Litigation Capital Management Limited

Welcome to the Litigation Capital Management Interim Results Webinar. I now hand over to Patrick Maloney, CEO, Nick Rolls-Davis, 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 UK markets with a growth story and the past six 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 one 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 options in respect of that from equity through to other products such as capital facilities. We were pleased to announce that LCM, just outside the end of the financial period, secured a 50 million US 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 three 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 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 permit LCM a period of 24 months in which to commit that capital and then a four-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 300 to 350 million US dollars. 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 vetting 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, consequently 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 strategies to achieve that, including an education process with our global strategic alliances with those firms that we've 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 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 corresponding previous period in a pretty challenging market. And when I talk about a challenging market, We have had to innovate in terms of the way that we undertake due diligence and the way that we originate our opportunities for investment, consequently 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 six month period to $40 million compared with the previous period of $18.4 million, representing an increase of 116%. So 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 six month period to 31 December 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 of highlights, we've reached the point in measuring LCM's performance on concluded investments to nine and a half years. Over that nine and a half 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 nine and a half years. 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 who are 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 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 one measures LCM's performance and the way that LCM has performed in respect of its investment over the last nine and a half years, That invested capital over 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. ROIC the return on investor 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 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 two business lines, namely direct investments from balance sheet and secondly, asset management. And we've 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.

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. Consequently, and in line with our conservative revenue recognition, income will flow through at irregular 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 materialise 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 standalone 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, 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 realisations 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 a strong position to continue to deploy both in our existing portfolio, as well as investing in new opportunities, which we've been observing an increase in applications. Additionally, we expect to see organic cash materialise 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 two 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 remain broadly in line with the prior period, and our cash position at February will further facilitate growth as we continue to invest in our growing portfolio of assets. pass on to Patrick to talk through the 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. There's $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 the third party pool of capital that we manage, that portfolio currently represents capital commitments of us of $63 million. $87 million of combined of those two 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 a portfolio such that it's not attended with concentration risk in respect of any one particular area. So it's not only by capital commitment but also by number we're seeing the diversity there. The pie chart on the immediate right demonstrates really 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, pursuant to which LCM acts as 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 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 one particular investment. So the same principles apply to 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. 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 or 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 their 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. I want to start on the right hand side of this slide. And we've talked about LCM's performance metrics over the last nine and a half 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 nine and a half years. And that has fluctuated in probably the last five 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 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 what 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, seven investments fit into the category of 25 to 36 months. And then there's two outliers, which sit at the 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 two 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 UK, 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 froze, nothing could progress through the court system, no hearings were taking place. The courts obviously adapted as they must 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 was a physical delay which put a certain number of months, maybe six months onto our investments simply because the court system shut down 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're given an extra couple of weeks or month. And when the expert testimony is required, they get an extra couple of weeks. 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 of this slide, I want to make two points. The first one 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, well, the most mature portion of LCM's portfolio of investments are those investments where LCM is funding 100% of the capital commitment. What we can discern from this slide is that a very substantial part of LCM's portfolio 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 investments which are in their most mature state are those where LCM is funding 100% of the capital commitment as a consequence of which LCM 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 UK market with a growth story, raising 20 million sterling at that time, so that was December 2018. Once we had that capital available to us, we set about committing it. So assuming that that was committed over the next sort of six to eight 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 their mature cycle. So I just want to go to the 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 permit 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 two reasons. One, it was a cost of capital. So if we compared the cost of capital of this facility as against raising capital through equity, that equity capital was just incredibly expensive given 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 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 of the entire facility on day one. 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've 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 two components to that. We have a fixed interest component, what'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 one 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. I want to hand over now to Nick Rolls-Davis just to talk about the market conditions as they're currently presenting.

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. 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 their decision making in different economic conditions. They're consistent. 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 one 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 counter-cyclical and counter-recessionary. So in times of economic uncertainty, instability, 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 or historically increased 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 at 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 of external capital for the funding of disputes so in particular we're anticipating this will be from both of the areas which we receive from 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 percent increase in those applications from corporates compared to the prior period. Now, that covers pretty much market conditions for now. Given what we've seen in the 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've made previously about the effect of the COVID-19 pandemic continue to be present from March onwards into the last 12 months. And those are the three 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 going to use on legal spend is now appropriate and whether there's an alternative um some of those corporates who are considering but have not yet commenced their dispute have also paused the thought um 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 spending The result of that is the third effect that we've seen, which is an increase in demand from law firms for 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 disputes 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's already said these are up on last year by five percent uh averaging around 46 good quality applications a month and this is not inquiries these are you know paperwork supplied with uh a good quality review so substantial applications and and that includes 29 portfolio applications so to the end of the to end of February whilst globally everything's 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, we're 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 as 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's just shown you the range of those investments. And the effect on 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 regards commitments to the fund of high quality investments. And so as you heard earlier, we're considering carefully in the next step to increase in size, the size of our assets under management and the fund size. So that's pretty much it for where the market sits and what we're seeing now and what we're expecting in the coming six to 12 months. And with that, I'll pass back to Patrick

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 in 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.

Patrick, do you have any closing remarks?

Look, I just reiterate that with the additional capital that LCM's 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.