- Third-party fund to be fully invested by 30 June.
- Economic instability and uncertainty drives litigation funding.
Litigation Capital Management (LIT:77p), a provider of litigation financing which enables third parties to pursue and recover funds from legal claims, is set to be a major beneficiary of the economic uncertainty and instability brought about by the Covid-19 pandemic.
That’s because the pandemic is leading to an increased number of insolvencies, bankruptcies and restructures, which is driving an increase in investment opportunities. Businesses are far more likely to reserve balance sheet capital and cashflow for their core activities and seek external capital for funding disputes. As an industry pioneer, funding in this area is one of LCM’s core competencies. The group reported a 68 per cent increase in applications from corporates in the latest six-month period and 40 per cent growth in applications from Middle East, African and Europe region. LCM is also benefiting from its strategic relationships with top global law firms Norton Rose and DLA Piper.
Having made A$39.7m capital investments and A$67m of commitments (including third party funds) in the first half, LCM now manages A$322m of investments, up 92 per cent year-on-year, including a US$150m (£109m) third-party fund which launched in March 2020. That fund is 70 per cent invested and should be fully invested by the 30 June 2021 financial year-end. A follow-on US$300m to US$400m fund, or an expansion of the existing fund is planned.
That’s good news for LCM’s fee income as the group receives 25 per cent of profit on each fund investment over a soft hurdle rate of 8 per cent, and earns an outperformance return fee of 35 per cent over an internal rate of return (IRR) of 20 per cent during the fund’s six-year term. The outperformance fee should be achievable as LCM boasts a cumulative IRR of 78 per cent over the past 9.5 years.
| Simon Thompson's 2019 Bargain Shares portfolio performance | |||||
| Company name | TIDM | Opening offer price 01.02.19 | Bid price 17.03.21 or exit price (see notes) | Dividends | Percentage change |
| TMT Investments (note one) | TMT | 250¢ | 735¢ | 20¢ | 454.7% |
| Futura Medical (note two) | FUM | 14.85p | 34p | 0p | 129.0% |
| Augmentum Fintech | AUGM | 102.4p | 158.5p | 0p | 54.8% |
| Bloomsbury Publishing (note four) | BMY | 229p | 281p | 16.2p | 29.8% |
| Ramsdens Holdings | RFX | 165p | 165p | 7.5p | 4.5% |
| Inland | INL | 57.75p | 57p | 0.85p | 0.2% |
| Litigation Capital Management | LIT | 77.5p | 76p | 0.71p | -1.0% |
| Mercia Asset Management (note three) | MERC | 29.57p | 27.5p | 0p | -7.0% |
| Jersey Oil & Gas | JOG | 205p | 184p | 0p | -10.2% |
| Driver Group | DRV | 74p | 49p | 2.00p | -31.1% |
| Average | 62.4% | ||||
| FTSE All-Share Total Return index | 6,852 | 7,475 | 9.1% | ||
| FTSE AIM All-Share Total Return index | 1,023 | 1,379 | 34.8% | ||
| Note 1: Simon advised taking profits on TMT Investments at 580c a share to bank 140 per cent gain including dividend of 20c ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares at 318c ('On the hunt for recovery buys', 6 July 2020). | |||||
| Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is used in the performance table. | |||||
| Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is used in the performance table. | |||||
| Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices or on date when Simon advised exiting the holding. | |||||
Although delays in case resolutions led to a small interim underlying operating loss, and analysts reined in their full-year forecasts, Investec is still predicting 56 per cent higher annual pre-tax profit of A$17.4m and EPS of 5.2p, rising to A$37.7m and 11.8p, respectively, in 2021/22.
More important is that two-thirds of LCM’s 40 balance sheet direct funded investments should mature within the next six to 18 months, paving the way for hefty shareholder returns. That’s not priced into a conservative price-to-book value of 1.9 times – litigation investments are held at cash cost – that attributes nil value to the fast-growing fund management business.
LCM’s share price is trading at the entry point in my 2019 Bargain Shares Portfolio and well below my fair value of 120p even though management is delivering. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].
Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.
They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.
