Litigation Capital Manag... Share Discussion Threads

[maddox] 03/7/2023 09:55

As a very close follower of BUR - I can see little value in fair value accounting. The in-flight cases are held at a fair value that isn't a reflection of their true worth and investors don't seem to trust the figures in any case. So, a share-price uplift is a vain hope. Putting FV through the P&L just adds huge complexity - especially if you incorporate a discount rate(additional interest rate volatility).

Keep the P&L and B/S simple and rns the case outcomes - I think LIT have come-up with the correct approach to keeping shareholders informed.

[74tom] 03/7/2023 09:14

Agreed, it's almost certainly irrational to sell right now unless you are either a forced seller due to fund outflows. If someone is trading with an emotional agenda then it will almost certainly prove costly.

One way to blow anyone out of the water would be to switch to valuing cases at FV, as per listed peers Burford, Manolete & Omni Bridgeway. I know it's been discussed ad infinitum on here before but there must surely come a point when the board run out of patience with the apparent level of undervaluation / they become it real risk of a hostile takeover?

One element of any switch I don't fully understand is whether there would be any impact on income tax in the year any NAV uplift was applied or whether the gain would be recognised below the tax line pending settlement?

[johnwig] 03/7/2023 07:57

74tom, the unavoidable truth currently is that LIT is still a "small" share. In other words it doesn't take very deep pockets to depress the price quite significantly. This, of course, applies to a myriad other shares on the drippy UK market.

Obviously I think it's crazy to sell LIT at this particular moment for the reasons that you so clearly describe but one never knows what convoluted, possibly deranged, plans the seller has in mind. Probably won't be long now, though........

[74tom] 03/7/2023 07:37

The constant downward pressure on the sell side continues here - around 500k shares have been sold in the last week to blunt the rise & now send it into reverse, including over 100k in the first 10 mins today. The common tactic is to load the offer with sells pre open & then leave an iceberg sell on the order book during the day to absorb any buying. Thurs & Fri saw around 300k shares bought at ~84p but the seller just kept reloading.

The key question is why would anyone sell when LIT are on the verge of announcing a record half year performance? And a huge record at that... Plus at least 2 case announcements are imminent in PFAS & Rabah, which will mean H124 gets off to a flyer too.

I've long suspected that some of the selling is personal, but where are the shares coming from? There are no disclosed shorts and it would only need a 595k short position to breach the 0.5% disclosure threshold...

Whatever the case, given the diversification in capital commitments, success rate, 11 year ROIC of 163%, huge growth in AUM & dramatic improvement in financial position I can't see any reason that this won't break out in the coming months. I'd also add that they've made some impressive looking senior hires this year, several of which have come from competitors.

[74tom] 29/6/2023 09:55

I'd agree with that someuwin. Certainly a £500m market cap wouldn't look expensive if the market was to price in deployed capital continuing to produce ROIC's in excess of their 11 year average of 163%...

I've crunched as many numbers as possible in the last week & come to the conclusion that this is now grossly undervalued.

It's no wonder the chairman has been buying hand over fist for the last 18 months...

[someuwin] 29/6/2023 09:00

I think LIT is now where BUR was at the start of 2016. Beginning a major, multi year growth phase which could see a similar 10 x multi-bag to $bn+ levels.

[l2b] 28/6/2023 17:54

Update to LCM v Rabah Enterprises - the purchased case from a liquidator.
Interest now added bringing total sum up to $20.2m
www8.austlii.edu.au/cgi-bin/sign.cgi/au/cases/nsw/NSWSC/2023/722

LCM share is 85% (remaining 15% to liquidator).
It's unclear if direct or 3PTY - no announcement as yet.

[makinbuks] 22/6/2023 13:02

The debt may not even be repayable early or if it is there will be charges or a penalty. I would imagine the lender wouldn't want LTM to have the option to get out of paying him his performance element

[l2b] 22/6/2023 12:36

It's an interesting (and welcome) discussion on capital allocation.
Does one prefer:
- Dividends or BBs
- Debt repayment
- Full reinvestment
- a combo of the above

For me, one always looks to full reinvestment option first.
Companies that have the ability to compound returns LT at high rates are the biggest winners.
LCM's average annual IRR is 79% (pre-OPEX & tax). I don't know what that would look like at a NPAT level given that the company is in the early stages but at maturity that has potential to grow to a significant ROE (e.g. FY18 was 30% ROE - the last result pre-ramp of 3P Funds model and came from DM returns only). Maybe a 40% or 50% or whatever is possible?
And they have they have the ability to reinvest comfortably - given the recent results Passive Funds will be banging the door down to give them money to invest at will.
So why not max out the capital investment opportunity?
Why pay down the debt (only costing ~13% or so) or pay divies? As an Aussie the franking is handy but I get ff divies from other investments.
So reinvest fully, juice this bad boy up - could be a 30-50x (over a few years) from here if they continue to execute and compound returns.

Ultimately, I have my preference but also have no issue with either strategy.
It's a good problem to have.
Hope the LCM team keep banging out the wins.
As at Feb-23 there was $201m to be committed in the 12 months from that date => plenty of more action to come so hang on to your hats!

[74tom] 22/6/2023 12:15

Ps. A couple of further points on the loan, here is the detail;

"The Credit Facility, which is secured against LCM's assets, is available for general corporate purposes, and has an overall term of four years. The coupon comprises a LIBOR based rate of 8% per annum together with a profit participation calculated by reference to the profitability of LCM's direct investments. In all circumstances, the overall cost of the facility is capped at 13% per annum."

- An 8% coupon now looks extremely competitive given SONIA is >5%, all small cap borrowers will pay a significant fee on top of this (i.e. Molten Ventures is SONIA + 5.5%)

- The 13% rate is a combination of SONIA + up to a 5% profit participation in direct investments

- It was only available for drawdown in the first 2 years, ending 22/02/23

Last one from me until the next announcement - hopefully we get another settlement pre year end, but if not it'll be the July market update.

[74tom] 22/6/2023 11:56

Hmm. That's an extremely negative stance given this weeks newsflow. The gross debt balance was just A$56m at 31/12 and the last 2 announcements alone will see A$43.5m in cash inflows. There is zero reason to expect any further drawdowns.

Further, they didn't draw down in H123, despite revenues of just A$4M. Gross debt at 30/06/22 was A$54.9m and at 31/12/22 it was $56m.

And no, it's not a sop to investors who think a dividend is 'nice' there are plenty of UK based income funds that can't hold shares if they don't pay a dividend. It was the main reason Premier Miton sold LIT down in late 2020 to just 53p. Oh and BUR also pay a small dividend - likely for exactly the same reason.

In 3 months we'll have a clearer picture of exactly where the balance sheet stands, however there is no doubt that recent inflows will have been fairly transformational to NAV.

[nchanning] 22/6/2023 11:25

Yes it doesn't really matter when we're talking about a £1 million dividend but its fundamentally irrational when achieving such high returns on capital with plentiful investment opportunities without any need for further increases in central costs . Most likely Lit will be drawing down on a debt facility again in future and paying up to 13% interest to pay this dividend . It's just a sop to investors who think a dividend is nice , not a rational capital allocation decision

[74tom] 22/6/2023 10:37

Those items don't need to be mutually exclusive? A good capital allocation policy should balance debt repayment, reinvestment in the business & capital returns to shareholders.

They paid a dividend of A$1.3c in their only full year on LSE before covid hit. A 1p dividend would only cost them £1.2m & would be more of a statement of intent than anything else. It would attract new investors & flag that the balance sheet & outlook was healthy again.

Sure, put the vast majority of the A$78m YTD settlements + A$30m+ of confirmed pending settlements into reducing the debt & funding new cases, however given the LIT balance sheet requirement for matching the entire Fund II value of USD300 is ~A$110m, of which some has already been committed, I don't see how paying out a small dividend would cause any problems.

Interested to see what others think, however I remember some time ago quite a few were keen for a divi to return.

[nchanning] 22/6/2023 10:02

There are still a lot of commitments due from Lits only balance sheet for Fund 2 , the debt was very expensive , and the returns on invested capital are outstanding . So better to reinvest the cash than pay a dividend for me

[74tom] 22/6/2023 09:14

At 31/12 gross debt stood at A$56m, with cash of A$33m, so net debt of A$23m

I have total cash of A$78m returning to LIT from the 5 settled investments reported in H2;

A$11.5m from today's RNS
A$32m from Monday's RNS
A$12.5m from Comet
A$14m from the March class action win
A$8.6m from Carillion

I make the gross profit on the above A$60.75m, assume H1 overheads of A$12m and corp tax of 30% and you get H2 PAT of A$33.6m.

We then have the PFAS settleent of ~A$16m to LIT at 50/50 fund split, plus Rabah A$14.8m+ assuming it's direct, plus Lynchpin as confirmed wins. Plus another 20+ in the pipeline.

Bottom line, the recent wins should comfortably put the company in a net cash position & surely means dividend's are back on the table?

[johnwig] 22/6/2023 08:48

74tom. I would be willing to add up all the successes in the header. Two points, though.

I have noticed that those threads with lots of statistics before you come to the new stuff are pretty daunting.

Secondly,I'm afraid that I would not have the time or opportunity to update the wins at the increasing frequency with which they will most assuredly appear in the future!!!

So please continue to publish the news, good or bad, as it appears.



P.S. I've just seen your latest piece. Impressive research and truly encouraging.

[74tom] 22/6/2023 08:43

As we now have 3 settlements from Fund I with disclosed metrics, I thought it was worth summarising their cumulative statistics;

LIT Invested Capital = A$6.7m
LIT Total Realisations = A$53.1m

Fund Invested Capital = A$20m
Fund Total Realisations = A$66.5m

Total Return on A$26.7m invested = A$119m, that's an ROIC of 345%

The eye popping fact is that the $20m invested in the 3 closed cases represents less than 10% of the USD150m / A$220m Fund 1. In their interims in March 21 they reported that this fund was 70% committed, so there are a whole host of additional cases waiting to close.

Indeed, from the last interims we know the followings;

"Fund I fully committed across 26 investments (two terminated after due diligence), two resolved, one of which resolved in FY22"

So there were 21 outstanding at 31/12, of which 3 have now settled & 1 is pending (PFAS for $33m)

Another 6 Direct investments were either awaiting a judgement or final hearing at 14/03/23, with no new settlements since (given today's was reported in Feb 23)

So we have 23 cases that should reasonably expect settlement in the next 2 years, 2 of which, Rabah (A$14.8m+) and Lynchpin (TBC) have reached judgement this month.

There were a further 8 cases in Fund II at 31/12/22 with a huge amount of capital to commit (the second close for $273m is more than double the current market cap...

Remarkable value situation developing here.

[someuwin] 22/6/2023 06:16

22 June 2023

Litigation Capital Management Limited

("LCM" or the "Company")

Successful resolution of direct balance sheet investment

Litigation Capital Management Limited (AIM:LIT), an alternative asset manager specialising in dispute financing solutions internationally, announces the settlement of an investment forming part of its portfolio of direct investments.

Successful award in investment in arbitration

As previously announced on 23 February 2023, the Company announced a positive development, with respect to a partial award in one of its 100% direct balance sheet matters. A settlement has been reached between the parties following an Award on liability and costs being granted in favour of the funded party. The matter was heard by a Tribunal appointed under the International Chamber of Commerce (ICC) Arbitration Rules. LCM's investment performance is detailed below:


*AUD$m Investment performance
Invested capital 2.9
-----------------------
Investment return (Gross profit) 8.6
-----------------------
Total revenue 11.5
-----------------------
ROIC on investment 293%
-----------------------

*The investment returns are subject to change based on the prevailing FX rate and timing of distribution

Patrick Moloney, CEO of LCM, commented: "We are pleased with the positive resolution of this investment and more generally the momentum in the progress of our portfolio in the second half of our financial year. This is of particular significance, given our first half results which were impacted by the timing, and consequently recognition of resolutions. We believe these recent resolutions demonstrate our expertise and skill in selecting and underwriting investments. Additionally, they reinforce the value and scale our funds management business adds to the Group, creating significant value for our shareholders and investors."

[74tom] 22/6/2023 06:13

Wow, absolutely on fire here… will amend the above list this morning & add in pending settlements which have been shared in this thread - may be an idea to add finalised settlements to the header?

[74tom] 21/6/2023 14:44

This has been sleeping for so long, however it looks like it's finally going to break out. No wonder when you look at recent case wins;

Feb - Carillion - $6.3m LIT / $12.6m total

Feb - Arbitration - estimated $5m LIT

Mar - Aus Class Action - $14m LIT

Apr - Comet - $10.4m LIT / $22m total

May - Aus PFAS - ~$33.2m total (as per page 8 of this doc;

Jun - Arbitration - $29.7m LIT / $58.4m total

That comes to an H2 total of A$133.6m, of which around $81m is directly attributable to LIT...

This blows all previous half yearly & annual results out of the water & is fairly transformational for the investment case.

They always update in July after Y/E close, last year was the 8th. Doubt Patrick will keep the market waiting long given the outstanding numbers they will be reporting!

[someuwin] 21/6/2023 13:53

The Funds management model provides equity investors with the benefit of exposure to superior Fund returns in the form of performance and outperformance fees payable to LCM as manager.

The growth of our funds under management model enables LCM to scale its business and portfolio of investments while enhancing returns for underlying shareholders and delivering long-term sustainable growth.

This also enables us to leverage returns by using third-party funds and our operational scale.

Our third-party Funds comprise sophisticated and institutional investors including:
• Large US university endowments;
• UK and European Pension Funds;
• Large Global Investment bank;
• Family offices; and
• Disputes finance fund of funds

Our experience in selecting high returning investments ensures we maintain competitive return metrics

[someuwin] 21/6/2023 08:34

Over half a billion A$ under management - and growing fast.

"Assets under management increased to A$506m by 31 December 2022 with further commitments in Fund II bringing our AuM to A$537m at 28 February 2023"