Litigation Capital Management Limited (LIT) Earnings Call Transcript & Summary

Welcome to the Litigation Capital Management full year results webinar. I now hand over to Patrick Moloney, CEO; Nick Rowles-Davies, Executive Vice Chairman; and Mary Gangemi, CFO. Patrick, over to you.

Good morning, and thanks, everyone, for attending our presentation in respect of our 2020 full year results. 2019 for LCM was very much a year where we built the platform in readying the company for growth. 2020 was definitely a very significant growth for LCM. So the first highlight was the launching of our asset management business, that was launched in March of this year. It was launched with a USD 150 million fund. That fund, when it was constructed, had an inception period for us to commit that fund for 2 years. Very encouragingly by 30 June, the end of our financial year, we had committed that fund already to 47% of its capacity. And by September, as we're coming with this presentation, we've committed that fund to 61%. So incredibly good progress that LCM has made here in terms of committing that third-party funds and a great start and launch to our asset management business. Secondly, touching upon revenue growth. So we had revenue growth in 2020 despite that being disrupted by COVID. We had 3 investments, which we're expecting and would have finalized during the financial period, which we pushed out into 2021, simply through core capacity in the conversion to digital hearings. Very encouragingly during the period, we had an increase in our applications across all regions by 25%. So a significant increase in the applications and the demand for LCM's capital in terms of litigation finance. Really importantly, our assets under management, when I talk about assets under management, I'm talking about the contracts to fund disputes globally, have increased dramatically. By 30 June, our financial year-end, we had assets under management across both our direct investments in our asset management business of $250 million and by September, that's grown to $304 million. So very significant growth in terms of our assets under management. In terms of actually putting LCM's capital to work and putting the asset management capital to work, the increase in the financial year 2020 when compared to the prior year, our invested capital and putting our money to work has increased by 87%. So a very significant increase in actually investing in these disputes as part of our portfolio. Moving on to strengthening our referral sources. So during the financial period, we entered into 2 new and revolutionary strategic alliances with global law firms. They provide us with a really important referral source in terms of quality opportunities for us to invest in disputes globally. And we'll touch upon those in a little more detail as we progress through this presentation. And finally, touching upon one of our investment strategies, which is our portfolio strategy. We consummated and then signed the largest corporate portfolio transaction that LCM has done in its history. That's a 20-plus global disputes with a capital commitment of up to USD 34 million. So that was a really significant transaction for us to enter into and really give some credence to that investment strategy. Just moving on to some of the other measures of growth that we have achieved during this financial period. In terms of capital commitments year in, year out, we've grown that from $98 million in financial year 2019, up to $147 million in the year just passed. Capital invested, I touched before, $27 million in financial year 2019, up to $52 million in financial year '20. Our gross revenue was up despite the interruptions of COVID, and I've touched upon the number of applications, significantly up 25% on the year prior. Talk about LCM's track record and its performance. So we track the performance of every single investment that LCM has entered into over the last 9 years. Inclusive of losses, we've generated a return on invested capital of 134% and a cumulative portfolio IRR of 78%. So that includes every single investment that LCM has made over the last 9 years, inclusive of losses. So what that's giving us is it's -- we're operating in quite a tight band there in terms of our financial metrics over that 9-year period. If I can just now talk about LCM's business model. So this has changed in the last financial period. So we're now running 2 business models. We're running our asset management, which I've spoken about briefly before and our direct investments off balance sheet. And there is a crossover between those 2 business models. In that, with the asset management, we actually co-fund from balance sheet up to 25% of each of those disputes. So we have absolute alignment between LCM and the asset management business. And that also gives all of our shareholders an opportunity to participate in the full economic upside of those investments as a 25% co-invest. And then below those 2 business models, we have currently 3 investment strategies. The first one of those investment strategies is our single case strategy. And that's a strategy that we have been pursuing since LCM's inception. We're now in our 22nd year of providing litigation finance into the market. And overwhelmingly, historically, that has been a single case investment. So that is investing in one single dispute. LCM would supply the capital. It will provide risk management associated with that dispute. And also we provide a greater or less degree of management assistance of that dispute as it travels through the court system or the arbitral process. Very much, LCM's track record has been built around our single case investment strategy. It's probably the hardest strategy that there is in terms of litigation finance. And our economic metrics that we've demonstrated in the last 9 years really bear out that we're very good at underwriting the risk associated with these investments and being able to predict which of these investments will go through to become a profitable outcome for both ourselves and our funded party. If I can next move to our second strategy, which is portfolio investments. That relates to us providing a funding source to fund a bundle of single case investments and that can either be done directly with a corporate client. We might have a bundle of disputes that we provide a finance solution for, alternatively a law firm who might be looking for a finance solution in respect of a bundled disputes that it might be acting in on a contingency basis. So that's our second strategy. The reason that those types of transactions tend to be attractive to us from an investment standpoint is they tend to be larger and allow us to invest larger amounts of capital in one investment. And secondly, you get the diversification and collateralization of risk. So all of our capital commitment is collectively secured against each one of those investments in that portfolio. So it allows us to participate in the funding of those disputes with reduced risk and a much larger investment pool. And the third strategy that we are pursuing is the Acquisition of Claims. And the Acquisition of Claims is typically in the insolvency space. They tend to be a much smaller investment for us. We're actually acquiring the cause of action from the party who would have been pursuing that and actually pursuing as principal, actually owning the claim and having complete autonomy as to how we pursue that claim through the system. So that's -- and it's relatively early stages of evolution. But for example, in Australia, we are the only litigation financing who are providing that service in this jurisdiction. And we expect that, that is going to be a very good and profitable strategy for us in the long term. If I can now move on to our asset management business and just give shareholders just a little bit more information about how that works. So as I described earlier, it's a co-investment arrangement. So we would apply in respect of every single investment that we enter into, 75% of that capital commitment will come from the fund and 25% of that investment will come from LCM's balance sheet. So a great alignment of interest between the fund and our balance sheet. In respect of how we get remunerated for the asset management component of that, we participate in a profit share arrangement. And that profit share arrangement is up to an IRR of 20%. We participate and receive 25% of the profits of each of those investments upon maturity and above 20% IRR, we get outperformance of 35%. So if one looks at our track record over the last 9 years, you would expect moving forward, if we continue to perform in the same way that most of our returns with respect to that asset management portion of our business will be in the outperformance section of 35%. And in respect of the participation on a co-funding basis, LCM will enjoy all of the economic upside of those investments up to our 25% direct investment. I just want to move on now and just talk about the investment cycle because I think it's important to understand how these investments work. Just to give you a sort of better understanding of what their life is. So the starting point here is to say, how long do these investments take. If we look at our historic track record over the last 9 years, the average time to completion of every single investment that we made was 27 months. Now that is from first deployment of capital through to an actual realization and the banking of the proceeds of that litigation or that settlement. Now when one looks and compares LCM's actual revenue generated in a particular year, what's important to remember is the operating expense or the significant operating expense with respect to that revenue was probably incurred by LCM 27 months ago. So when you're comparing OpEx with revenue in a particular year, there actually is a mismatch between the majority of our OpEx and when that is actually going to convert into a tangible revenue event. That's important to remember when you're considering these investments. The other thing that's very important to remember about the investments that LCM enters into is that they have their own natural life. So unlike other investments, where you have to make a logical decision about when you sell-out of an investment. When you're investing in disputes, they have a natural life, which is managed either by the disputing parties themselves, alternatively by the court. So they can't perpetually go on. They will have a natural life in the court system or the arbitral tribunal, depending on where they're being pursued, we'll actually bring that, that investment to an end naturally because the parties do not settle it by adjudicating that dispute. So that's a dynamic that is kind of important to understand because it's very different to any other asset class that investors might be familiar with. So it's very much an alternative asset class that we are a specialist in investing in and its disputes globally. If I can hand over to our CFO, just to talk about the full year financial highlights. Mary, can I hand over to you, please?

Okay. So Patrick has run us through and give us an overview about the KPIs, which are, of course, our underlying measures of growth. But turning to the performance for the year just gone. Growth revenue is up 11% at $38.4 million, and gross profit is up to $21.7 million, up 7%. Remember that, we're still reporting revenue under IFRS 15, which means that we report revenue as and when that is earned, as opposed to fair value. Adjusted profit, before tax, is marginally down 9% at $11.1 million, and statutory profit before tax is $9.2 million, again, marginally down 9%. This is primarily because we had 3 matters, which were pushed out into the next financial year as a result of the delays caused by COVID. Cash is down to $24.9 million to report an upset. Investments are up 89%, which shows that we continue to deploy capital, and we continue to put that capital to work and invest in more projects. Total capital invested during the year, again a sign of us putting that capital to work. Exclusive of third-party interest is up to $41.3 million, up 49% but inclusive of third-party interest, that's up 87% in the year. If we turn to the balance sheet overview, the capital invested, just as mentioned, is up $41.3 million from $27.8 million in the prior year. Our total equity has increased to $82.2 million, up from $76.2 million. Cash generation is up $30.7 million, and we also had some post year-end receipts, which grew that up to $35.3 million and net cash at the period end is $29.5 million, including that final receipt. If we move on to the next slide, it is pretty self-explanatory, but it just shows the movement in cash over the course of the year. We had cash generated from litigation investments of $30.7 million. And again, you can see that we continue to deploy our capital and put that capital to work. And as you can see, there's an outflow of cash of $39.7 million with our post year-end position of $29.5 million. If we move on to the current portfolio of direct investments, I will hand back over to Patrick.

Make a general statement across both our direct investments and our funds under management, our asset management business. We're striving, as we always have, to build a portfolio of global disputes which has diversity. In the same way that you would build a portfolio of investments through diversity, we applied the same principles associated with this when we're building a portfolio of disputes. Diversity is incredibly important to give a variety and to spread risk. So we are building that portfolio in commercial disputes, in insolvency disputes, in class actions, in portfolio funding, as I've described, and in arbitration. And we're also building that portfolio such that it doesn't suffer from concentration risk. And what I mean by that is we're making sure that there's a good spread of capital commitment so that we're not investing too much of our capital or our capital under management in one particular investment, which might be unsuccessful. And if we look at our direct investments, they fall into 2 categories. The first one is where LCM is funding 100% of that dispute from balance sheet. And the other one is what I've described before is our co-funding arrangement with our funds under management. So we can see the numbers, significant growth. We're currently funding 23 separate investments on a 100% basis and 18 on a co-funding basis. The last observation I'd make is the pie chart on the right-hand side of this is where these investment opportunities have been originated from. So we're really seeing, over a period of time, that an increase in the amount of quality applications and quality investments that we are originating through our London office. Now we would expect over a period of time that there will be a shift towards the Northern Hemisphere in terms of dominating our portfolio of investments, simply because we have much larger economies in the Northern Hemisphere to be originated out of our London office. And with the larger economies, you would expect more disputes. So whilst Australia is always going to be a really good market for us and a market that we are very familiar with as a funder, inevitably, we're going to see significant growth in other jurisdictions outside of Australia, including Asia, Europe and United Kingdom. If I can move over to the funds. The highlight here really is the speed with which we've been able to commit this fund. This fund, when it was closed in March, allowed a period of 2 years for LCM to commit that fund. Within the first 3 months, we committed that to 47%. And by September, 6 months into that process, we're at 61%. Now the very important statistic that we probably should focus upon here. Even though we've been able to commit that fund very quickly, what we haven't relapsed in any way is the very rigorous due diligence process that we pass all of our applications through before we actually offer commercial terms and agree to actually investing and fund a dispute. Now typically, and historically, LCM has converted between 3% and 7% of applications into funded transactions. And by that, I mean, only 3% per of applications ever reach a point where we invest in them. Now if I look at the 12-month period just completed at 30th June, our conversion rate was 3.5%. That demonstrates very clearly that LCM is not relaxed in any way, the rigorous approach it has to due diligence and underwriting the risk of these investments, notwithstanding that it had a large pool of capital, which it was keen to invest early. So again, as with our direct investments, we're seeing diversity across the entire portfolio of our asset management business. We're building that in importantly. And again, we're seeing a significant increase in the number of opportunities which are arising out of the London office. I might hand over to Nick Rowles-Davies, just to talk about the market conditions, including the countercyclical nature and also the uncorrelated investment class that we're in, both really important points in the current market.

What is probably important to remind ourselves of when we're looking at the arena in which we operate is that 2 big aspects. First, the uncorrelated nature of our investment class in relation to the rest of the world. In that, each of our individual investments is not only not on -- not correlated to what's going on in terms of the economic climate, but also not correlated to each of the other investments. Each case has its own factoring matrix, and it's decided in the specifics of the law as regards to that factoring matrix. So just because one case wins, it doesn't mean the next one is going to win, but equally, if the case loses, it doesn't necessarily mean that the next one is going to have the same effect. So they all stand on their own facts. In relation to the industry and the economic position and market economic outlook, one of the things that's been suggested and certainly from fact, historically, it's been shown that there is an increase in disputed spend and increase in pieces litigation and arbitration when an economic downturn is faced. So it suggested and the facts maintain that not only is litigation countercylical but it's also counter-recessionary. And last important thing for us to consider, given that we are experiencing an economic downturn, the effects of COVID, and that suggests to us that the outlook in terms of the likelihood of the number of disputes that are going to need litigation financial or increased legal spend is going to increase. And perhaps if we put that in context in terms of the last 12 months, and we've already said that we had a 25% increase in the number of applications we received for financing in the last 12 months, and that is a number of 522 cases. Now that was before the impact of COVID. And I just want to touch on what's happened since February, March, April and the impact on what's been going on and what we're seeing in the marketplace. I think there's probably 3 ways to describe for 3 distinct areas, and 3 distinct responses that have happened as a result. The first is that corporate clients who were in the midst or are in the midst of a dispute, whether it be litigation or arbitration are reevaluating whether or not they're going to continue with that legal spend and maintain that monthly cash flow drain when they have perhaps other priorities. The second element is those corporate clients who have not yet embarked upon the dispute, not yet embarked upon a piece of litigation are now reevaluating whether they have the budget to do so. Now both of those elements mean that those corporate clients are thinking about how they're going to deal with their legal spend. That's something that we encourage corporate clients to do, whether they're looking at funding, whether it be by way of necessity, so they don't have the money to bring the case. And -- but for our investment they can't bring it, but also those corporate clients, which is very much the corporate clients that have been on our radar and part of our strategy over the last 3 or 4 years, are those clients to fund out of choice. So they may all have the money, but they're evaluating, are they going to use their own money or they're going to invest that in their core business and let us deal with the external legal spend? Now that's very much at the forefront of those corporate clients' minds, and it drives the third aspect or the third response that we've seen in the market, which is law firms that are involved in those matters are experiencing a drop in the continued instruction or the ongoing and new instruction from those corporate clients because of that reevaluation. And what that means is those corporate clients are asking for a different outlook from the law firm, how can they deal with their legal spend differently? What can they do to reevaluate the position for them and a system with that legal spend? And that's where we come in. And what we're seeing is an increase in interest from law firms in how we can work with them, an increase in the education process. The law firms accelerating their learning. Really picking up on what we've been doing and how we've been doing it. And very much looking now at how they can use us as part of their business development process and using us to talk to their clients to maintain those strengths, strengthen those relationships, to cement themselves with their clients by doing things in a slightly different way, changing the way they deal with the legal spend and creating a situation where the law firm benefits because they have maintained their instructions and have continued and increased constructions. The client benefits because they get to deal with their legal spend in a much more efficient method in terms of an accounting strategy. And from our perspective, it's driving new business, new relationships and creating a situation where instead of what is good business, which of course, is the single case matters that we've done historically well. But going forward, creating relationships, which have an ongoing and enduring situation, which means that we are discussing what cases should be brought, when they're brought. And very much being much more involved in the whole management of the process. So the market conditions certainly are favorable. The outlook is certainly favorable. The historic 12 months has shown that we had an uptick in the number of applications, that's continuing. And certainly, in terms of the pipeline and the market opportunity, I think the next 12 months is very much a positive thing.

Nick just outlined there for us for what we're seeing in the market generally as a consequence of this kind of cyclical nature. If I could just look forward before we move on to strategic priorities, and just make this observation, inevitably, given the market conditions globally and the uncertainty associated with that, there's going to be an increase in insolvency event, it's going to be an increase in perhaps -- it's going to be an increase in restructuring of companies. Now in most jurisdictions in which we operate, there's a moratorium on that, that you cannot appoint an external administrator to an insolvent company currently. They will be lifted at some point in time. And the overwhelming expectation is in respect of global economies, is there's going to be a significant increase in the number of liquidations, bankruptcies and restructurings that occur. Now if you look at LCM's history, LCM was a pioneer in the litigation funding space, started here in Australia. For the first 10 years, we almost exclusively funded into the insolvency space. So we have a tremendous amount of experience in funding insolvency-based disputes and restructuring disputes. So if we look just over the horizon, we have an expectation that there will be a considerable increase in the number of quality investments that we have coming out of the insolvency space. And those opportunities will probably last for 6 years from when they start, running right through to the conclusion of the limitation period. So if we look ahead, tremendous opportunity for LCM really touching upon that kind of cyclical nature of the way the business works. Just moving on to strategic priorities. So again, forward-looking. We will be launching a further third-party fund and building upon our asset management business. Our initial thoughts around the size of that next fund will be probably somewhere in the order of USD 300 million to USD 350 million. We haven't settled upon that yet. But it is within that sort of range that we're thinking currently. The timing of that will be probably late this calendar year or early next calendar year depending upon the speed at which we fully commit the existing fund. The next strategic priority that we've got is to increase both the number of applications, but also the quality of applications. So if you look at LCM's historic conversion rate of applications into funded investments, it runs since we started back in 1998 to date, to run between about 3% and 7% of applications ultimately end up as a funded investment. And that's just really a reflection of the rigor with which we undertake due diligence and risk assessments around these applications of these investments. Now through our law firm alliances, which I'll move on to, we're aiming to increase the quality of those applications so that we can increase that conversion rate and operate far more efficiently as a company in terms of entering into these investments. So law firm alliances. Nick talked a little bit about the increasing demand from law firms to have an alliance with a reputable and quality funder like LCM. We will look to not only potentially enter into additional law firm alliances, but really trying to sort of leverage the relationships that we've already formed with global firms, such that we can provide a wider suite of products to that firm's clients to assist them in terms of funding their disputes. We want to increase the number of our portfolio investments. So at its very core, LCM's value is in its portfolio and the revenue that can be generated from that portfolio. So obviously, we're looking to increase our portfolio. If we look at the metrics that we've achieved to date, $250 million as of 30 June and $304 million as of September when we are making this presentation. So we've made great progress in terms of increasing that portfolio in the past, and we expect to continue to do that into the future. And the final thing is we're looking closely at expansion opportunities into other global markets. Now shareholders would have observed that LCM has been cautious and has been very diligent in the way that it's expanded into regions in the past, up into Asia and then into the U.K. And you would expect that we would have that same cautious and disciplined approach to moving into any new markets. But it is something that we're constantly looking at in terms of expanding our global footprint. It's important at various junctions. Just to look back and have a look at the growth that LCM has achieved within a short period of time. So this slide really shows you what our growth has been over the last 4 years. And many shareholders will know that LCM originally get an IPO on the Australian Securities Exchange back in 2016. We then, in 2018, delisted from the Australian Securities Exchange and listed on the AIM market in London. You can see the phenomenal growth that LCM has achieved over that period. So if we look at the total portfolio of assets under management, we've increased during that 4-year period from $33 million to $250 million. And as I've described, as of September now, we're at $304 million. So really, really significant growth in the portfolio of assets under management. Operating capital, again, increased over that period of time. Applications in the year, you can see exponential growth in the number of applications. Capital commitments are actually putting LCM's capital to work and now with our asset management business, putting the third-party pool of capital to work, increased significantly over that period of time from $6.25 million when we listed on the Australian Securities Exchange, up to $147 million currently. Capital invested during the year period, again, we're seeing the same increases. So importantly, the last bar chart there talks about our OpEx compared to our portfolio of assets under management. That's really comparing what our OpEx is compared to the pool of assets that we are managing. And you can see a really healthy decline from when we listed on the Australian Securities Exchange, it was 13% of what our portfolio size was. We've got that down progressively over a period of time now just to 4%. So we're really very happy with that. If we can turn on to the next slide, which really sort of make some observations about perhaps the dynamic that we're seeing and the way that the market is valuing LCM. So what we can see here is that the market capitalization of LCM is very much tracking its operational capital on its balance sheet. What the market is currently not recognizing is our portfolio under management. So you can see the stark difference there between our capitalization and the market cap and what our portfolio of investments is. So that's at 30th June, $250 million, that's obviously increased now to $304 million and is growing on a monthly basis. So I think that's really sort of demonstrate perhaps what the market is not seeing in LCM currently in terms of its intrinsic value. And obviously, a real opportunity for investment. And if I can sort of move to the final slide here, which is really sort of applying our historic financial metrics to what our assets under management are and what that might look like. So if I go back to the slide and just refresh people's memory. Our average time or life cycle of our investments is currently 27 months. We expect that to elongate slightly and perhaps go to 3 years or even 3.5 years in respect to some of our investments because we're moving into -- with the larger capital backing, so much larger disputes. And when you have larger disputes, people tend predictably to fight longer and harder over larger sums of money. So if we expected that to elongate out to 3 to 3.5 years, you look at, at 30th June, we had $250 million of assets under management. In September now, we've got $304 million. By the time that we fully commit the asset management, the third-party fund that we've got, which we expect to do in the latter part of this calendar year or early next year, we'll have at that time $416 million of assets under management. If one just simply applies our historic multiple of invested capital and look 3 years out, we turned that $416 million into $973 million. So really, this is showing the ability for LCM to generate organic capital through its investment cycle. Now even if you wind down that performance to a 2x MOIC, which is not running significantly less than what we have performed over the last 9 years, it still produces an outcome of $832 million. And if you just wind it up slightly to 2.5x, you're getting up into that $1 billion mark. So this is really sort of giving investors a bit of a glimpse of the ability of this business to generate organic capital and the size of our current assets under management. So if I can just close by saying even on the investments that we currently have under management, the future looks incredibly bright for us. But if you couple that together with the strategic alliances that we've entered into, the way that the market is generally going in economic conditions, LCM is just perfectly placed for significant growth into the future.

And we have a question from Carlos Sanchez, who asks on Page 17 of your annual report, you talk about the need of more capital. Can you elaborate more on that? Are you planning a rights issue? If you decide to raise that, how much are you looking to raise in the order of AUD 200?

Currently, the level of demand for LCM's capital and the growth rate of the litigation finance industry inevitably drives us to need additional capital. Now if we look at what we've achieved this year, we've brought on a new -- entirely new source of capital through our asset management business. But we really will need to supplement the capital that we have available on our balance sheet so as to enable us to continue growing in the way that we're growing. Now the source of that capital really comes down to cost, so cost of capital. So currently, if we think about what we believe is the intrinsic value of LCM, I'm doing the rights issue is a very expensive way for us to raise capital. And it also is unfavorable to investors because it has a dilutionary effect on their participation in the company as a shareholder. So we're looking wider than that, and the Board is considering forms of quasi debt. And when I talk about quasi debt, I mean, a form of capital, which would have some features of debt and some features of a profit split participation. So perhaps a coupon rate, coupled with a profit participation in a portion of our direct investments under management, some type of product like that. The other way that we have been considering introducing new capital to LCM is we've had a number of approaches over the last 12 months, with investors wanting to take advantage of our historic performance and track record by purchasing from us a strip of our direct investments. So that would give that investor direct exposure to our economic performance, but also introduce new capital into LCM. So I think -- if we think about what the level of that might be, I don't think that we're talking about at the sort of levels of AUD 200 million. I think we need to sort of progressively grow. And despite being in litigation funding, which is probably a novel industry, we are very conservative about the way that we manage money, and we certainly don't want to find ourselves in a situation where we sort of overextend ourselves with debt. So it's likely to be a blend of those options as we move forward.

And Alan Thomas have a lead-on question. So -- and from a strategic perspective, what's the aim? Is it to open a second fund, depending on the outcome of the first closure? He's trying to get a very approximate view of where the firm will be in 10 years? That is approximately enough time for 2 funding cycles to be fully utilized and recovered, but the quantum of around 2 funding is unclear from here.

So I think I've touched upon the size of fund #2. So we expect -- we've already started our forward planning in respect of going to market with our second fund. The terms of our first fund don't permit us to close a second fund until we have the first fund, 75% committed. Now we're fast approaching that 75% mark. Our current thinking around the size of our second fund will probably be USD 300 million to USD 350 million, but we haven't sort of formed a concluded view in relation to that. But that's certainly something that we will be going to market in the near future. So whether it be the latter part of this calendar year or early next year, we certainly will be doing a second fund. And I'll just remind shareholders that the 2 cornerstone investors in our first fund, which took well over $100 million of capacity in respect of that USD 150 million fund, both of them entrenched rights to participate to the same level in fund #2 and fund #3. So we have an expectation that those cornerstone investors will participate in our next 2 funds, which gives us a really good sort of opportunity to cornerstone that -- those funds with existing participants in our first fund. In terms of our investment cycle, as I said before, if you look at the life of these investments, historically, over the last 9 years, that has been 27 months. We expect that to sort of elongate slightly, perhaps up to 3 years or 3.5 years. So if one is trying to sort of look at what this business might look like in 10 years' time, that's probably a little too far out. It will certainly be substantially larger than it is now. But if you look at that last Slide 16, it really does show you what the potential of our current assets under management will be within sort of 3 years' time. So very, very substantial economic growth.

Sort of leading on from that. David Kenton comments and you might have comments on this. With all the businesses based in Sydney, they have found the U.K. AIM quote to be worthwhile with all the attendant expensive compliance. But they have withheld the dividend, and there's no actual broker projections beyond 2020, which makes it hard for U.K. investors to evaluate, which he suggests might hold back the share price.

Look, I think LCM is currently -- is -- sorry, constantly sort of looking at the way that we communicate our business to the market to try and help investors and potential investors better understand our business. Now I think that the move of LCM into alternate asset management will probably assist the way that people think about this business and I think probably demystify slightly this asset class of investing in disputes globally. In terms of research, LCM obviously does not have control over which investment houses cover us in terms of research, and it's very hard for us to influence what that research does. I mean, we are currently considering whether we do some private research so that we can actually sort of have, I think, a greater level of input into the way that we communicate the intrinsic value of this business to the market. But certainly, educating investors and informing them in a better way is something that we're acutely aware of, and we are working on.

And Bruce Packard asks, can we settle the fair value versus historic cost debate? Is there anything now or in the future, which will require you to report fair value accounting for cases?

Yes, there is the potential for our auditors to require us to adopt fair value accounting in the future. That's not something that we can rule out. It very much depends upon the dominating jurisdictions in which we are investing. So when we're investing in jurisdictions such as Australasia, we don't have to apply fair value accounting because of the way that the funding agreement is structured. If we're funding predominantly into the United Kingdom, that pushes us more towards fair value accounting. And so it really depend upon what our portfolio of investments and how that evolves over time. So the one comfort that I think that the executives of LCM can give to the market is that LCM had the choice when it originally IPO-ed in Australia and again, when it IPO-ed in the United Kingdom to adopt fair value accounting. It was -- it was a principal -- it was an accounting principle that we could have applied if we'd wanted to, but we took a far more conservative view. And to some extent, that makes our job a little more difficult because it makes our revenue line far more lumpy, and that's something that investors don't relate well to. But given that we had the choice to do that and didn't do that and adopted the most conservative approach that we possibly could in terms of accounting, you would expect that if LCM was required to adopt fair value accounting, we would adopt that in the most conservative way. So I don't think there's any necessarily evil or fear that investors should have about fair value accounting. It's very much about the way that the management chairman, the executives apply the valuation policies to their level 3 assets. I think that's the fundamental message that I like and comfort that I'd like to give to the market.

We'll now got to verbal question from [ Wekin Sou ].

Just 2 questions on the funds management business. And first on banks. If the consensus shareholder from fund -- investor from shareholder fund 1 take up the interns rights to add to a large stake of fund #2 and potentially 3, I think you might have mentioned. Is there any concern of concentration -- client concentration risk, number one? And the second question, follow on, is there -- is the fund phase and upfront phase set to a high watermark and i.e. is extremely safe in nature? Therefore, if you were to win case #1 within the portfolio and then lose case #2, would there be in payment?

So just to answer the first one, I'll answer the second one first. So the way the things fund is structured is it different intervals is sort of a squaring up provision. So what happens is we get paid our performance fee in respect of each resolution along the way. And then at different points towards the back end of this fund, there's a square up. So we do the accounting and make sure that we haven't been overpaid in the unlikely event that we actually aren't successful in some of our investments. So there is a built-in mechanism there to ensure that everyone is squared up at different points along the way towards the conclusion of that fund. The second aspect of your question is are we concerned about concentration risk? Now when we look at the quality of the investors we've got, I mean if you just look at the U.S.-based university endowment, you probably couldn't find a more stable investor globally than a large U.S. university endowment. And that, that particular investor took up 50% of this fund and has an entrenched to take up 50% of the next 2 funds. They are an endowment that has had very significant experience in the litigation funding industry. So you'll see that they have invested in other listed providers of litigation funding globally. So they're very experienced and comfortable with our asset class. And the second largest was a global investment bank, also with very significant experience into the litigation finance space. Now so I suppose that we've sort of ameliorated the best we could -- that concentration risk. But the issue is, is that if those investors decline to take up that right, we feel very confident that we could replace them with other sort of very high-caliber and blue-chip investors in respect of our second and third and ongoing funds as we build out our asset management business.

And we've got a question from [ Sah Tou ] who asks where are you intending to purchase insolvency claims? Would this be in the U.K. or other countries? If so, would you not be up against the incumbent dominant players in the U.K.?

Yes. So if we look at the markets where we think that we will be rolling out this product, we're certainly rolling it out in Australia at the moment. So Australia, we're the only funder in the market that is offering to acquire claims. So there's currently no competition in Australia in respect of that. Availability of insolvency-generated investments in Australia was quite low at the moment. So we've had -- we've had some instability in the Australian economy more recently through COVID, but there's been a moratorium on insolvency, which has not yet expired. So prior to that, we had sort of many years of pretty buoyant economic times. So insolvency-based opportunities has been quite low, but we're expecting, as I described before, for there to be a significant increase, sort of looking forward in respect to that. In the United Kingdom, that there are listed funders who operate in the small end of the market. And when we talk about competition, I think that the opportunity here is so vast in the market currently, let alone the uptick that one would expect naturally with the downturn in the economic activity, that there's probably room for sort of 2, 3, 4, 5 of the operators to sort of comfortably operate in that market. And as I described before, LCM has significant experience, embedded experience in this insolvency space and I think it's a natural sort of a progression for us to move into that acquisition line.

And [ Sah Tou ] also asks, will you continue with more strategic alliances with law firms?

I think we will. I mean if the -- I mean, I actually like to get Nick to answer that. He's kind of spearhead that. I think there's probably a limit to how many of these you can do effectively before they don't make as much sense. But I'll hand over to Nick just to talk about that issue.

I think there's definitely a maximum number that you can do because of the nature of the benefit that we derived from those transactions. And obviously, what you -- one of the add-on benefits for the law firm is that what they're starting to do is to use us as a business development tool. They're working closely with us to develop and look at areas that are of interest to them, where they want to get new clients or where they can provide solutions for specific clients in specific industry sectors, whether it be aviation, oil and gas or construction. What you can't do is be all things to all means. So there's a natural limit. If you're funding or very closely involved with 1, 2 or 3 global dominant players, there are others that will be competing for that same business. So we have to bear that in mind. That said, the benefit to us of those strategic alliances are, but clearly, we get to look at it an awful lot of cases, business an origination of single case transactions is a labor-intensive job. And by performing these relationships, the vast majority of that business development is outsourced to the law firm. That they already have the clients. They've got the relationships, whether it be in the commercial space, so not necessarily the dispute partners, but the relationship partners who have control of those particular clients might be noncontentious lawyers. But that means that they've already got the vast network. They've got those contracts, the opportunities are there. And part of the process that we go through with those law firms is very much educating what we can do and in litigation finance or legal finance, whatever the description is, has evolved so much in the last 10 years, whilst the number of the lawyers in the markets that we operate in, will know what they think it is and what solutions can be provided. By getting involved in these alliances, we're educating all the time. And they're learning from us, we're learning from them what the needs are. So they're very powerful arrangements for us and not just the first look at good cases and the BD side, but also the streamlining of procedures. So the more we work with them, the more they understand how they get to a yes, how they get an accepted case. The more they understand what it is we look at. And that helps us because, clearly, driving new business into LCM from these alliances is important, but if you suddenly had a cascade of cases, that might be difficult for us to deal with, and we certainly don't want to increase our operating as overhedged and a vast amount to accommodate that. Part of the process is we're teaching in law firms and working with them, so they understand what it means, what cases should come in. And those relationships are such that now we're seeing an uptick in business. Last year, it was good, but as I said, the future is positive because of these relationships. So in short, yes, we've got 3 now. I think there will be more but we're careful about how we undertake those.

And Carlos Sanches has a follow-up question. Saying in the past, Mr. Rowles-Davies has commented that corporate portfolios are a very sticky product. Are you seeing any signs of the stickiness with your current clients?

I should probably answer that, Patrick.

Sure.

Yes. It's still early days. We've got 3 corporate portfolios that are signed up and running. But the positive news that I've seen or the positive responses are seen in relation to those transactions. So what's happening is they're demonstrating the arrangements that we thought they would demonstrate. So we've started to see revenues shown off and we still had in the interim results that we commented on. The aviation portfolio has had some settlements because there were certain mature -- further mature cases than those that just started day 1, the same with the first construction portfolio. And what's happening with those is that we've added new cases. So the stickiness of the evergreen nature of the relationship means that, I can't remember the exact numbers off the top of my head, but it was sort of late 30s in terms of the number of cases in the aviation portfolio to start with. And I think it's rising and getting up over 40 now. So that process seems to be working. The client that we're dealing with seems to like the process, seems to understand it and has now started to add more cases in more jurisdictions. So that's definitely a positive sign. The speed at which the cases of concluding seems to be tracking as we expected and the returns that we're getting things to be pretty much on target with what we anticipated. Clearly, there will be fluctuations, but the general flow of traffic is in the right direction. And in this construction portfolio, the original one, that seems to be doing the same thing that we're likely to look at new cases to go into that part because they have new disputes. So ensure the stickiness, which is a line up definitely seems to work, and they're tracking generally in the right way, and we're very positive. And the latest one, hopefully, will be another example of that. And unsurprisingly, there are others in due diligence, which we hope will go the same way. So, so far, so good and tracking the way we'd like it to.

And we've got 2 questions on the lockdown effect on cases. With certain cases flowing through in FY '21, is this indicative of future delays in case settlements, especially in the U.K. with COVID restrictions?

Look, I'll answer that in -- so far as Australia, and then I might get Nick to follow-up on his observations in the United Kingdom. Look, in Australia, we had the core systems having to adopt quite quickly and swiftly when this country went into lockdown the administration of the court system through the digital medium. Now once that was put in place and the judges and the practitioners who operate through the court, the litigators became more and more familiar with that process, it became far more streamlined. And what inevitably we will see is these features of the judicial system and the way that things are heard digitally will actually say when we go back to normal or whatever normal will be after COVID. It's -- if it's operated probably in a far more efficient way of running a core process. So if you think about how many times highly paid legal practitioners have to travel from their office or their chambers into court and what a terrible waste of time that is what ultimately happens now is everyone stays in their office. It's all done digitally. It's a far more efficient way rather than waiting in a court list for hours and hours before you manage herd, you can get on with more productive work. So that's a longer way of saying, look, I think there were delays through the implementation of this system. As practitioners and judges and the whole system becomes far more efficient, I think we'll see those sort of flow out. And I think we'll see digital as being something that will stay with the system forever. Nick, can I just get you to sort of touch upon what you're seeing in the U.K.?

Yes, sure. Look, I think there was a period of adjustment that you could expect. But the U.K. commercial ports and the legal system here has adjusted pretty well. I mean there were, as I said, the initial changes distraction causing a slight delay. But I don't think we're seeing anything particularly worrying in terms of pushing cases out from the U.K. perspective. And then perhaps we should address the arbitration world, which is that realistically, the arbitration world has fared pretty well in terms of adopting virtual hearings and not sending people around the world to meet for panels for tribunal hearings. And I think, as Patrick said, I think what you'll see certainly in arbitration going forward is the adoption of virtual hearings and they're here to stay because it's turned out to be a far more efficient years of time and reduce legal bills by -- considerably. So I think in short, the U.K. is pretty much back on track, and the arbitral world seems to cope really well.

And Glen Dixon asks, is the weighting of these third-party funds, not conflicting interest as there's a better return for investors in the fund? Or is all capital in the funds raised externally and co again 25% by LCM. As such, investors received the additional benefit of returns?

Yes. I think we were very conscious about introducing this notion of co-funding, so that LCM and through LCM, its shareholders could enjoy a percentage of the full economic outcome of these cases, and we've done that through co-funding. So well, we -- the advantage we get in relation to the asset management business is first of all, gives us access to much greater pools of capital than we could ever sort of raise through equity or other sources as a company stand-alone. So it allows us to grow the business at a far greater rate and more particularly, the assets under management. But it also gives us access to performance fees in respect of capital that LCM doesn't have. So it gets the benefit -- we get the benefit of leveraging the business through use of investors' money, and we get paid performance fees on that, whilst also sort of maintaining an interest in alignment through co-funding. So I think it has very significant benefits both for direct investors in our funds and from equity investors in LCM as a vehicle.

And a final question from Carla Sanche, who asks what stops you from becoming a GBP 1 billion company in 5 to 10 years?

Well, I think we would embrace that comment as shrewd observation of LCM's growth. We would like to think that we might be able to achieve that inside that period of time. But look, if we look at LCM's growth just over the last 4 years since we've been in the public market, that's very significant. If we continue to grow at that same rapid rate, and we will easily have a market capitalization of GBP 1 billion within some time frame, such as you've suggested, particularly given the outlook what we've got now and into the future.

Thank you. That's the end of questions. Patrick, do you have any closing remarks?

Other than to say, we have established the platform for growth, we've achieved very significant growth during 2020. The economic outlook generally in global markets is incredibly conducive to LCMs further growth. And we see the outlook is incredibly bright for LCM.