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

Good morning, ladies and gentlemen, and welcome to the Litigation Capital Management Limited Full Year Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. And if you could give that your kind attention, I'm sure the company will be most grateful. And I'd now like to hand over to CEO, Patrick Moloney. Good morning.

Good morning, or good afternoon, good evening, depending upon where you are in the world. Welcome to LCM's full year results presentation of this financial year ending 30 June 2023. I'm accompanied here by Mary Gangemi, our Chief Financial Officer, who will talk to our financial performance throughout this presentation. So I'm going to start with highlights. This LCM is really the combination of some really focused efforts to build the scale of this business. What we're seeing in this financial period was some of the realizations which are coming through or the results of that building sale. So first of all, realized revenue or income for the period on a consolidated basis of AUD 181 million, which is a record for LCM, AUD 84.2 million of that revenue or that income was directly attributable to LCM and its balance sheet. Moving to adjusted profit before tax for the relevant period, AUD 53.9 million, of which AUD 16.2 million related to fair value movements. So the statutory profit before tax is AUD 42.7 million. Again, that's our best results historically for LCM. This is a year where we have transitioned into fair value. That really brings us in line with our peers and makes us comparable on that basis. It also increases the transparency and the information set that investors will have in terms of the progress of our portfolio through its evolution. So we've got a total portfolio value at the end of the period of AUD 428 million applying fair value to it. In terms of assets under management, we've had a significant increase AUD 484 million at the end of the financial period, 30 June 2023. As of the end of August, that had risen to AUD 552 million. Commitments were up significantly on the prior period of AUD 104 million for the financial year ending '22, up to AUD 176 million in the period just past. Capital invested similarly up significantly, AUD 68 million in the prior period to 30 June 23, AUD 95 million. As a consequence of the financial performance during the relevant financial period, the Board has declared a dividend of 2.25p, which is encouraging because it's a reflection of us really transitioning out of the period, which was interrupted as a consequence of COVID and the like and the combination of our efforts to build scale in this business. And the Board is also announcing a buyback of AUD 10 million over the next 12 months. Just really a recognition of what the Board sees as value in us buying back our own shares from the market. We think -- and we recognize, I think that shares are trading below what the inherent value of this business is. Moving forward now, looking at the KPIs, which we have set for ourselves in terms of measuring the performance in this business. And really, that's across 3 broad sectors. So the first one is building the portfolio. And that at the front end of that is through applications. So we've had applications commensurate with the prior period 434 as against 442. We have a significant increase in the amount of capital committed and that tends to indicate that the quality of those applications is improving because we're getting up more commitments out of a similar number of applications. And then in terms of capital, actually, invested across our portfolio has gone from AUD 68 million up to AUD 95 million. So we're seeing encouraging increases in all of those numbers. In terms -- the next thing that we measure ourselves is in terms of investment performance. On a 12-year basis, our return on invested capital has actually gone up from our previously reported number from a return on invested capital of 1.63x to 1.78x. If we look at the cumulative or portfolio IRR, it's reduced by 1%, but still holding at a very high and encouraging level. So that is every single investment, which we have completed over the past 12 years, inclusive of losses. If we now look at the return on invested capital on a 3-year running period, we're still seeing very healthy numbers of 2.09x compared to our 12-year track record. Then if we can move to assets under management at the end of the financial period, we're just under AUD 0.5 billion of assets under management. As at the end of August, that has increased to just above that AUD 0.55 billion. We'll then move across to our financial review. I'll hand over to Mary to talk to that.

So it has been a transformational year for LCM, and we really are starting to see the benefits of the asset management model, and we're very pleased with the realizations of some of the investments we've made in our first fund. They have translated into realizations from investments about AUD 84.2 million. That's up 78% on the prior year. [indiscernible] is trying to actually create a bridge to show investors what it would have looked like under our old reporting standards and then overlaying fair value. So the realized gross profit like-for-like with what investors are familiar we've seen in the prior year, it was AUD 51.5 million, compared with AUD 30.9 million. So again, an increase of 67% there. Adjusted profit before fair value and tax at AUD 37.7 million is an increase of 95% on the prior year. Overlay on that, the realized gains from the fair value transition, that's an extra AUD 16.2 million and that brings our adjusted profit to AUD 53.9 million in line with the prior year based on fair value basis. Statutory profit before tax is $42.7 million, broadly in line with the prior year. And the resolutions from the investments in the fund have increased cash to AUD 83 million from AUD 29.3 million. I think it's in a strong position. Total capital invested, again, broadly in line with last year at AUD 36.3 million, and the value of the assets in our portfolio of investments is sitting at AUD 203 million versus AUD 186 million in the prior year. This slide is just providing a financial snapshot. Broadly, on an LCM-only basis, with the exception of the assets under management, which is sitting at AUD 484 million at the year-end and it's increased to AUD 550 million as at the end of August. The value of portfolio of investments, what we've tried to show here is that we've demonstrated how that's moved under the restated numbers year-on-year, moving from AUD 137 million at the end of '21, up AUD 203 million at last financial year period. Cash generation was strong. As I said, a lot of resolutions in the first fund flowing through now and increasing our cash position to AUD 83 million at the period end. A lot of investors will be familiar with this slide. This is just a waterfall, which shows the movement in our cash. The starting position of AUD 29.3 million. Again, a lot of the movement in our cash position is attributable to cash generated from the realization of investments as well as capital deployed into those investments. We have -- we've maintained discipline with our operating expenses, and they're broadly in line with the prior year. We have seen an increase in the interest expense, and we did draw down on the facility early on in the fiscal year post balance sheet. We have actually started to pay down some of that balance, but our closing position is AUD 83 million. We looked carefully and we worked carefully with our advisers at transitioning to fair value. There was a lot of work that we need to get with our external advisers as well as applying a lot of our experience historically and attesting that on the book retrospectively. The valuation methodology, which we've come up with, we believe is -- will demonstrate this in the next slide, is providing us with a lot of more transparency in the underlying value of the portfolio of investments on a line by line basis. We take a look at the individual investment. What we see is the observable milestones was not to the external market, but observable milestones meaning that particular investment as it progresses through the judicial system or the arbitral system. And we apply discounted cash flow to each and every one of those investments based on certain risk profile, the cost of capital, and we just mentioned that at each period end. We join upon 25 years of experience and our unparalleled track record with respect to the resolution of investment, and we subjected that valuation framework to extensive back testing and our investment process has not changed, not our underwriting process. So we believe it will come up with a good framework that provides us more clarity or visibility to invest us on how our portfolio is progressing. This slide is just showing the impact of the last 4 resolutions. The light blue bar chart basically shows the last 4 resolutions and how they were held at cost at each period end. And then the dark blue on the right-hand side of the light blue chart is showing how that -- when those investments will run through our framework and our valuation framework under the current model. How they would have been valued and through the restatement? What they would have been held at each period end? And then the gray bar chart on the right-hand side then shows how to -- what the final resolution with respect to those investments were. And you can see the valuation framework is providing a fairly reliable measure there.

If you want to just go back and just make a couple of other points in respect of the added transparency and the informations that the investors will get through fair value. So If we look at the bar chart on the right-hand bottom, that's an arbitration, which we funded. It's our most recent revenue of vendor realization. Under the old holding out cost, investors would have had visibility on AUD 8.4 million worth of investment at December '22, and that's resolved prior to the end of the financial year and as we have generated AUD 67.7 million worth of revenue from that one investment. So you can see now if you look across the dark blue bar chart in respect to that investment, you can see aggressively that investment increasing in value over the period of its life sitting at AUD 58.3 million and then yielding a natural cash result at realization of AUD 67.7 million. So I just wanted to highlight that this really is providing investors with a lot more information and a lot more transparency and visibility on the progress of these investments or the pool of investments. Just moving on to our operational review. So I want to touch, first of all, on the market conditions. Now -- and there's probably 3 aspects of these market conditions, which I want to highlight. And the first one is the uncorrelated nature of these investments, particularly in a pretty volatile market, which is pretty unpredictable. So we think about what we invest in, we invest in a dispute. Ultimately, that dispute is adjudicated by a judge of a court or it's resolved through a commercial negotiation. Now irrespective of what the prevailing economic circumstances are, the political circumstances that might be prevailing, the geopolitical risks associated with the war in the Ukraine and like, it just does not apply differently or principles depending upon what those conditions are. So the ultimate result of these investments is utterly uncorrelated to what's happening more widely in the market. So a really, really important feature I think about our investment class or our investment strategy, particularly in markets such as these. The second highlight that I want to identify is the countercyclical nature of the litigation funding industry more generally. And what I mean by that is what happens when we have market conditions as they present at the moment. So we have a lot of uncertainty in global markets are present. We have an environment of high interest. We have geopolitical risk associated with the war in the Ukraine that is disrupting supply lines and making business very difficult. Now the culmination of those in respect of the economy is there's a lot of strain generally in economies and across the territories in which we operate. Now those market conditions tend to drive demand for LCM's capital [indiscernible] capital across our whole industry. So we tend to operate in uncertain times than in recessionary cycles. We tend to operate and see a lot more opportunities than potentially we do when the markets are more stable. So market conditions for us are really conducive to driving demand. And then finally, I just want to touch upon market consolidation, which we've seen generally in the litigation funding industry in some of the jurisdictions or the territories in which we operate. We're actually seeing a reduction in the competitive landscape, which is really providing us with some really great opportunities to get a foothold and getting more market share in some of those markets in which we operate. So those are the 3 really market conditions that I wanted to touch upon most importantly in respect of the market conditions, which we're seeing in the market place. Next, I want to move on to the portfolio of disputes, which we're managing. So the first slide here depicts our direct investments that is the investments we are utilizing directly, balance sheet capital to directly invest into these investments. And they fit into 2 categories. The first one is we have a $73 million portfolio of investments, which LCM is funding 100% of the capital commitment. Secondly, we have a co-investment portfolio where we're using LCM's balance sheet capital to co-invest with our funds management business. That currently sits at $153 million from LCM's balance sheet side. Although we've already invested or deployed $105 million, leaving $121 million still to invest. And what you can see from that is we are very much transitioning from LCM using its balance sheet capital to fund 100% of the capital commitment of a dispute or the budget of a dispute into a co-investment model with our asset management business. So in respect of every dollar that we have on balance sheet capital, we're diversifying the risk, which is obviously very healthy. As investors would be familiar with me saying, we build these portfolios of disputes with diversity, both across jurisdictions and across industry sector and across time. What we can see here is in a split between the APAC region and the EMEA region, we're seeing an increase of our portfolio here in the Northern Hemisphere and the EMEA region. And we should expect to see that because we are operating in large economies and in larger economies, you have more economic activity, which leads to more disputes. So just moving on now to Fund 1. [indiscernible] invest in our Fund 1 was USD 150 million. It's been fully committed. We have AUD 221 million worth of commitments there. AUD 138 million of that has already been invested or deployed. We're seeing again a similar diversity across that portfolio. So we're ensuring not only did we have disputes coming from a diverse range of jurisdictions, but also diversified by type and by industry sector. And we're ensuring that no one individual investment dominates that portfolio such as to create concentration risks. And finally, moving to the Fund 2. Fund 2, we closed during the past financial period at USD 291 million. Just behind the USD 300 million that we were targeting. We have started to commit that. We're currently at about 40% committed. We should expect to see that probably fully committed within the current financial year or in the next 12 months, which will allow us to move on to Fund 3. So we have AUD 148 million committed to that fund, and we're starting to see early deployment of about AUD 12 million after the end of the financial period. Again, we will be always down to see the way to what we have our direct investments and with Fund 1, especially we have diversity across industry sector, jurisdiction and from concentration risks. I want to touch upon the discipline that we apply in respect of growth. So you've seen LCM and the management team really build out the platform we've got that we're operating. That really gives us access to more disputes globally for investment. But we're doing that in a disciplined way. So this slide really just fixed up our OpEx against the size of our assets under management at any particular time. It takes back to prior to listing on the first public market back in 2016 in Australian Securities Exchange right through to 2019 when we listed in London. And you can see that we've settled in to a position where we've got pretty predictable OpEx at 3% of our assets under management. So we do really focus upon applying discipline at the same time as growing our platform. And then finally, I want to look at the performance metrics of the disputed investments, which we've concluded. I touched earlier upon in the presentation on our 12-year track record. This brings that 12-year track record up into 3-year running period or rolling periods. We should think about 3-year rolling periods of being important because that is a sensible time on an average time that we think that we will ultimately land in terms of the lifetime of these investments. So historically, the life of these investments has been between 25 and 27 months. We have encouraged investors to think moving forward for a number of reasons, they're probably sort of 36 to 42 months is where they will land. So we've taken -- we've split our performance metrics up into 3-year rolling periods. And really interesting, what we can see here is across that 12-year period in terms of the IRRs, they're remarkably similar and they stay within a relatively tight band. And we're seeing fluctuation in the multiple invested capital, the return on invested capital. We're actually seeing a strengthening of the performance in the last 2- to 3-year rolling period, which is really encouraging. And then move to outlook. So LCM continues to build the scale of this platform. And we're looking at really 3 aspects to that in terms of building out the scale. And the first one is our capacity to select the best quality disputes to invest in. So it's our underwriting process or our rigorous due diligence process. And as we build our scale, we need to ensure that we maintain the discipline out of all that task so that we can maintain the performance metrics, which we've enjoyed over our full history, but most particularly in the last 12 years. So we're very focused on building scale, but really very much having a discipline to speak to the methodologies which we've developed over many years to work out what the risks of these investments are and to seek only the best of those investments. The second aspect to building growth is to have a diversified capital structure. So in terms of that, we are thinking and we are exploring going to the market with a retail sterling bond issue in the early stages of looking at that, but that will really give us access to another capital source in addition to the ones that we are already utilizing. Secondly, we expect that we will fully commit our second fund within the next 12-month period, which will allow us to go to market and raise a third fund. So we're in a fortunate position based upon our performance really in terms of investments of bringing -- having access to a number of different diversified capital sources in terms of building this down in our business and most importantly, building out the portfolio of dispute investments we've got such that we can diversify the risks that investors are exposed to. And then finally, the origination capacity of our platform, and that is really utilizing the skills that we have developed over many years to underwrite the risk of these investments and the capital that we have got access to, we need to identify the best possible quality disputes globally, and that applies us to build out our platform such that we can get access to those. And that's -- those are the 3 aspects of our business, which we are very much focused upon in terms of building the scale of this business. And then finally, I want to look at the outlook of the business. So first of all, we've got a growing funds management business. We are seeing on the resolution of a number of disputes in Fund 1. They are showing exceptional performance metrics. Those performance metrics are increasing the demand of LP investors to participate in future funds. So we anticipate fully committing Fund 2 and then sort of moving into our first stage or our third time, I should say. Now that funds management model is allowing us to -- where it's adding to the organic generation of capital onto our balance sheet and through our balance sheet, equity investors get the benefit of that. We're looking continually in terms of new territories that we can consider in respect of moving into it. So we're getting a lot of inquiry coming to us out of the U.S. and out of Canada presently, and that is a reflection of the fact that there's a contraction in terms of competition in those markets. We're not currently marketing into those jurisdictions or those territories, but we are seeing incoming inquiries. So we're looking at those territories, obviously, in a very disciplined way in the same way that we have enjoyed expansion in the past. We're also looking at our capital structure more generally of the retail bonds diversifying the capital that we have available to us, which is a succinct differentiator for LCM as against most particularly some of our private competitors. The margin conditions as I've touched on previously, a very competitive to driving demand for LCM's capital, we expect that those unfavorable market conditions will continue for some time. We're seeing increased numbers with respect to insolvency events, both in the United Kingdom and across the balance of the territories in which we operate, which is a real [indiscernible] for LCM because we have vast experience in terms of funding insolvency and restructuring related disputes. So when we look at the general outlook and the availability of capital that we've got, we're looking very positively in terms of the years ahead. And we'll now move to questions.

That's great, Patrick and Mary. Thank you very much indeed for updating investors this one later. [Operator Instructions] I just want to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your Investor Meet company dashboard. Firstly, thank you to everybody for your engagement this morning, there was a considerable number of questions. If I may just hand back to you, KT, if I may. Just ask you to read out the questions were as appropriate to do so, and I'll pick up with you at the end.

Thanks very much. Firstly, will the company continue to reduce their current historical costs and fair value account? Those great values are very certain historically shows the most conservative.

We won't be producing accounts under total cost accounting moving forward. There's obviously a transition period here where we wanted to provide investors with a level of comfort with respect to the transition. We will be providing just enough disclosure for investors to be able to understand the position in a similar manner. Pulling out the fair value realizations and the deployments both on a third-party basis, the consolidated basis and healthy and stand-alone basis and where we feel that there's value added with respect to more disclosure around how the account for this moving forward, we'll obviously refine that messaging and ensure that we provide as much transparency around that as possible.

Thank you. There's a few questions around [indiscernible] case. Are you able to give any update about that?

So the [ Genex ] case has concentrated quite considerable interest from investors. We have had a final hearing before the arbitral panel and respect of that particular is skewed. we are waiting on an award or [indiscernible] award depending upon how that comes through. I can't really give any guidance in respect to that. It's very much in the hands of the tribunal. But we would expect to get a resolution in respect to that much definitely in this current financial period that we're in.

In terms of the fair value accounting, can you provide any detail about what effects [ detail ] having cash flow in respect to tax payments?

So fair value won't have any effect in terms of the actual cash outflow, it's the timing difference, very much akin to a provision or an accrual. The tax becomes payable on realization.

Next question, at the closing of Fund 2, can you provide any details about the fund amount raised and the timing?

So in terms of Fund 2, we were targeting USD 300 million, we ended up doing a final close at USD 291 million, USD 9 million short of that target. I think that the fact that we were able to close that Fund 2 very, very close to what our target was in pretty difficult circumstances in terms of what the market was is a real testament to LCM's track record. So we were very, very pleased with closing our funds in such close proximity to what our target was. So I think it was really a direct reflection of market conditions. I should add that one of the reasons why we're seeing a bit of consolidation in some of the territories in which we operate is because other participants in the market have not been able to gain access to capital in the same way as LCM. So we feel pretty confident and fortunate to close very close to our target, USD 300 million.

I mean has the company been approached by private equity?

No.

What has been the feedback from the Fund 1 investors and they recommitted future funds already?

So first of all, in terms of the closing of Fund 1 and into Fund 2, all of the institutional investors in Fund 1 participated in Fund 2. They all increased their investment going to Fund 2. Some of those cornerstone investors have contractual rights in respective to future funds, I think in respect to the lease Funds 3 and that's leading Fund 4. So we are seeing tremendous support from those institutional investors in respect to the funds management business.

How will LCM deploy more cash balance with limited balances left on Fund 2? Are gains being recycled back into Fund 1 for future investments?

So we have the capacity in respect to Fund 1 and Fund 2 to recycle our capital and reinvest depending upon the time line in respect to those. In terms of fully committing Fund 2, we are currently at or around 40% committed in respect to that. Given the demand for our platform in the economic circumstances and us building out our platform, so we have added some really experienced talent to our London office. We've expanded our Singapore team really to respond to demand coming out of both of those jurisdictions. We're very confident that we will have funds who committed to such -- to an extent that we can start marketing Fund 3 within the next 12 months.

Just looking at the fair value accounting and how that in line with the broader litigation finance industry. Question one would be, what plans the management has to build trust with the broader investing company?

Let me start with -- I mean I think what investors really need to recognize is the fact that LCM is a really -- LCM has a really long history in this industry. So we are one of the pioneers of this industry. LCM has been operating in this industry now for 25 years. Over that period of time, we have managed -- invested and managed those investments 250 of them through to completion. We currently have a portfolio of somewhere between 55 and 60 scaffold investments. So we have a data set to draw upon, which is larger than most litigation funders in the market. So we have a very large -- a very long history, a lot of experience and a data set, which enables us to draw upon to accurately predict the value of these and the outcome of these investments. So the second observation I've made is that LCM has been very conservative in the way that it has accounted historically. LCM's business has evolved, particularly in terms of funds management, such that we have to move into IFRS 9 in respect of the way we report to the market. But we have chose historically to be very conservative, and the investors should assume that we will continue with the same conservative and I'll just hand over to Mary for probably some additional points.

Yes. I mean, there's not much to overlay on that. The slides that we prepared was in an effort to try and provide visibility around how those last 4 investments would have looked under historical cost accounting versus IFRS 9. But in developing our framework, there are a number of things that we looked at and I think it probably give investors comfort is there is a framework that's in place and that framework has been built in a manner that minimizes management override, and we are relying on the observable milestones with respect to individual investments and that's how the matters progress throughout the process. And so there is minimal management intervention and the framework that's been developed in such a way, hopefully, to provide investors with comfort.

And then following up to that, which I think fully answered was will the old cash counting [indiscernible] that be the next exclusion?

We will provide as much disclosure as we can to ensure that there is transparency, but it's just not feasible to be able to provide tests of accounts moving forward under both historical and IFRS 9 accounting.

Given the improved book asset backing of the company to awards, is the company considering future debt leverage to leverage growth?

So I think we have announced to the market together with these financial results that the Board is exploring a retail sterling bond issue. We're at -- we're still exploring the options associated with that. But what we're endeavoring to do is really diversify our capital structure, and we think it's very important to have a number of different sources of capital to increase the strength of LCM's offering. We want to explore all options associated with our cost of capital and a retail bond is part of that process.

An investor says well done on the sector results, please can provide your rationale for the dividend, the level on the future dividend policy, please?

So I think if I can start with the dividend, which the Board has declared, it's really in recognition of the very strong financial performance of the company over the period and the levels of cash that we are holding within the company at the end of the period. We've balanced that against what our future opportunities are and the opportunity we're seeing in the market. The Board is constantly giving consideration to what our dividend policy is. And as we build scale, we'll be able to report and refer to what that dividend policy as it evolves.

Great. And [indiscernible] has asked about the buyback and you achieving a 78% in IRR and can be interpreted the share buyback as an indication of how you feel your undervalued?

Yes. I mean I think that the Board approaches the buyback on really an allocation of capital basis. What is the prudent allocation of LCM's capital? We see the company is undervalued by the public markets, and we see that as an opportunity to buy LCM stock as being a proven way of allocating LCM's capital. So I think investors should interpret that the Board is of the view that the public markets are currently undervaluing LCM as platform as a business.

And staying on the share buyback, how did the board strive on the 10 million share buyback?

I think we as a Board, really sort of looked at available capital at the end of the period. We look forward in terms of what we expected the inflows were going to be in the upcoming financial period. We looked at the opportunities and after giving consideration to all those factors, we settled upon the 10 million figures being a meaningful amount for us to allocate in that way.

Great. So you mentioned a few times in the annual report that competition is down within the industry. Can you elaborate on the reasons for this? And also elaborate a bit more on the conversations we've had -- you've had with, particularly in North America and Canada.

So let me start with North America and Canada. So what we've seen is we've seen a bit of a contraction in terms of those jurisdictions. We're saying a couple of funders exit those markets, which has sort of increased the incoming demand through applications coming out of those jurisdictions into LCM. Now those are territories which we don't market into. We don't currently have a presence in those markets, but we are seeing an incoming inquiry by application. So I think more generally in terms of competition, I think we're seeing a couple of litigation funding out its exit the market and exit those territories. And in addition to that, we're seeing that some of our competitors are finding it more difficult to get access to investment capital running the strategy that they're running. So that really puts LCM in a very good position having access to capital in the market conditions as they are to really capitalize on that reduction in competition.

So you mentioned increase up to 2 levels that will not need to be matched to proportionate increases in overall cost as a differential to LCM. But are there any particular participants, you can think of are exposed to this? Some of the smaller insolvency players, perhaps?

Look, I don't think it's right for me to sort of provide commentary in respect to our competitors. But what I can say is that we have been very particular as a management team to keep our operating costs as low as possible. And I think that, that really places us in a very strong position where you've got uncertain markets to really capitalize on the opportunities that we're seeing.

Great. And how do you view progress towards regulations of the litigation at the industry?

Look, I think [indiscernible] pretty consistent in saying that certain forms of regulation are really good. I think that forms of regulation in whatever jurisdiction, whether it be Europe or whether it be Australia or whether it be the U.K., ultimately, we'll favor on those who have been in the market for a long time. And we would welcome for regulation at the appropriate time, and we would offer to participate in just discussions and deliberations about what that regulation should be.

In terms of debt and interest rates increasing substantially, would it be best to folks comparing all the debt and keeping capital back to co-funding potential investments?

Yes. So LCM has started a program in terms of repaying its current modest facility. We have started to pay down our facility already. We -- as we've announced, as a Board looking at other options such as a retail sterling bond and we're looking at that most particularly associated with the cost of capital. So we are actively looking at our options, which might give us access to capital at a more efficient rate than we're currently paying.

Can you give any explanation as to a what the number of applications has been decreasing over the past few years?

I think there's a number of applications this year were commensurate with the prior year. But I think rather than focusing on how many applications, it's more important to focus upon what the commitments were. So in other words, looking at the quality or inferring the quality of those applications as opposed to the quantity of those applications. It's far more important to have an increase in the number of commitments that it is to have an increase in the number of applications. So what I think the numbers are really telling us is that the quality of those applications are becoming better in the markets and the territories in which we operate.

Do external investor funds stay with you or do you pay out profits in capital?

The contract was repaid in a way to show the LCM stand-alone balance and the profits that are directly attributable to LCM of the business. Anything to do with third-party investors is carved out.

Okay. And just also double check. If you're still investing directly into fund cases or will this moving forward with regards to the co-investment strategy?

Look, I think in terms of the fund, LCM specifically current evolution in terms of doing scale, we're very happy with the co-investing model. The co-investing model really gives us access to a pool of capital that we are managing, but it also gives us the opportunity for -- to put out our balance sheet capital to work with less risk because diversified across a larger number of investments. And that balance sheet capital can enjoy the full economic upside of the resolutions. So we think we're striking the right balance currently between the utilization of third-party funds in our asset management business and utilizing a proportion of LCM's balance sheet capital at the same time is allowing us [indiscernible].

How does LCM material increase application to support asset growth, for example, geographical or take part exemption?

So I think generally in the market, we are looking at strategies continually about different parts of the market that we may focus upon in terms of investing. So we're currently looking at the resources sector as being a sector that we've enjoyed some buoyancy in the past. We've continued looking at other sectors. We are looking at other jurisdictions and we're also in an environment where we're seeing a bit of a contraction in terms of competition. So I think a number of those factors will lead to not only increasing the number of applications, but as I said before, increasing the quality of those applications and then we can operate in a far more efficient fashion.

Looking at the regulations again, have you seen any changes in the U.K. market in response to the Supreme Court judgment?

Look, I can't talk across the entire market. What I can talk to is how that decision impacted LCM. So for those investors who may not be across this, there was a decision recently of the Supreme Court here in the United Kingdom, which has controlling the way in which litigation finances can be remunerated. So in circumstances where a funding arrangement with a funded party remunerates the funder as a percentage of the pool of capital, the damages were recovered in that dispute, they are now subject to the regulations, which regulate damages based retainment between [indiscernible] and their client. Now that's quite wordy, but what it does is it restricts the basis upon which litigation funders can be remunerated. In terms of LCM, there was a timely handful of our funding arrangements, which had a small component, which was a percentage. We're in the process of renegotiating those at the moment. I have every confidence that we will be able to do so, some of them we have renegotiated already. And more generally, if I look sort of at our past resolved matters, there's no issue associated with that in the United Kingdom in terms of our current book, I've just described that, in terms of the future. We overwhelmingly remunerated on a multiple of invested capital rising over time. So it will have very little, if any, impact [indiscernible].

A question about the second half fund. Do you think that is the catch-up of 2019? And do you think this is going to continue as a one-off catch-up?

Look, I think there's a couple of ways to give consideration to that. The first is that as our portfolio grows and with the transition to fair value accounting, you're going to see us moving in terms of the recognition of the incremental growth of the book. So you're going to see this moving and you should not see as pronounced some difference between one accounting period and the next. Secondly, I think you're probably seeing some of the backlog being resolved, which were delayed as a consequence of COVID, but you're also seeing LCM managing a larger portfolio of investments. So I think LCM's business model has changed. The scale of LCM's business has changed. So we should see as remarked or pronounced difference between the first half and the second half moving forward.

Looking at the litigation space in general. There may be more [indiscernible] about debts getting paid. Can you give any details about how you get paid, you pay to you? And have you had any problems in pays in the past?

We have had historically in the 25 years that we have opened very little problems associated with that. One of the reasons for that is we run a very rigorous due diligence process across the applications that we received and only a very small proportion of those applications ultimately transition into an investment for LCM. One specific criteria that we look at long and hard, very early in that process is recoverability or our ability to be paid in circumstances where we complete judgment or an award, which we need to enforce. So we are looking at that recovery to very early in the process, and we are not investing in those unless we can see sort of a very clear pathway to a recovery. So it's something that we have been very acutely aware of for many, many years, and we have the benefit of being an experience with regards to the finance in the market. We've had very little problem with that aspect of our business, but it's ever present.

And someone has asked, if you could go into any more detail about the Fund 2?

Not at this stage. We are still exploring the bond. As I think everyone will probably appreciate the market is fairly unpredictable, the debt markets at present. So we are monitoring that circumstances where we move forward will be keeping the market fully informed.

Great. Again looking at the fair value accounting, how would you manage the increased volatility over profit and loss. Do you feel the need to write off assets on the loss?

So again, we are working to a framework which values the assets as they progress through being a judicial process. So you are only accruing value as those matters progress in the next day, which is usually derisking that particular investment. But we fair value it, there will no doubt be any volatility. If something moved in a negative fashion, we will obviously have to reflect that in our accounts. So I don't think you can avoid it, but I do believe that the framework is still in such a way that we would like to hope that we minimize the fluctuation and the volatility.

And looking forward, do you see expansion into the North American market in the medium term? And is there an opportunity for margin in U.S. focused fund?

Increasing scope for us to be managing a U.S.-focused fund. As I said, we are seeing more applications coming out of North America than we've ever seen historically. We're seeing a more mature market in the U.S. So we're seeing more law firms looking to recommend that to their clients than we've ever seen in the past. And we're seeing a growing market there. We're seeing some contraction in that market in terms of the offerings through our competitors. So we have been looking at that market for some time. We continue to look at that market. And if we can move into that market in a disciplined way, we will do so.

How does [indiscernible] LCM?

Yes. So there's not a great deal of difference. Obviously, the underlying inputs will give up because they will be specific to the particular company. But in terms of the approach and using a discounted cash flow model, taking into account that the cost of time, the costs associated with risk for those individual assets and the assumptions around what the estimated budget and the estimated future cash flows are around those individual investments is broadly in line with our peers.

And I should add to that, like LCM, together with its advisers has spent a long time that are working upon this valuation methodology. And I think if we look at [ Benefit ] experiences recently just overhauled the methodology that it uses as well. So we've seen a lot of rigor brought into our industry both through LCM and through Benefit with respect to looking at this issue and trying to work out a methodology or valuation methodology which is after also one give investors the most transparent and the most insight into the progression of our portfolios.

Great. We've got about 5 minutes left, so I'll try and squeeze a few more questions in. And how the investments do you currently have in process? And what you're currently regarding their completion time wise?

I can talk to the number of investments that we have, and then I'll let Patrick take over with regards to the program. So currently, balance sheet is 20 investments, Fund 1 is sitting at 20 investments following the resolution of a number of those and Fund 2 is 12 investments. And we've made a few additional investments placed the year-end period into Fund II, and Patrick can talk to you how those matters are actually progressing.

There's also a number of direct investments of 100% as well. So if I look at where we are under progress -- so in terms of our direct investments, we've got 4 of those investments, which have received positive judgments, which is subject to appeals or partial appeals. We've got on direct investment, which has had a final hearing and awaiting award. In respect to Fund 1 investments, we've got another 4 investments, which have received positive judgments or awards, which are subject to challenge. And we got 3 Fund 1 investments, which has had a final hearing and waiting awards as well. So you can say there's quite a bit of activity in terms of our book and there's a number of our investments, which are very mature.

Given the benchmark, interest rate has increased considerably. What impact does it have on the cost of capital? And how will the company address it?

So with respect to the cost of capital, the credit facility that we took out was structured in such a way that it was capped at 13%. So it has not impacted, there hasn't been a change or a shift with the underlying increase in base rates because it was always structured in such a way that it was at 13% -- it was structured 13% interest rate. In terms of what we're doing more broadly, Patrick has touched upon the fact that we're looking at the retail bond market in order to optimize the cost of capital for the business moving forward.

And I'd just add to that, we're very conservative the way that we think about debt. So as a proportion of our overall balance sheet, our debt levels are very, very modest. So we intentionally look at that and we monitor that continually.

Looking at applications, what proportion of applications currently got approved?

Historically, it's been between 3% and 7%, and we're sitting around 3% to 3.5% mark currently. And I think that's really a reflection of the unpredictability of the market more generally. So if we -- one of the previous questions that were asked was having a managed recovery of risk. I think probably we're at the lower end of that conversion spectrum because we're pretty conservative about how we look at recovery risk associated with a market such as it presents at the moment.

I'll just do one final question to close off, and then we'll -- the rest of the investors' questions will be answering after the meeting. We put forward great metric upon which investors can judge the progress made at LCM. Other than AUM, what metrics or KPIs you feel are most instructive as a Board?

So I think when we look at LCM's business, I think the KPIs that investors should focus upon is -- first of all, our investment performance. So we need consistency associated with investment performance because our investment performance drives not only a revenue line, but it drives demand for the opportunity to invest with us in a whole series of other things. So -- by that, I'm not suggesting that we need to increase our performance. There's -- it's a very bright performance, and it could come back from where it is and still -- we would still have tremendous demand for investors to participate in our funds. So I think that is one factor. So it's really is how many commitments we have in a given financial period. So how much of the capital that we have, have we committed during that period? And less important metric but still some in the industry should be focused upon is how much capital we have actually invested during a period. Financial metrics that I've talked about and then look at the availability of capital, which is are we increasing our funds under management over a period of time. So it's gone from Fund 1 to Fund 2, we'll be moving in the next 12 months in all likelihood into the Fund 2 and then the diversification of those capital sources. So not only balance sheet capital, but the leverage on our balance sheet and what format takes, whether that takes the form of a retail sterling bond or what have you. So it's really those factors that I encourage investors to look at in terms of measuring LCM's growth over time.

That's great. Patrick, Mary, thank you very much [indiscernible] investors this afternoon. So I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Litigation Capital Management Limited, we would like to thank you for attending today's presentation. May I wish you all a very good afternoon.