Until this year, Burford Capital was one of the darlings of the UK stock market. Its litigation finance model was seemingly able to attract capital as easily as it could source, assess, fund and bank investments in legal cases. But that all changed in August, when a short report took aim at Burford’s governance standards and accounting treatment of non-realised gains, spooking shareholders. For many, litigation funding and its heady promises of uncorrelated returns is now something to give a wide berth.
Caseload growth
High return on capital
Market leader
Relatively short case turnaround
Poor sentiment towards litigation funding companies
Use of unrealised gains
But a case for the defense is offered by fellow Aim litigation finance outfit Manolete Partners (MANO) – which funds or acquires smaller, less contentious and generally procedural insolvency claims.
The group’s business model was honed over a decade before its public listing a year ago. Because it focuses only on litigation stemming from insolvencies, its average investment is a reassuringly short 11 months, which means shareholders do not have to wait all that long for "unrealised gain" to be realised. These cases are also highly profitable. In the six months to September, Manolete settled 18 of its cases at an average value of £135,556, for a 193 per cent average return on capital employed.
The longer-term track record is equally strong. For the years 2012 to 2016 (years during which the operation was at scale and all cases have been settled) the return on investment from the portfolio of cases invested in has ranged from 145 per cent to 167 per cent. Meanwhile, just two cases remain open from the 31 Manolete invested in in 2017, with ROI [return on investment] standing at 142 per cent as of the end of September.
Unlike Burford, Manolete has a much better idea when and how its cases will wrap up as it focuses on reaching settlements rather than taking cases to trial, which also helps to keep lawyers’ fees on a tight leash. That also removes some of the uncertainty around the use of unrealised gains (that is, estimated increases in the fair value of a case), which Manolete is required to make under IFRS rules. The key finding of an internal review – that historical unrealised gains have been 34 per cent below the average actual realised gain – offers further encouragement that the accounting treatment is accurate.
It is also growing at a clip. Because a typical claim requires a limited amount of labour, and Manolete’s network of insolvency practitioners provide a conveyer belt-like run of new cases. Chief executive Steven Cooklin says his team is accepting around a quarter of the two potential investments that “walk in each day”. He added that significantly more profitable investments in several larger recent cases would not dissuade the group from buying claims where the expected return is below the current 2.9 times money multiple.
Manolete is the market leader and competition does not yet appear to be an issue. It also has plenty of room to grow, given that cash recoveries on the UK’s 2,300 insolvency claims amount to around £500m each year. Meanwhile, broker Peel Hunt reckons changes in the rules around claimants’ legal costs mean the field is ripe for third-party funding.
Manolete Partners (MANO) | |||||
ORD PRICE: | 415p | MARKET VALUE: | £174m | ||
TOUCH: | 413-417p | 12-MONTH HIGH: | 620p | LOW: | 190p |
FORWARD DIVIDEND YIELD: | 1.1% | FORWARD PE RATIO: | 19 | ||
NET ASSET VALUE: | 71p | NET CASH: | £3.1m |
Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) | |
2017 | 4.8 | 1.8 | 3.1 | nil | |
2018 | 10.6 | 3.7 | 7.4 | nil | |
2019 | 10.1 | 6.8 | 12.5 | 1.50 | |
2020* | 13.8 | 9.7 | 17.8 | 3.60 | |
2021* | 16.1 | 11.9 | 21.8 | 4.40 | |
% change | +17 | +23 | +22 | +22 | |
Normal market size: | 1,500 | ||||
Beta: | 0.54 | ||||
*Peel Hunt forecasts, adjusted PTP and EPS figures |