Cost of capital is the return required by the providers of the money used to fund a position. A position creates value only if its risk-adjusted return, after time, exceeds that cost.
For a funder, the cost of capital includes the return investors expect, the cost of any borrowing and the cost of capital sitting idle between positions. Duration affects all three, since long matters tie up capital and idle time dilutes the average.
Pricing a legal asset therefore needs a view of time as well as probability. A position priced to a median duration under-recovers on the cost of capital when the tail arrives.
Cost of capital is not the contractual rate on a particular advance. It is the hurdle the contractual return has to clear.
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Institutional partners evaluating a position against this platform's outcome and duration models are welcome to reach out directly.