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

Welcome to the Litigation Capital Management Interim Results Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Patrick Moloney, CEO; Nick Rowles-Davies, Executive Vice Chairman; and Mary Gangemi, CFO. Patrick, over to you.

Good morning. I feel privileged to be presenting on St. Patrick's Day, given my heritage. So kicking off, LCM came to the U.K. markets with a growth story. And the past 6 months' performance really gives some considerable validation to the growth that LCM has achieved and continues to achieve. And I start by talking about some of the short or near-term priorities that we said in our annual report that we will be focusing on coming in to the new financial period. And the first 1 of those was looking at LCM's balance sheet capital and looking for a way to supplement that capital, and LCM looked at a range of opportunities or a range of options in respect of that from equity through to other products such as capital facilities. We are pleased to announce that LCM just outside the end of the financial period, secured a USD 50 million credit facility, which supplements and gives far greater flexibility to our capital structure. It's incredibly important for LCM at this juncture of its growth for 3 principal reasons: First, it provides a short bridge for LCM to significant organically generated capital; the second thing that it permits LCM to do is to grow our portfolio of direct investments. So to continue with that growth of that portfolio. And that, of course, in years to come, will generate considerable organic income of its own; and the third thing that it permits LCM to do is to grow its asset that management business. Of course, investors are familiar with the business models that LCM runs, which is an asset management and a direct investments from balance sheet. And all of the opportunities that LCM funds through its asset management business get co-funded with balance sheet capital, so as to give equity investors direct access to the economic upside of those investments. Turning second to our asset management business. As investors know, we closed a third-party pool of capital to commence our asset management business in March 2020. We've had tremendous success in terms of committing that capital and putting it to work. So when that fund was concluded and closed in March 2020, it was structured so as to commit LCM a period of 24 months in which to commit that capital and then a 4-year period to manage those investments to a profitable conclusion. As at the end of the financial period, we had managed to commit that third-party pool of capital to 64%. And as we do this presentation, we've committed to 70%. So in under 12 months, we have significantly committed that third-party pool of capital. We've also started work in respect of either upsizing that fund from $150 million to $300 million. Alternatively, closing a second fund, probably in the order of about USD 300 million to USD 350 million. So those plans are well advanced, and we're in strategic discussions with stakeholders with respect to that. The next short-term strategic priority that we've been focusing on is increasing the number of applications that LCM receives. And of course, the applications are the start of the process in terms of us betting and diligencing opportunities for investment. So it's really important that LCM has a steady stream of applications such that it can put its capital and the capital that it manages to work. And we've managed, notwithstanding pretty challenging times across the world consequent on COVID to increase our applications compared to the corresponding previous period by 5%. And the final strategic priority that we've been focusing on is improving the quality of those applications themselves. And we've implemented a number of energies to achieve that including an education process with our global strategic alliances with those firms that we have entered into a global strategic alliance with to educate them such that when applications come from those firms, they come in a far more advanced stage, reducing the burden on LCM to undertake such a rigorous due diligence process. So we feel that we've made great steps to achieving some of those priorities. And obviously, we continue to strive for improving those priorities. Moving next to the highlights of the half year period. I've touched upon the committing of the third-party fund. We're currently at 70%. And when that fund reaches a commitment point of 75%, LCM is free to close its next fund. And as I mentioned, we're well advanced in respect of talking to stakeholders in that regard. And what I mean by stakeholders is existing investors in our current third-party pool of capital. And those investors who had a desire to invest in our first fund, but we couldn't give them allocation given the size. In terms of revenue, our gross revenue in respect to the period was $8.1 million. We'll touch upon the financial performance in more detail with Mary, our Chief Financial Officer as we progress through this presentation. Applications I've touched upon before, up 5% from the same period -- the same corresponding previous period in a pretty challenging market. And what I mean when I talk about a challenging market, we've had to innovate in terms of the way that we undertake due diligence and the way that we originate our opportunities for investment, consequent of not being able to travel and not being able to have face-to-face meetings. So it's a tremendous achievement for us to increase the number of applications, notwithstanding that we've had to change the way that we think about business development and origination. We've made tremendous steps forward in terms of the amount of capital that we are investing. So either balance sheet capital or third-party managed funds, we've managed to increase the amount we invested in the 6-month period to $40 million compared with the previous period of of $18.4 million, representing an increase of 116%. That represents a very, very significant increase in the amount of capital that we have managed to actually invest over the period. Secondly, in respect of commitments. We've increased very significantly on the previous period. So the commitments in respect of the 6-month period through December 31 was $67 million, and that represented an increase of 134% on the corresponding previous period. So notwithstanding challenging conditions economically globally. We've entered into a really significant number of additional commitments in respect of funding disputes than we did in the corresponding year. And finally, in respect to highlights, we've reached the point in measuring LCM's performance on concluded investments to 9.5 years. Over that 9.5 year period, if we take every single investment that LCM has made, including investments which were not profitable, we've generated an internal rate of return of 78% and a return on invested capital of 135%. So whilst we have been able to increase the scale of this business, increase the origination capacity of this business, we've managed to expand this business into new territories in the last couple of years. Whilst doing all of those things, we've still managed to maintain that standard of underwriting such that our investments perform within a very tight band and have done so for the last 9.5 years. If I can move on to LCM's strategy of building scale. Now when we think about building scale, what we're really talking about is increasing the pool of assets under management. And whether that's the pool of assets comprising direct investments from balance sheet, or the asset management business, we're managing capital on behalf of third-party investors. What we're trying to do here is increase that portfolio, and through the increasing of the portfolio and the natural maturity of those investments as they travel through the court system or the arbitral process to ultimately increase the revenue. And the important thing for investors to focus on when measuring LCM's performance during any particular period is to look at look at whether LCM is achieving growth and achieving what we set out to achieve, which is increasing the size of the portfolio. And of course, the first step in relation to increasing the portfolio is to increase the number of applications. The second thing is to increase the amount of committed capital during the period. And that really comes down to new commitments and new investments we're making. And those commitments were increased by 134%. And then following on from that, it's increased the amount of capital that we're actually putting in the ground or putting into investments physically because if 1 measures LCM's performance, and in a way that LCM has performed in respect of its investment over the last 9.5 years, that invested capital over the life -- the average life of investments, which is currently 27 months, should be multiplied by 135%. So if we look at those measures of growth, LCM has made tremendous achievements, notwithstanding some pretty challenging economic circumstances and the effects of COVID. The second thing investors should look at is that we're maintaining a certain standard in terms of the performance of our investments. We've gone through this the ROIC, return on invested capital of 135% and the cumulative internal rate of return. Now we don't expect as we gain scale in respect of this business to be always performing at that level. But at this particular point in time, it should be really encouraging for investors to look at the performance and see that we are tracking in line with the same way we've tracked because it gives you the reinsurance that we're not relaxing any of the standards of due diligence and risk that we apply towards entering into these investments. And then finally, in terms of measuring LCM's performance and its growth, is what are our assets under management across those 2 business lines, namely direct investments from balance sheet and secondly, asset management. And we're currently got $322 million worth of assets under management currently being financial commitments in respect of funding disputes globally. I'm going to hand over to Mary to talk through the interim highlights from a financial perspective.

Thank you, Patrick. The nature of our business is reliant on parties agreeing to settle a dispute or for an investment to reach a resolution through the courts. And consequently and in line with our conservative revenue recognition, income will flow through at a regular intervals and in line with the timing of these resolutions. As touched upon by Patrick, our key performance metrics are the best indication of progress in building scale, and this doesn't immediately filter through in the same period. Instead, this will materialize over time as our portfolio matures. Additionally, as we continue to build on our portfolio, this will likely smooth earnings over time. That said, revenue for the period on a stand-alone basis was $7.7 million, gross profit was $5 million and statutory loss before tax was $1.2 million. We have demonstrated that during this period, we continue to put our capital to work, more importantly in reinforcing the momentum in our growth metrics we -- which are a strong indication of the progress we've made, our investments on balance sheet have grown by 108% to $71 million and invested capital during the period has also grown by 21% to $22.3 million. On the balance sheet, we've touched upon invested capital, but if we turn our attention to cash generation, this reinforces the fact that our realizations are far better aligned with the timing of our revenue recognition with revenues being converted relatively quickly into cash. Cash at the end of February stood at $26.9 million, placing us in this position to continue to deploy both in our existing portfolio as well as investing in new opportunities which we've been observing an increasing applications. Additionally, we expect to see organic cash materialize as our portfolio is reaching maturity on the direct balance sheet side, which Patrick will talk to a little later on. The cash waterfall simply highlights that the 2 most significant movements during the period are those which are fundamental to our business, being capital deployment and cash receipts related to the resolution of matters. Expenses remained broadly in line with the prior period, and our cash position in February will further facilitate growth as we continue to invest in our growing portfolio of assets. I'll pass on to Patrick to talk through the portfolio.

Thank you. So I want to look now at LCM's portfolio. So if we look at our current portfolio of direct investments, we currently have, in terms of 100% direct investments, meaning that LCM is funding 100% of the capital commitment in respect of those investments is $108 million worth of those capital commitments. If we look at then LCM's direct but co-funded investments, that being the 25% of the co-funded arrangements with a third-party pool of capital that we manage, that portfolio currently represents capital commitments of us of $63 million. $87 million combined of those at 2 categories has been invested to date, with a balance of $84 million to be invested over the life of those investments. Now as investors know, those investments are progressively made by LCM on a monthly basis right from the inception from when we sign up those new commitments right through until they're actually realized. So those investments are made progressively on a monthly basis over the life of the investments for us. Now if we again look at the structure of the portfolio of direct investments that LCM has built, we're looking for diversity across industry sector. And the first pie chart there really demonstrates the way that we construct our portfolio such that it's not attended with concentration risk in respect of any 1 particular area. And then -- so it's not only by capital commitment, but also by number, we're seeing the diversity there. And the pie chart on the immediate right demonstrates really and proves the integration of the London team led by Nick. And the way that they are now generating at a similar level to what the traditional teams of LCM have in Australia and up into Asia. So what we're seeing there is pretty much even contribution towards the origination of those investments, which comprise LCM's current portfolio of direct investments. If we turn over to LCM's asset management business and have a look at the portfolio that we have built and constructed in respect of that third-party pool of capital to sure to which LCM access a fund manager. So as we've talked about, that's currently 70% committed. So we've got $151 million worth of commitments already entered into, leaving us with $56 million available to commit into the future. If we look again at the diversity of that portfolio, we're getting good diversity across our industry sector. And if you look at the second pie chart, we're looking there that the whole portfolio is not attended by concentration risk in terms of capital commitment in respect of any 1 particular investment. So the same principles apply to the investments that we -- or the portfolio that we have built in respect of direct investments to our asset management business. We're looking for diversity. We're looking for a portfolio which is not attended with concentration risk. If we can turn over now to what the portfolio looks like in terms of maturity. Now one of the things that investors continually request from LCM is a form of forecasting or a form of guidance in respect of what its forward earnings are going to look like. And LCM, like other listed litigation financiers is reluctant and not prepared to provide any sort of financial guidance moving forward. Simply because our investments are obviously monitored and managed very carefully by LCM through to a profitable conclusion. But ultimately, those investments are not under LCM's control. So we're investing in third-party disputes, where those disputes will be brought to an end or a conclusion, either by the parties to that dispute reaching a commercial resolution. Alternatively, if that's not possible, they'll be adjudicated by a court or tribunal. Now just making an observation of that dynamic, an interesting aspect of this asset class is the fact that these investments have their own natural life. So they are brought to an end, irrespective of whether the parties to the underlying dispute have the wherewithal to negotiate a commercial outcome, an outcome will be imposed upon them by a court or a tribunal. So in that sense, all of LCM's investments will have a natural life, and they will be brought to a conclusion naturally either through the court or through the parties resolving the dispute. What I want to do is in respect of this slide is try and give investors some insight into what our portfolio looks like now and hopefully, give investors the tools that they might be able to get an insight into what our revenue stream might look like in the very near future. So the first, I want to start on the right-hand side of this slide. And we've talked about LCM's performance metrics over the last 9.5 years. Another metric which is important to bear in mind is what is the average length of LCM's investments that it has brought to conclusion over the last 9.5 years. And that has fluctuated in probably the last 5 years between 25 and 27 months. It's currently running at 27 months. So if we take that 27 months as being a really good indication of what an investment, the life -- the typical life of an LCM investment. We then sort of move back across, if we look at then the maturity of LCM's portfolio of investments by number. So all we can see there is the largest part of our portfolio has a maturity of between 13 and 24 months. That comprises 17 separate investments. And then if we move beyond that, 7 investments fit into the category of 25 to 36 months. And then there's 2 outliers, which sit at a 37 to 48 month mark. So what you can discern from that is a very large proportion of LCM's portfolio of direct investments is coming to the point of maturity now. If we think about why perhaps some of these investments are taking longer to mature than they would have normally in normal market conditions, we look to COVID. COVID has caused delays in the court system. And there's 2 ways in which those delays have manifest themselves. First of all, at different times, different economies have gone into lockdown. So in Australia, the predominance of the restricted lockdown happened at about this time or shortly after this time last year. When in the U.K., it was much later in the year when that occurred. And the immediate effect of those was to shut down court systems such that everything throws, nothing could progress through the court system. No hearings were taking place. The courts obviously adapted as they masked to ensure that commerce and economies can still function effectively to a digital format. So they picked up within a matter of months and started operating again quickly. And that has brought with it tremendous efficiencies in most of the court systems in which we operate. So it's the first delay, it was a physical delay, which put a certain number of months, maybe 6 months onto our investments simply because the courts being shutdown and hearings couldn't take place. The second and less discernible delay that is occasioned by COVID is that the courts tend to allow indulgences in terms of timetables simply because there's restricted access and inability to travel and the like. So when people and parties are required to put on their evidence, they've given an extra couple of weeks or months. And when the expert testimony is required, they get an extra couple of this. That has a tendency to elongate the time period. So that explains why some of our investments are slightly stretched over the average time to completion. And then finally, in respect to this slide, I want to make 2 points. The first 1, is investors will say, well, how can we be sure which of your investments by size comprise these investments, which on their face appear to be coming to maturity within the next sort of immediately through to the next 18 months. And if we look at the bar chart on the immediate left-hand side of that page, you'll see that our portfolio in terms of the amount in dispute is very evenly spread across. So we're not managing a portfolio of small claims. We're not managing a portfolio of really large claims. It's a nice even spread across all of the sizes of those disputes. And then the final point I want to make is the vast -- or the most mature portion of LCM's portfolio of investments are those investments where LCM is funding 100% of the capital commitment. So what we can discern from this slide is that a very substantial part of LCM's portfolio of investments are coming into their maturity stage, and that translates directly into an increase in LCM's revenue line. Secondly, we can observe that there's an even spread in terms of size across the portfolio, and we should expect that, that will probably translate into and across the portfolio, which is coming into maturity. And finally, what we can say is those matters, which are in the most -- and those investments, which are in the most mature state, are those where LCM is funding 100% of the capital commitment as a consequence of which and through LCM, its equity investors, get the full 100% benefit of the economic upside in respect of those investments. So I hope that provides some assistance to investors in terms of understanding where we are in terms of our investment cycle. And the final observation I would make is, if you think about LCM coming to the U.K. market with a growth story, raising GBP 20 million at that time, so that was December 2018. Once we have that capital available to us, we said about committing it. So assuming that, that was committed over the next sort of 6 to 8 months and then applying our average time to completion, you can see again that, that $20 million is coming into a period when those investments to which it was applied would be coming into the mature cycle. I want to hand over now to Nick Rowles-Davies, just to talk about the market conditions as they are currently presenting.

Thanks, Patrick. So just to touch on market conditions and then shortly thereafter, the outlook for the next 12 months. The area in which we operate is entirely uncorrelated to the markets at disputes, in the form of litigation and arbitration are unaffected by political, economic or other market conditions, as we mentioned before. Courts and tribunals don't change the decision-making in different economic conditions, they're consistent. But not only is the asset class uncorrelated, but each individual dispute within our portfolio is also entirely uncorrelated to the next. So a loss in 1 particular investment is not reflective of the book, the portfolio or the merits of any of the other investments. And added to that, LCM's business benefits from being countercyclical and counter recessionary. So in times of economic uncertainty and stability, financial pressure, businesses tend to transact outside their normal business operating conditions, and that leads to an increase in disputes in times of economic instability. So recessions have increased will historically increase the number of disputes that we see. Economic uncertainty, instability, particularly brought about by COVID is no doubt going to lead to an increased number of insolvencies, bankruptcies and restructurings. So historically, this is an area of expertise for LCM and one of our core competencies, having been a pioneer in the industry starting out in that space. So we anticipate a significant increase in investment opportunities arising from insolvency and restructuring. So in these times of economic uncertainty and instability, businesses tend to reserve balance sheet capital, keep hold of their cash flow for their core business. And that leads to an increase in interest -- an interest in and the use all of external capital for the funding of disputes. So in particular, we're anticipating that this will be from both of the areas which we receive from where we receive corporate applications. And as we've talked before, those funding out of necessity, the impecunious applicants and those funding out of choice, those corporates who have the financial ability to pay their legal fees but choose to use our funds instead of their own. Now the evidence of that is already there. We're seeing that and have done in the last period, and we've witnessed a 68% increase in those applications from corporates compared to the prior period. Now that covers pretty much market conditions for now. I want to move on to the outlook before that. I don't know whether Patrick, if you want to talk to the facility that we've recently entered into or we're happy to go straight into outlook, we'll do that. So just to go straight into the -- yes, of course. So just the outlook currently and for the next 12 months, given what we've seen in the first half of this year, first half of this year, the outlook is actually very positive, very healthy. We've had a marked increase in applications received from our strategic alliance with DLA and Aldersgate, a significant uptick in interest discussion and application from our other strategic alliances with global law firms. And in those, we've introduced innovation and new thinking into those relationships, whether that be by way of education in the process to reach a positive investment decision or innovation in our origination collaborations. So there's been an increase in demand for our capital from corporate clients as that instability and uncertainty remains in the global economies. The figure I mentioned previously is the year-on-year increase of 68% in applications from corporate clients. And that shows the observations that we made previously about the effect of the COVID-19, and then it continued to be present from March onwards into the -- so the last 12 months, and those are sort of the 3 effects that we've mentioned before. Those corporates who were in the midst of a dispute that have, at the very least, considered whether the allocation of the budget that they had previously we're going to use on legal spend is now appropriate and whether there's an alternative. Some of those corporates who were considering but had not yet commenced their dispute, have also paused the forward and have reconsidered whether the budget allocation is justified currently and whether the resources can be used better elsewhere. And that's led to an increase in the discussions with lawyers over alternatives and alternative ways to address that legal spend. And the result of that is the third effect that we've seen, which is an increase in demand from law firms or knowledge, and how things work. And a marked acceleration in the education and understanding by them of what we do. And a number of large law firms are taking a keen interest in better understanding dispute financing, how it can assist them with their business development, their client acquisition, and of course, most importantly, for them, currently client retention. And that's reflected in the applications. Globally, as we've mentioned, and Patrick has already said, these are up on last year by 5%, averaging around 46 good quality applications a month. And this is not inquiries. These are paperwork supplied with a good quality review. So substantial applications, and that includes 29 portfolio applications. So to the -- to end of February, whilst globally, everything is tracking well. And as Patrick alluded in previous comments, despite the difficult conditions for origination and business development, the need to pivot and change as to how we've done that. No physical travel and everything being done virtually, all of the teams have managed to cope well and increase the number of applications, but we're definitely seeing a large uptick in the European and EMEA region. To the end of February, the increase has been quite significant and compared to the same period last year, were up by 40% in terms of good quality applications. So things are positive in that regard. By the end of 2021 and into 2022, we're anticipating an increase in the number of applications from the insolvency and restructuring field. It's the various government moratorium regimes and stimulus programs come to an end. And I think it's fair to say that our portfolio of investments is maturing, as Patrick has just shown you the range of those investments. The effect on -- of Slide 10 of the combined portfolio profile is that more than 65% of those investments are entering a duration where given our experience and the historic average duration of 27 months, they're reaching a period of maturity. And then lastly, in terms of outlook, our third-party fund and our asset management model, we're tracking as expected as regard to commitments to the fund of high-quality investments. And so as you've heard, we're considering carefully in the next step to increase in size or the size of our assets under management and the fund size. So that's pretty much for where the market sits and what we're seeing now and what we're expecting in the coming 6 to 12 months. And with that, I'll pass back to Patrick just to talk about 1 slide that we've overlooked.

So just want to go back to these credit facilities slide and provide a little more information around that facility. As I mentioned in my opening remarks, LCM's Board looked very carefully at what the capital options were available and what options it could avail itself of in terms of introducing additional capital to LCM's balance sheet to continue to commit LCM to grow and to grow its portfolio investments. We looked at the entire range from raising capital through equity, through commercial bonds. And ultimately, settled upon the credit facility that we entered into in the last month. And that was principally for 2 reasons. One, it was a cost of capital. So if we compare the cost of capital at this facility as against raising capital through equity, that equity capital was just incredibly expensive, given that the company is trading at a particular share price, which in view of the Board is not reflective in any way of the intrinsic value of this company. So raising capital -- permanent capital through equity was an incredibly expensive option for us. In respect of flexibility, raising commercial bonds requires you to actually draw that capital down and start to pay the interest rate component of that in respect to the entire facility on day 1. We really needed the flexibility to use that capital only when LCM's balance sheet needed it as a bridge to organic capital. And then when we weren't using it, we weren't paying the coupon. So we settled on this facility as being the best option. Now if we talk about what we're paying in terms of an interest rate or coupon rate in respect of having those funds available to us, we have 2 components to that. We have a fixed interest component of 8%, it's currently 8% and it's fixed off LIBOR with a base of 1%. So it's currently fixed at 8%. And then there's a profit participation in LCM's direct investments which is capped at 13%. So the maximum cost to LCM in respect of these funds at any particular point in time when drawn is 13%. Now when 1 compares paying for their capital at that rate compared to what LCM has performed at in terms of an internal rate of return on its investments of 78%. Currently, there's adequate margin in there for us to adequately utilize this capital facility really to drive LCM's growth. And if I want to -- just in my closing remarks about where LCM sits in the market, you've heard from Nick about the opportunities that we're seeing out there in terms of growth and the quality applications, which are being originated by our investment managers. We've talked about introducing capital so that we can actually fund these opportunities, which we're generating and originating inside LCM. And that capital is either coming from the facility or coming from organically generated capital through our mature book of investments, and we're also continuing to grow our asset management business. So if we look at LCM's profile, we've got a ready source of capital from both asset management and balance sheet capital. We've got economic conditions, which are really conducive to driving people and corporations, most particularly towards wanting to use an external source of capital to fund their disputes. So LCM is an incredibly good place given our history and our experience to take advantage of these market conditions and the capital available and the demand for our capital. So we look at this outlook as being really, really positive going into the next few years. So happy now to field or answer any questions that investors might have.

[Operator Instructions] We have a question here, which asks, why did the fund's commitment rate slow down between September '20, back at 60% and March '21, 70% compared to the first 60% committed in 6 months between March '20 and September '20? Is it because of a lack of own capital pre RCF due to project delays?

Look, there's a number of reasons why the perception might be present that the commitment rate has slowed down. The first observation to make in respect to that is the receipt of applications and our ability to convert those applications into funded projects is not entirely dependent upon LCM. It's also dependent upon the funded party and reaching commercial terms. So that process is not -- and the way that that progresses is not always linear. So you have fits and starts in that process. In some months, you originate more applications. In some months, you diligence more applications and they travel through the process and the IC process. The second observation I'd make is the perception is, is that there was a very quick commitment rate in the beginning, but what investors need to remember is that we, in the months preceding closure of that fund we had prepared a portfolio of, I think, 9 separate investments, which we seeded into the fund and pretty much immediately upon its closure. So that gives you the perception that the commitment rate early in the cycle was much better than the latter part of the cycle. So I think that's the effect that you're seeing. And then the final observation I'd make is our investments, as you've seen from Slide 10, range in capital commitment size very markedly. So at 1 end of the scale, you have a dispute, which might be about between $10 million and $20 million in the budget in respect to that of the capital commitment is relatively modest compared to at the other end of the spectrum, you have claims I think we had 2 in number, which were in excess of $0.5 billion in dispute size as you can appreciate, the capital commitment in respect to those is very much more. So if you're originating diligencing and passing through the investment committee process, a very large claim, you need have capacity much quicker than a bundle of smaller claims.

And regarding to third-party managed funds, can you elaborate further on the type of structures these investments are in? Are they multiyear commitments? What's the management peak, et cetera? Are LCM aligned with the underlying investors? For example, do you also invest capital in these third-party funds?

Yes. So the structure of our third-party funds management business is actually aligned with the interest of both the investors in that third-party fund and equity investors. And the way we get that absolute alignment is in 2 forms. The first is that every single investment that LCM originates, which meets the fund mandate is co-funded as to 25% from LCM's balance sheet and 75% from the pool of third-party capital that LCM manages as fund manager. So you get this absolute alignment between that. So LCM equity investors enjoy the full economic upside in respect of that 25%. And the fund enjoys the economic upside in respect of the 75% commitment, with the exception that LCM as fund manager gets a proportion of that profit depending upon the way that each individual investment performs. Now LCM does not receive a management fee. We made a choice to have an increased performance fee in respect of those investments. So we get 25% of the funds profits in respect of each investment up to an IRR of 20%. And then above that, it's a 35% profit split in LCM's favor. So there's 2 ways that we're aptly aligned in terms of balance sheet and fund: First of all, is participating through our performance fees; and the second is through co-funding.

And can you please clarify what the $21.1 million net cash movement post period on Slide 7 was derived from?

So Mary, do you want to talk about -- talk to that?

Sorry, I was just on mute. Yes, so the $21.1 million post period cash movement was the initial drawdown on the facility that we closed at the end of February, offset by further deployments in investments from that period through to end of Feb.

And have you resolved as to the requirement or otherwise to move to fair value accounting?

Yes. LCM's position is not moving to fair value accounting. We are very comfortable with the very conservative approach that we take with respect to accounting principles. Unlike other of our listed peers who have moved to fair value accounting, we're very comfortable recognizing revenue only when it's earned and LCM has fulfilled all of its obligations such that we become titled to both the return of our capital and our profits. Now that inevitably leads to a more lumpy revenue line. And it means that LCM may not necessarily generate or receive its revenue in one or other of the halfs of the financial period. But that should not be a concern to investors. It's simply the way that LCM's revenue line works. And we don't recognize any intrinsic value in our revenue line of investments prior to them reaching full maturity and receiving the proceeds.

I understand the comparison of relative costs of the debt facility to alternatives and the return on invested capital, but the coupon and participation looks very expensive. Why did the bank consist on such a high rate of return for secured debt?

Look, we tested the market really vigorously. We've got in excess of 4 offers from global sources. And that was the best LCM was able to achieve in terms of available capital at our particular stage of growth and evolution. So we were pretty comfortable. We've got advice from a number of investment banks as to what we should be expecting to be able to raise a capital facility at. And we managed to secure capital at a rate, which was below that, which we were advised we should expect to receive. So we have really just met the commercial market in respect of that facility.

And regarding the 27-month average completion period, how has that average changed over the last 9.5 years?

It's fluctuated between 25 and 27 months. Now we have recognized and investors would recall this from reading our annual report. That as -- as we have a larger capital base to operate with and as we build our portfolio such that we can invest in larger disputes with larger capital commitments without attending that portfolio with concentration risk, those disputes, those large disputes, where the dispute is about a larger sum of money will probably elongate compared to the smaller disputes. So over a period of time, we probably expect that 27 months to elongate slightly. And the simple dynamic that is at play there is that the larger the amount of money that people are fighting over, the harder they fight and the longer they'll fight and the more obstacles they'll put in the plaintiff or the claimants way to reaching a conclusion. And we're realistic about that. But in respect of the portfolio, which is coming into maturity, we would not expect it other than the dynamics that I've described in respect of COVID to have display any different characteristics to those that we've completed within the last 9.5 years.

And should shareholders be concerned that COVID or due diligence changes could result in lower returns when these cases complete in 2022 and '23?

Investors should not be concerned about that at all. LCM has not relaxed any of its really rigorous due diligence or risk underwriting processes. And they're not really affected by COVID. The way we go about origination and business development in terms of sourcing our opportunities. We've had to change and adapt simply because we haven't been able to travel, and we haven't been able to have face-to-face meetings with our referrers. But in terms of the underlying processes and methodologies that LCM has developed over its 22-year history in terms of underwriting and assessing the risk associated with these investments, that has not changed at all during the period of COVID and will change moving forward.

Sorry, to add to that. The way we price our investments means that to the extent that anything has been pushed out. The vast majority of these investments are priced on a multiple of invested capital increasing over the duration. So we built in a safeguard to ensure that our returns actually probably increase the longer they take because we see that as a higher risk in terms of general investments. So investors shouldn't be concerned about that.

And when you receive a proposal, how do you assess the chances of winning?

Well, LCM has a criteria which is applied to that. And a quick gallop through that criteria is, first, we're looking for disputes where the legal principles are well settled and predictable. Secondly, we're looking for disputes where the underlying evidence is in documentary form as opposed to relying upon oral testimony. So we obviously recognize there's risk in a case being reliant upon someone's performance in the witness box, and that's the type of investment we would avoid. Thirdly, we're looking for a clear line of sight and respect of recovery. So we look very hard and very closely at whether we will be able to recover against a target or defendants. And that typically drives us towards defendants who either have deep pockets and adequate financial resources, alternatively, defendants, which are backed by some form of insurance, whether it be directors and offices, policy or professional indemnity. The next criteria is we look really closely at the proportionality of that claim. To ensure that at all times during the progress of that investment, there's an alignment between the funded parties interest and desires and that of the funder. And these principles do most of their work in the smaller claims such as to ensure that the funder and the lawer are not taking all the proceeds of the particular dispute because otherwise you have an unalignment between the funded parties who may be getting a disproportionately small amount. So they're the types of investments which we would avoid simply because we want to have absolute alignment between the funded party and the funder. And the final criteria is that we're looking for a legal team who can prosecute that claim adequately and appropriately and diligently through the court system. And that may sound really simple and straightforward. But it's really a criteria which is grounded in discipline because often you -- or not infrequently, you'll get an application which will meet our other criteria, and we can see that, that is an investment that LCM could generate significant profits for shareholders. But we know that the legal team will not prosecute that with due diligence and dispatch. And we need to have the discipline to say that's not an investment because that legal team represents too much risk for us, even though we can see inherent value in that underlying dispute. And then investment manager will apply those principles. And ultimately, there's a process which leads to a decision being made by our investment committee. And that's a very quick run through the process. And it obviously has a lot more detail to it. But in the context of this forum, that's probably as quick as I can go through it.

And a question about upsizing of the first fund or launch of the second fund. Is the 25% investment rate sustainable over time? And is the launch of a second fund of $300 million to $350 million, as you mentioned, 6 months ago, still the base case?

Yes. I mean, we, as a company, are very conscious not to simply go into the market and raise capital just to bolster our asset management business. We're conscious that we need to be able to put that capital to work, in other words, committed and then invested within a sensible period of time. So we think we could comfortably cope with a fund of USD 300 million to USD 350 million, and we could commit and deploy that within a reasonable period of time. So we're still very confident that that's the correct number. We are still contemplating with stakeholders, whether it's best to upsize the existing fund. And part of the drivers in respect of making that decision was really our ability to actually get out there and conduct a proper roadshow given the restrictions on travel, across the globe currently. But we're in the final stages of that process. And we are very confident that we will be in a position where we will make a decision and then bring to a closure either an upsize or a new second fund within a short period of time.

Operating in multiple territories supports further growth, but does it also provide other benefits in relation to choice of territory for litigation or specific potential investments?

Look, I think when LCM thinks about its longer term strategies. One of those is certainly looking at new territories in which for us to operate. I think equity investors should expect that LCM will approach that in the same way that we've approached expansion in the past when we expanded up into Asia when we expanded, ultimately establishing our U.K. office headed up by Nick. We did that in an incredibly disciplined fashion and would not move into a new territory unless we had an experienced team that we could put on the ground from day 1. Not only that we're sort of really familiar with the legal principles associated with that particular jurisdiction, but more than that would understand the actual culture of the dispute scene and the legal profession within that particular territory. Those issues for us are paramount. And we would just -- we would not move into a new area unless we were satisfied that we had the right team in the same way we did when we brought Nick and his team on to form our U.K. office.

Can you give us an update on the corporate portfolio? Have you acquired new portfolios and how the current portfolio is doing?

I'm grateful to hand over to Nick to answer this 1 and give myself a quick break.

So just touching on the existing corporate portfolios, we've had the benefit of some resolutions within both the aviation portfolio, and in 1 of our first construction portfolios that have produced revenues that have been reported already. They continue to make progress in relation to the aviation. I think we started at 38 cases in that book, and it's now up to nearly 50. That's despite the resolution. So the client has continued to believe in the process and put new cases in. We had 29 applications of portfolios within the last period. And that is both corporate and law firm and insolvency portfolios. And that means that we're tracking quite well in relation to those matters. So I think it's fair to say that we continue to operate on the basis that -- excuse me. We continue to operate on the basis that that's an area for us, which we see significant growth. It's an area where we're distinguishing ourselves from the market. But clearly, in the last 9 months, we've had to look at the way in which we originate those. And we very much work with our law firm and strategic partners to generate those leads. That said, what we've been pleased with is the reaction from other areas of the market where, again, probably because of the effects of COVID, other people have come to us with an interest in how they might operate in the same way. So I think it's fair to say that the ones that we have ongoing are producing returns and kind of proving the model that we expected, which is that the revenues come a little bit more quickly than the 27-month period. They're slightly what we've referred to as evergreen and that they continue to produce new investments from the same portfolio. But also we have some still in due diligence, 1 of the largest, probably the largest construction portfolio or the largest corporate portfolio that's being done, certainly by LCM remains in due diligence. And it's an indication of onward strength and how we've been originating good transactions and continue to make significant progress. So very much positive, but not just in corporate portfolios, which obviously was very much for us. We've been pleased with the way that the law firm portfolio transactions are beginning to get some traction. So all in all, really positive.

And how do you see competition in the corporate portfolios? And are you seeing more competition from your peers?

Look, I think the answer to that is we're not seeing any competition in the marketplace at the moment. To be perfectly frank, I think, Nick and I would like to see more competition in that space, simply because it'll help getting the message out to corporates. We seem to be the only funder globally who is actively focused on that part of the market. And I think we would certainly -- it's such a large and vast market out there. There is room for perhaps a dozen funders to be focusing on that market globally. To date, we're really not seeing a great deal of competition, if at all.

And do you expect insolvency cases to be the biggest driver of growth in committed capital over the coming 12 to 18 months? And how does LCM compare with EMEA peers that focus specifically on insolvencies, such as [indiscernible]?

I think the answer to that is we would not expect there to be any significant increase in the number of applications in respect of insolvency or restructuring-related disputes, within the near term. So even though governments globally may stop stimulus packages and then relax the moratorium against winding up corporations or placing them into bankruptcy. The reality is that once an external administrator or controller is appointed to insolvent corporate shell, there's a time lag between that insolvency practitioner really investigating the affairs of that company and identifying the courses of action which require funding and then to meet an application through to a funder to bring that into 1 of the portfolios of investments that LCM manages. Now the reality is that I think it's inescapable that we are going to see an increase in the number of externally administrated insolvent companies. We're going to see an increase in bankruptcies. We're going to see an increase in restructuring across all of the markets in which LCM operates undoubtedly. But that -- there will be a lag in respect of that. But that -- once those applications start flowing through, we would expect, and it's been our experience in the past having funded through the global financial crisis in the back end of the Asian credit crisis, that those applications will continue for very many years thereafter until the limitation period sort of expires. So you've got a good 6-year flow once that starts of insolvency and restructuring-related disputes, which will require funding. So we certainly see it as an area of growth, but not as soon as perhaps some other the funders have been talking about. Whether we regard ourselves as being in competition to other funders who focus solely on insolvency market, look, we don't operate -- we don't operate in direct competition on a day-to-day basis with [indiscernible] and we operate a far more diverse business and focus on -- far more diverse sectors in the marketplace than simply smaller scale and solvency.

And in LCM's fund, is there a catch-up on the 35% profit share after a 20% IRR? Or is it just a 35% share on all profits above a 20% IRR?

Yes. So there's no catch up. So we get a 25% profit share up to 20% IRR. And then when we get outperformance, calculated at 35% thereafter. Now if 1 considers that the IRR that LCM has achieved over the last 9.5 years has been 78%, inclusive of losses, we would have a fairly high conviction and expectation that we will be operating largely in the area of outperformance.

And how much of the $50 million facility has been drawn down? And if a significant proportion, is there any further need for more debt capital?

Well, currently, LCM has drawn down $25 million of that $50 million. That puts us in a strong financial position for the foreseeable future. Whether there's any need in the immediate time for any additional capital facility, the answer is no.

And is there a trend in average claim size, are you now handling more larger and presumably slower claims than, say, 5 years ago?

Yes. It comes down to the discipline associated with building a portfolio of dispute investments. As we talked about before, we ensure that any portfolio that we build or create is not affected with concentration risk in respect of any particular investment dominating the capital commitment. So as LCM's capital resources increase and as the size of the portfolio, we're managing increases, it enables us without attending our portfolio with undue risk to enter into capital commitment to the larger size. So and as I said previously, in answer to 1 of the other questions, when you're funding a dispute, which is larger, they normally take longer because people fight longer and harder about larger sums of money, and they fight longer and harder by adding complexity to those disputes and putting impediments in the way of the climate or the plaintiff to a judgment or an award. And that will have a tendency to elongate a time, but that needs to be measured against the benefit to LCM of being able to increase the size of the profit split or the fee that we earn in respect of these investments.

And are you seeing increasing competition and thereby pricing pressure?

No, we're not seeing pricing pressure anywhere. I might get Nick to talk to what he's seeing more directly in the Northern Hemisphere. In the Southern Hemisphere, I think with the onset of regulation in respective class actions, which was brought in to the Australian market in August of last year. I think the observation we have made in the marketplace is that has dampened competition from offshore litigation financiers coming into our market. So it has increased the regulatory burden that is required in respect of funding class actions moving forward. And that's proved to be a disincentive in terms of litigations finances operating from offshore and putting their capital to work inside the Australian market. So I think that has had a tendency to drive litigation financiers out of the market who don't have a permanent presence in Australia, which is less than the competition. I think that there's not a great deal of competition in the Asian markets currently. It's dominated principally by 2 funders, 1 of which is ourselves. So we're not seeing a great deal of competition in that market, which is still emerging and providing a really steady flow of quality applications in arbitration and trade. And Nick, I might just get you to comment upon what you're seeing in the markets in which you operate?

Sure. So I mean, clearly, there are more funders in the market than there were. But that -- there's the quality their ability to execute and the amount of funds under management or access to capital they have very significantly. What you're seeing in the EMEA market is a slightly more sophisticated approach from lawyers, they've grown in education over the last 10 or 15 years, and we understand that price is not everything. Now what that means is that some lawyers will run a process but appreciate that maybe access to large capital being regulated only on the stock exchange or by the Jersey FSC in a largely unregulated market and having transparency by being listed is a big plus for an awful lot of law firms when they're dealing with funders. So that automatically cuts out a little competition, which tend not to operate. And of course, there were only a small number of listed funders globally that public markets. There are still the broker-led introductions. And some firms, we use them and some clients will use them. I think the U.K. is unique in that respect because of the historic insurance markets. And the brokers tend to try and compare everybody, apples and apples. And we have a strategy to deal with that. I mean, firstly, we don't do an awful lot of broker-led introductions. We refuse to get involved in a race to the bottom over price because the price that we charge reflects the risk and the risk doesn't change regardless of the other circumstances around the case, such as the fact that there's competition. Most funders in the London market now that we operate against, if we do come up against the most sophisticated and have been there for a long time. And they understand the same thing, so they price appropriately. We're very much distinguishing ourselves from the rest of the market. We're trying to by gaining specialisms in certain niches, whether it be construction or insolvency or aviation or oil and gas or whatever it is. And that -- because of the nature of the highly qualified and top professionals we have within the LCM, we're able to do that. And when you look at other funders, if you take off the branding, a lot of them are exactly the same. You wouldn't know 1 from the other. If you read their [indiscernible] or their websites. And hopefully, with LCM, that's a difference because we're adding some value over and above just being a source of capital. So the short answer is there is more competition in single cases. There's none in portfolios. And as Patrick has alluded to, it will be helpful to have a slightly more innovative opposition in that respect because that would educate the market and mean that every time that we pitch, we don't have to educate as to what we can do and what solutions we can provide. There is something changing on that front, but going slowly. And then, of course, a lot of our work in terms of origination is the innovation with the likes of the DLA or Aldersgate arrangement, which because of its structure allows very competitive pricing at the same time as being a very warm professional introduction from a top global law firm. Clyde & Co, the same effect because they know how our process is it's not simply that we get to look at a large number of their cases, but 1 of the huge benefits of working with these firms and the same with Norton Rose Fulbright is that they understand how they can quickly get to a positive outcome. They can triage their own cases. And that means they'd rather work with us than go to the market. So there's very little competition in that respect. So in short, yes, the market is a fuller market than it was. In some areas, there's an increase in competition, namely funding out of necessity in the broker region. But where we do our best work and where, of course, the vast majority of untapped cases are, which is funding out of choice, the corporate world, we don't face an awful lot of competition. And when we do, we're careful not to get involved in the rest of the bottom. So hopefully, that encapsulates the market really.

And in the $21 million net cash movement post period, are there any proceeds or receivable movements?

Mary, I might get you to talk to that?

Yes, sorry. There are some small receivables that have come through. There's also deployment included in that figure. So it's a combination of cash drawn down, receivables coming through as well as deployments being made.

And as you scale up on own and managed funds, do your costs increase proportionately? Can you give an idea of the opportunities and efficient -- for efficiencies of scale?

Look, I think we haven't included at the slide, which we typically include in our full year results, which attracts our operational expenses as a percentage of our overall portfolio of assets under management. But what I can say is that, that's been tracking down from the time that we did our first IPO on the Australian Securities Exchange. It was tracking from memory at about 13% of our portfolio. And when we did our full year results, it was tracking down at around 4% or below. So there's certainly efficiencies which can be drawn from operating a larger portfolio. We will inevitably have to increase in some respects. Our team as we have larger pools of capital under our management. But we're very conscious when we are increasing our operating expenses that we do so in line with an increase in the size of the portfolio of assets under management. So we're very conscious of that. And we are very disciplined about the way that we grow the business in line with the growth that we're achieving in terms of the size of the portfolio under management.

And how do you think your business model will put for if inflation picks up over the next 3 to 5 years? But so is it a good hedge against inflation for investors?

Look, I think that I wouldn't necessarily always lean towards inflation as being something that 1 would hedge against in respect of the Litigation Finance Industry. But I think I would rather sort of lean towards the fact that it's a good hedge against the countercyclical nature. So it's a very good hedge against a downturn in an economy because we tend to get more applications coming and more demand for our capital, both from corporates and from insolvency practitioners. So I think it's probably a better hedge against the downturn in an economy than it is necessarily in relation to inflation. And I think we all need to accept that there is going to be turbulence in economies as global governments or governments across the globe withdraw stimulus, which they have to do at some point.

We do have more questions, but we've run out of time. Patrick, do you have any closing remarks?

Look, I'd just reiterate that with the additional capital that LCM has got available to it, with the market conditions, which are generally prevailing and with LCM's experience in the marketplace, we are very much moving into a period, which will be incredibly conducive to both LCM's growth and an increase in its revenue line.

Thank you, Patrick and Nick and Mary and to you all for joining. You will now been taken to a webpage to give some anonymous feedback on Litigation Capital Management in today's presentation. If you're unable to complete this now, you'll receive a follow-up e-mail about an hour later. We'd be really grateful if you could take a few minutes to complete. This is the end of the webinar.

Thank you.