin on average — will show a pattern of realized IRR falling short of underwritten IRR across nearly every case that runs long, not just the occasional outlier. If a fund's realized-versus-underwritten IRR gap is systematically negative and concentrated in cases that took longer than modeled, that is a pricing methodology problem, not a case-selection problem, and no amount of tightening case selection will fix it.

Jurisdiction pooling hides the venues that are actually mispriced

Pricing models that apply a single national or regional base rate to a case type, rather than a jurisdiction-specific rate, systematically overprice cases in below-average venues and underprice cases in above-average venues — and because funders naturally see more deal flow from venues where plaintiff counsel is active and case volume is high, a pooled national rate can be quietly wrong in the exact venues generating the most volume. The leak is invisible in aggregate portfolio statistics because the errors partially offset across venues; it becomes visible only when performance is decomposed by jurisdiction, which most standard reporting does not do by default.

The same pattern shows up with judge-level pooling: applying a circuit- or district-wide average duration or ruling rate to a case in front of a specific judge whose documented rate diverges meaningfully from that average produces a predictable, one-directional pricing error for every case in front of that judge.

Correlated-risk blindness understates the true cost of capital

The portfolio-construction leak described elsewhere in this series has a direct pricing consequence: a book that is more concentrated than its case-count diversification suggests is effectively carrying more risk per dollar deployed than the pricing model assumes, because the pricing model priced each case as an independent draw. The fix is not necessarily to demand a higher return on every case — it is to price the correlated cases as a group and require a higher blended return, or a lower aggregate allocation, to the correlated cluster specifically, rather than spreading a modest premium evenly across a portfolio that is not actually uniform in its risk exposure.

The audit that surfaces the leak

All three leaks share a diagnostic signature: a systematic, one-directional gap between underwritten expectations and realized outcomes, concentrated in a specific dimension (duration, jurisdiction, judge, or correlated cluster) rather than distributed randomly across the book. A portfolio review that decomposes realized-versus-underwritten performance along each of these dimensions separately — rather than reporting a single blended IRR gap — is the fastest way to find which of these leaks, if any, is present in a given fund's book.

Fee and expense structure can hide leakage even when the underlying pricing is right

A fund can price the underlying risk correctly and still show a leak in realized returns if the fee, servicing, and expense structure sitting on top of that pricing is not itself accounted for in the same performance decomposition. Stacked servicing fees, case-cost advances that carry their own interest treatment, and waterfall structures that allocate expenses unevenly across a portfolio can each erode the spread between underwritten and realized return in ways that look, from the LP's vantage point, identical to an underwriting miss — even when the underwriting was accurate and the leak is purely structural.

Distinguishing an underwriting leak from a structural fee leak requires decomposing realized performance at the same level of granularity used for the underwriting checks described above — by case, by duration bucket, by jurisdiction — but with the fee and expense layer stripped out first, so that what remains is a clean read on whether the underlying prediction was right, separate from what the fund's own cost structure did to the number afterward.

This distinction also matters for how a fund responds once a leak is identified. A structural fee leak is fixed by renegotiating servicing terms, restructuring the waterfall, or changing how case-cost advances are carried — an operational and legal fix, not an underwriting one. An underwriting leak is fixed by correcting the pricing methodology itself, which is a different team, a different process, and a different timeline. Funds that misdiagnose one as the other tend to fix the wrong thing first and watch the same gap reappear in the next reporting period.

What to ask for from an intelligence provider

• 01A realized-versus-underwritten performance decomposition by duration bucket, jurisdiction, and judge — not a single blended portfolio-level gap.
• 02Jurisdiction- and judge-level base rates in the pricing model, not a pooled national or circuit-wide average applied uniformly.
• 03A correlated-cluster pricing adjustment for cases sharing a judge, venue, defendant, or causation theory.
• 04A documented history of which prior underwriting assumptions were revised after realized-outcome review, and why.
• 05A performance decomposition that separates fee and expense structure from underwriting accuracy, so a leak gets diagnosed and fixed by the right team rather than misattributed to case selection.