Brazil has quietly built one of the most structurally distinct and resilient special-situations credit markets in the emerging world: government-backed legal claims. Under Brazil’s Constitution, “the ability to litigate against the Federation or the government is a constitutional right,” asserted a senior partner at a leading Latin American investment institution. 

This protection has repeatedly withstood attempts by public entities to delay or restructure payments – “many times the government has tried to change the Constitution… the attempts are not to pay, the attempts are to pay in instalments, to pay later. It’s always a postponing game,” remarked the investment partner. The Supreme Court’s recent rejections of proposed instalment schemes underscore how firmly the judiciary defends these rights. As one market leader noted, even new state-level proposals face immediate challenge, “We are already litigating it… we’re probably going to overrule it next year.” 

This combination of constant regulatory friction – and equally constant constitutional reinforcement – has created a paradoxical environment: contentious yet stable, unpredictable in process yet extraordinarily predictable in outcome. As the well-versed lawyer stated, operating in Brazil requires deep proximity to the legal system, “I talk to senators, Supreme Court justices, ministers… one has to do that to be in this asset class.” 

“I talk to senators, Supreme Court justices, ministers… one has to do that to be in this asset class.”

Senior partner at a global investment institution, Brazil 

The opportunity is enormous. The federal government pays roughly USD 20 billion annually on nearly 100,000 claims, while the market for distressed assets (including court orders, tax credits and debts) is “worth over USD 100 billion,” as noted by a partner at a local Sāo Paulo law firm. 

Meanwhile, the judiciary manages more than 84 million active cases. Brazil’s famously complex legal system, where commercial disputes can take six to eight years to fully resolve, creates persistent liquidity needs among claimants. Yet, as the local lawyer observed, “Right now, performance still depends heavily on specialist knowledge, individual court behaviours and unique deals.” 

Two markets dominate this universe. The first is the crowded last-mile market for precatórios [final judicial orders requiring the government to pay a specific debt], where banks and family offices purchase these claims at discounts of 30–40 percent to face value. Pricing, however, would improve significantly if “governments at all levels become more predictable with precatório payments,” which would make these assets “much easier to price” explained the lawyer. 

The second market, which is far more specialised, is the structured financing of mid-stage claims where legal merit is already determined. Here, investors advance capital secured by the claim, earning “around 2 percent per month, plus inflation, plus the kicker,” exclaimed the senior partner. The cash-flow profile is unusually fast, “Of the USD 2 billion I’ve invested… I’ve already given back USD 2 billion.” These attributes – legal certainty, collateralisation, inflation linkage and rapid Distributions to Paid-In capital (“DPI”) – position the asset class as a natural candidate for institutional private-credit portfolios. 

Despite growing global interest, “foreign funds are not currently active competitors… there are no foreigners. Zero!” emphasised the senior partner. While international investors may allocate capital through local managers, “there is no dedicated team from the likes of Blackstone, BlackRock, Cerberus, Apollo – nobody is doing this in the country except for [us].”  

“Foreign funds are not currently active competitors… there are no foreigners. Zero!”

Senior partner at a global investment institution, Brazil 

The reason is not lack of appetite but the extraordinary complexity of the market. “You need to be very good at local law… you will need to study the entire Brazilian judiciary,” advised the specialist, explaining that leading firms operate on a scale that is “extremely difficult to replicate,” with networks comprising hundreds of senior lawyers and dozens of sourcing houses. As a result, real competition today comes from domestic institutions, such as, “BTG… Safra Bank… very local people.” Foreign attempts to enter have ended predictably, “Whoever tried left,” concluded the partner. 

Yet international participation is increasing indirectly through capital commitments. Siguler Guff’s BSSF III recently closed at USD 415 million, beating its target. As the lawyer observed, “Foreign new funds entering the market bring more structure. They demand clearer documentation and tighter risk controls… good for the whole sector but [putting] pressure on local firms.”  

However, for the asset class to scale, Brazil must address gaps. “Right now, Brazil doesn’t really have a clear set of rules for litigation funding or selling claims… there is no regulatory framework for third-party funding,” explained the lawyer. Greater standardisation would also mitigate reputational risks, given the ease of political narratives that “funds are cashing in on government losses.” 

Institutionalisation, though, is underway. One leading expert is launching “the first public offering of an entire portfolio of legal receivables… around R$ 1 billion… we’re creating a secondary market.” This expert is unequivocal about the future, “This is an asset class already in Brazil… I’m 100%.” 

With its constitutional durability, vast scale and accelerating professionalisation, Brazil’s legal-claims market is rapidly evolving from a niche special situation into a sophisticated, high-yield, inflation-hedged asset class increasingly aligned with global private-credit portfolios. For sophisticated investors, it’s becoming very hard to ignore.