Litigation Capital Management Limited

LCM's interim results are very strong. We're seeing increased generation of revenue compared to previous periods. We're seeing strong growth in terms of our portfolio of investments. The most significant development in the company has been the first closure of a third party pool of capital where LCM will act as a fund manager. This will create an entirely new business model for LCM to operate. So it will operate two business lines from this point forward, our direct investments, which we have done historically, balance sheet investments, and then asset management. So we will be managing pools of capital on behalf of third parties, and we'll operate the investment strategies that we have significant experience in using those two capital sources.

A corporate portfolio is where we make a set of investments across a number of disputes that are being run by a particular corporate client, and we deal with them directly on an ongoing basis. So from our perspective, it gives us the ability to deploy larger sums of capital across a range of disputes. Therefore, the risk of our capital loss is much lower. It also allows us to have a continuing and ongoing relationship with that corporate client which means that they'll continue to give us more cases and we can invest on an ongoing basis. We've invested in two different corporate portfolios in the last 12 months, one in the aviation sector, one in the construction sector. It's important to understand the range of those investments in that in the construction sector, it's seven different cases. In the aviation business, the original was 38 cases when we first invested. There's been a huge demand and increase of interest in the corporate portfolio work that we've been doing from corporate clients. We have a very strong pipeline. One should also remember that in the last six months, the revenue that we've generated out of the London office has been entirely out of corporate portfolio transactions. And it's accounted for nearly 50% of the revenue for LCM. A strategic alliance is where we work very closely with a law firm. We talk to them about what we're doing and how we do it. We help them by showing them our processes, sharing information, and that allows them when they're making applications for litigation finance to have the passage of that application run much more smoothly simply because they understand us and we understand them and they know what it requires to have a successful application. We spend a lot of time thinking about how we originate new business. We think we're pretty innovative about how we do that. And working with a law firm on a strategic basis allows us insight into particular sectors and geographies where they may know much more about that particular industry than we do. It allows us to target those sectors with them. A strategic alliance with a law firm has huge benefits for LCM, but it also has huge benefits for the law firm. From LCM's perspective, we have the ability to have the first look at any application for funding that that law firm may put forward. From the law firm's perspective, there's a combination of discussion and strategic thinking when it comes to where the law firm's resources might be applied for new work. That means that it also gives the law firm the ability to change the narrative when they're talking to existing clients to obtain more work from them. but also targeting new clients by distinguishing themselves from their competition by looking and talking about litigation finance in a different way. From LCM's perspective, historically, working with the first strategic alliance we took on, an international law firm, That's proved very successful, and we've received over 30 applications in the last six months from that particular law firm globally. Because of the success of that particular alliance, we've now adopted a new approach with another international firm based in Sydney, where we'll take the same approach with them and look to expand our offering by working with them and their clients to obtain a larger number of applications for litigation finance.

The fund which we've just done our first closure on, it's a $150 million US fund. We've done our first close at $140 million. LCM will act as a fund manager. We will employ the same investment strategies we do with our balance sheet. The use of that capital will allow LCM to expand its business significantly. It will co-fund each investment into disputes together with our balance sheet. So 75% of the capital in respect of all investments going forward will come from the fund and 25% from LCM's balance sheet. LCM will be paid performance fees in respect of managing that third party pool of capital and LCM will enjoy the full economics of its 25% interest in each one of those investments. That fund not only allows LCM to grow its portfolio of investments but it also allows us to move into parts of the market that we have been constrained in terms of capital doing in the past. And what I mean by that is some of the larger corporate portfolio transactions that we are looking at now require much larger capital commitments. And the use of this third party fund will allow us to move into that market and expand that corporate portfolio market well beyond what it is now. In terms of the investors who've participated in providing this pool of capital for LCM to manage, They're high quality blue chip investors. So we've got one large US university endowment fund, and we've got a global investment bank, both of whom cornerstoned to a large degree this capital raising for us. Not only does that endorse LCM as a manager of these types of investments and endorse our disciplined and methodical track record in terms of these investments, it also validates the asset class. It demonstrates that we've got highly sophisticated investors in this space investing their capital under our control into the disputes funding space. Another aspect to that is both of the cornerstone investors have entrenched rights to participate in our next two funds to the same degree. So it really is a very strong endorsement of LCM's skill and ability in terms of making these investments and managing pools of capital for third parties. So LCM did its first close of that third party fund on the 10th of March. We've already seeded that fund with nine separate single case investments. We've committed the fund up to $33 million US, which is a 22% allocation or commitment of that fund pretty much on day one. So it's got off to an incredibly strong start with nine top quality investments already. It gives LCM the confidence to say that it will completely commit that fund well inside the inception period and we'll be on to doing our next fund and building our funds management business. One of the criticisms historically of the litigation finance industry has been that notwithstanding that the investments have been made have been very high yielding, which the market has enjoyed and resonated with, The criticism, if it be one, has been that the revenue lines have tended to be lumpy. LCM has always strived to endeavor to smooth our revenue line. And as we grow our portfolios, we'll see a natural smoothing of our revenue line. Secondly, with the introduction of the funds management business, that'll also work towards smoothing our revenue line as well. The third aspect in terms of investment strategies that LCM has implemented is corporate portfolios. We've spoken a lot to the market and extolled the virtues of those types of investments. They tend to be larger investments but not attended with the same risk as a single case investment. We currently have two corporate portfolios under management and the characteristics that we told the market that they would exhibit over a period of time has rung entirely true with those. So in the building and construction portfolio that we're managing, it's had two resolutions of a seven case portfolio. So it's delivered financial returns incrementally over the last sort of 14 months, as opposed to having one single one-off revenue event upon maturity of a single case investment. So a combination of all of those factors, as well as the way that the fund itself is structured, which is a performance fee is paid to LCM as fund manager upon the resolution of each transaction as opposed to the end, all of those features will have a tendency over time to smooth LCM's revenue line. Investors should expect that LCM will continue to build out its asset management part of its business. As I mentioned before, LCM has an expectation that it will fully commit this third party fund that we've just closed well inside the inception period and we'll start immediately upon raising our second fund with our cornerstone investors already locked in with rights in that regard. You should expect that we will continue to expand our portfolio of investments and we will continue to do that with the same discipline that we've done it in the past in terms of not having a portfolio that's attended with concentration risk and be spread through industry sector. In relation to our corporate portfolio strategy, investors should expect that we will continue to build that. And over a period of time, we will get far more traction in respect of that part of the market. Those particular investments for LCM are very valuable for us as a manager of third party capital, but also managing our permanent source of capital on our balance sheet. They tend to be much larger commitments and much larger investments for us, but attended with less risk. So they're very much part of our strategy moving forward. In terms of the economic cycle that we might be in at the moment, global markets are seeing great instability. Historically, instability in financial markets has led to an increased number of disputes but corporations being less reluctant to risk their own capital in respect to pursuing those disputes. And that feeds directly into our strategy in terms of corporate portfolio markets. So we should expect to see an uptick and an increased demand for those products out in the market. Secondly, inevitably, we're going to see an increase in liquidations, business failures and the like. You know, LCM commenced its business of litigation finance in the insolvency and restructuring space 21 years ago. We are incredibly well placed with this new fund of third party capital that we're managing to really capitalize on those increased opportunities, which we will see coming out of these unstable markets in the future. So we're incredibly excited about the future. We feel that we're well poised at this point, not only to build out our funds management and asset management side of the business, but also to take advantage of increased demand in respect of the products that we have in the marketplace.