SMALL CAP SHARE IDEAS: Litigation Capital Management


SMALL CAP SHARE IDEAS: Litigation Capital Management expects more disputes work as insolvencies rise

Chief executive Patrick Moloney believes there is ‘much room to grow’ for Litigation Capital Management, the alternative asset manager that specialises in funding legal disputes.

One of the single most important landmarks of the last year has been the creation of the asset management division.

This has allowed LCM to tap into deeper pools of capital to enhance returns and will ultimately help expand the company’s ‘global footprint’, explains Moloney.

LCM, which funds legal disputes, expects to benefit from a sharp rise in insolvency, liquidation, bankruptcy and restructuring actions

LCM, which funds legal disputes, expects to benefit from a sharp rise in insolvency, liquidation, bankruptcy and restructuring actions

‘We’ve seen incredible growth during the 2020 financial year, and we expect that to continue,’ he adds.

LCM to some extent is counter-cyclical in the sense that turbulent markets tend to create opportunities. Instability means companies will naturally seek outside financial help to fund expensive litigation, particularly when cash is constrained.

On the supply-side, uncertainty of the kind we are currently seeing tends to result in a sharp rise in insolvency, liquidation, bankruptcy and restructuring actions.

‘We’re expecting a huge volume of opportunity for investment that will result as a consequence of the current turmoil that we’re seeing in global markets currently,’ observes Moloney.

LCM specialises in funding legal disputes in two ways: directly from its balance sheet and via a third-party fund it manages. It will then invest in a single case, a portfolio of them, or even acquire claims.

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Showing the scale of its ambition, it recently completed a portfolio deal in the construction sector with a capital commitment of A$48million (US$34million).

It can take at least two years (25-27 months) before a case yields a return. But when it does, the payback can be significant.

If the 2019 financial year saw the company refine the platform, 2020 marked its growth phase as assets under management moved to A$250million and then to A$304million by September.

Gross profits for the 12 months to June 30 were up 7 per cent at A$21.7million, and, while pre-tax profits dropped marginally, this was purely the result of three investments shifting into the new financial year.

It had cash of A$31.8million as at June 30, while there was A$84million third-party capital available to be committed.

Looking ahead, chief executive Moloney and the team plan to extend the asset management activities with the support of two cornerstone investors that backed the original fund and that have rights to participate in the second and third funds.

Maintaining ‘strict due diligence’, they also want to turn the increased flow of litigation leads into investments, while the interest in geographic expansion includes the US, a huge market where it is currently under-represented.

‘As we look at growth, we are not just focused on markets we are already in,’ says Moloney. ‘We are looking at opportunities globally.’

A range-bound share price suggests investors are yet to fully appreciate the company’s potential. This will be a kick in the shins for Moloney and his team who have made significant operational and financial progress.

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However, for the value investor, the disconnect between the share price and the company’s intrinsic value may offer an opportunity. 

Two figures jump out of the recent results – a nine-year return on invested capital of 134 per cent and a cumulative internal rate of return over the same period of 78 per cent.

The disconnect between LCM’s total portfolio value and its market capitalisation since listing on AIM at the end of 2018 also stands out.

And Moloney makes this very salient point: ‘Taking current assets under management and applying an historic multiple of invested capital of 2.35-times, you are getting some pretty large numbers that are heading towards a billion dollars-worth of capital.’

He points out: ‘I think once the market sort of truly understands the potential of our portfolio of investments under management, I’m hoping that there will be greater recognition of the true value of the company.’ 



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