Litigation Capital Management Limited

Welcome everyone to Litigation Capital Management's full year results for 2021. 2021 for LCM provided a really strong financial performance as well as sustained growth throughout the year. And that was all achieved by the company and by us in pretty disrupted conditions across all of the territories and jurisdictions in which we operate. So just starting with some of the highlights of the year for LCM as a company. First, we had a boost in investment performance, which resulted in an increased adjusted profit before tax compared to the previous year, up 47%. Applications throughout the year, being the starting point with respect to investments, were up 10%, again, during a year with considerable disruption. We achieved a significant increase in our assets under management compared to the previous year. We closed 2020 with assets under management of $250 million and we closed 2021 at $336 million. Capital invested during the period was up very significantly, up by 69% compared to the previous period. In terms of funds under management, LCM closed its first fund, creating its asset management business in late March 2020. And notwithstanding that we've been operating that fund entirely with the disruptions of COVID, we have now committed that fund to 77%. And we have started in earnest the marketing of our second fund. We are targeting $300 million and we are expecting an imminent first close in respect of that fund, which will involve all of the investors in respect of fund one. in terms of performance our performance during the year was really strong as well and when i mean performance i mean the financial metrics that we generated from the investments which we concluded on a 10-year portfolio basis including losses we've maintained an irr of 78 in respect of our return on invested capital across all of those investments we've actually increased that now to 153 percent So really, really strong financial metrics were generated from the investments which matured during the financial period 21. Finally, in respect of capital structure, we've introduced greater flexibility. We've introduced a capital facility, which we closed in February of this year. That capital facility is US$50 million and really gives us additional flexibility with which to not only grow our direct investments but also to grow our asset management business through the co-funding. And that facility is really... thought about by us as a bridge to the organic generation of capital, which has been put back slightly due to the disruption to the court systems of COVID. The next topic that I want to talk about is really building scale. And this is a concept that we introduced during the last financial period. And we've encouraged equity investors to really focus on some of these metrics to measure LCM's growth. So the first one is the front end of any of these investments is really a receipt of an application. That application travels through our due diligence or risk management process. And if it meets our criteria, ultimately ends up as an investment, which feeds the asset management business and creates really positive returns for LCM's balance sheet. So those applications were up 10% in financial year 21, which is a tremendous achievement when we really think about how much disruption there was to the market. Now, we have said quite a bit about LCM's resilience and the resilience of its business, together with the counter-cyclical nature of its business in uncertain times. But the reality is, is that In terms of day-to-day operations, LCM's business was as disrupted as any, but we've managed still to perform at a level where we increased our applications by 10%. And we also increased our investments. So in terms of commitments, they were slightly down on the previous year. And that's a consequence, really, of... the period in which we receive information to support our applications being elongated. And the reason that's been elongated is that no matter where we receive our applications from, whether it be an insolvency practitioner, whether it be a law firm or whether it be a corporate client, the information feed or flow typically comes through that client or that potentially funded party's lawyers. And there's been tremendous disruption to the way that law firms have operated over the past 12 months as a consequence of COVID, many of them operating remotely, and that has slowed down the flow of information to LCM. So notwithstanding that we had an increase in the number of applications, Those applications haven't travelled through our due diligence, risk management and underwriting process at the same speed they would have if that information flow was not disrupted. Nonetheless, those applications are within the system. Capital invested, on the other hand, increased very significantly. So from $52 million in 2020, we increased that to $88 million in financial year 2021. And finally, we look at assets under management. So assets under management have been steadily growing now for years. At LCM, we had a really encouraging and significant increase from $250 million at the close of 2020 up to $336 million at the end of financial year 21. So those metrics we were really happy with across the board. I wanna move now to maintaining our performance. So we've seen in the previous slide and the explanation for that, that we're continuing to grow scale into this business. And one thing that people and investors have inquired of us is, will you be able to maintain the same performance that you have achieved in previous years as you build out the scale of this business, in particular asset management? And we've been pretty candid about that and said that over a period of time, you should expect to see somewhat downward pressure on our financial performance. But as you can see, in terms of our 10-year track record, there is movement there and we can still provide outstanding investment performance, even if that was to decrease. Now, we're at a 10-year mark in terms of measuring LCM's performance. We measure this on a portfolio basis, meaning that we take every single investment that LCM has completed during a 10-year period, treat that as a portfolio and then measure its financial metrics or its financial performance. And that's including losses. So we don't carve out our losses. Now, we have actually increased our return on invested capital with the resolutions during 2021. We closed off the nine-year mark at 134%. Return on invested capital have increased that to 153%. We've stayed and maintained steady at 78%, where we closed off the nine-year mark at. and the conversion rate in respect of applications to investments reduced slightly to 3%. So just talking about the financial performance of those investments, incredibly strong during this financial period. And if we look at the conversion rate, the reason why that conversion rate has dropped a little is because LCM has applied more vigor to its application process in particular recoveries during the instability of global markets. And that's really to ensure that if we participate in investment and we back a particular dispute through the litigation or arbitration process, that we will be able to recover against an award that we might achieve. And we've been pretty rigorous about that given the instability in certain sectors of the market. And the consequence of that is it's dropped our conversion rate. And that has also feeded in during this financial year to a slight decrease with respect to our commitments during the period. And I'm going to hand over to Mary now really to go through some of the financial aspects of our performance.

Thank you, Patrick. We have in the past explained that our revenue recognition results in income flowing through at regular intervals. The recent resolution of a matter which formed part of our portfolio of direct investments demonstrates how the timing of one resolution can have a significant impact on the results for the year. Patrick will cover the maturity profile of our portfolio of investments further on, but the recent resolution of direct balance sheet investment demonstrates the quality and high yielding returns of our maturing portfolio, which is now beginning to crystallise. In a year which experienced further disruption as different countries navigated their way through a resurgence of COVID, LCM still managed to deliver a strong set of results, which is testament to our disciplined investment selection process. We were able to deliver year-on-year growth across the majority of our KPIs, these being the metrics that we believe provide the best indication of progress in building scale and laying that foundation for future growth. As mentioned previously, this doesn't immediately filter through in the same period. Instead, it will materialise over time as our portfolio matures. That being said, gross revenue for the period grew marginally to 36.3 million. Gross profit increased by 20%, which was underpinned by solid returns on the resolution of the balance sheet matter. Adjusted profit before tax was up 42%, 15.8 million, and statutory profit up 41%, 13.1 million. Cash was 35.5 million, up 42% on the prior year. And we maintained momentum with investments now at 88.6 million, up 71%, and capital invested up 17% to 48.5 million during the period. A significantly improved set of results on the prior period, which demonstrates our ability to grow the business and deliver value. This slide touches upon some of the themes covered in the previous slide, but if we turn our attention to cash generation, this reinforces the alignment of our revenue realizations with collections. with revenues being converted relatively quickly into cash. Cash at the end of June stood at 35.5 million, providing us with both liquidity and flexibility to continue deploying in opportunities and bridging the gap between the expected organic cash generation, which is expected to filter through over the coming financial period from the maturing investments, as well as our ability to continue to invest in our growing portfolio of investments. The cash flow waterfall, as with previous years, emphasises the movement in our working capital is predominantly centred around the deployment of capital and cash receipts related to the resolution of matters. Two of the most fundamental activities in our business being capital deployment and returns. Expenses remain broadly in line with the prior period, which demonstrates disciplined cost management during the period. And our cash position will further facilitate growth as we continue to invest in our growing portfolio of assets. I'll hand over to Patrick to talk through the profile of our current portfolio of investments.

So we'll start with direct investments. As investors are familiar with in terms of past presentations and past descriptions of our portfolio, our direct investments really fall into two categories. And the first one is direct investments where LCM is funding 100% of the capital commitment with respect to that particular investment. Now, the majority of these investments predate the establishment of our asset management business. And the majority of investments moving forward past the end of March 2020 will comprise co-investments where we are co-investing with the asset management arm. So if we look at first direct investments where LCM is responsible for 100% of the capital commitment, they currently sit at $105 million. If we look at our portfolio of co-investments, that sits at $76 million. In respect of the combined value of those two parts of our direct investments, we have deployed or invested into those $104 million to date with $77 million to be invested progressively over the life of those investments. Now, if we look at the profile of this combined portfolio of direct investments, what we're really looking for and what you see displayed here is the diversity across industry sector, across jurisdiction, across territory, and the fact that any individual capital commitment does not dominate or create concentration risk across that portfolio. The other observation I'd make is that what we're seeing now is the EMEA region starting to dominate in terms of the origination of these investment opportunities. And that's precisely the trend that we expected when we opened our London office. The simple reality is that where you have a larger economy, you have more economic activity, you have more disputes, and disputes are what we really fund into or invest in. So you should expect that we would see an increased number of investment opportunities really coming out of the larger economies in the Northern Hemisphere. So the trend with respect to more investments coming out of the EMEA region as opposed to APAC is precisely what we had anticipated would happen over a period of years. If I then move across to our... asset management business, the fund one as we call it, we've now reached a point where that is now 77% committed. That is, we have $165 million of that fund committed. We have $76 million of that fund actually deployed with $49 million to be invested. And if we again look at the profile of this portfolio, we're seeing again diversity through industry sector, we're seeing diversity through geography and jurisdiction, and we are seeing a lack of concentration risk in respect of any one individual investment. We expect that that fund will be fully committed by the end of this calendar year, and we're expecting to move seamlessly across into Fund 2, which we're in the process of closing now. I'll talk a little bit more about where we're up to a bit later in this presentation. Next, I want to move to the maturity of our portfolio, give a bit of an insight to investors as to how our overall portfolio is maturing. So if we start on the immediate right-hand side of this slide, We observed that on our 10-year mark in respect of measuring our financial performance, if we look at every single investment that we concluded during that period, the average time to completion is 27 months. Now, we said to the market now for a number of years that as we move into new regions and we are funding with a larger capital base, we can fund larger and more complex commercial disputes. we should expect that the time for completion of these disputes will be elongated. We are estimating that they're likely to be in the order of 36 months as opposed to 27, which it's historically been. The other effect that we're seeing in the court system is delays occasioned by COVID. So whilst those delays are being rectified by the court system through a number of means, particularly technology, There's no doubt that delay will be occasioned to the maturity of our portfolio as a whole. I just want to pause there and talk about what that means for LCM because we often get asked the question by investors, are we concerned that the time for an investment will be longer than our average 27 months? And the really important thing to remember is the way we structure these investments, and what I mean by that is the litigation funding agreement that we enter into with funded parties is typically is structured as a rising multiple over time. So it's a reflection of the time cost of money in respect of LCM's investment. And what I mean by that on a really practical level is if an investment elongates out or the life of investment protrudes past what we expect it to be, being the 27 months, LCM's return ratchets up over a period of time. So when we think about our investments going and being delayed by COVID or taking longer than they might traditionally take, that's not a matter of concern for us. That does not erode the performance of our investments. In fact, in many occasions, it actually enhances the returns that we receive. Now, moving to the middle of this slide and talking about the maturity profile across the portfolio. So if we take 27 to 36 months as being the expected life of these investments, we can see that there is a substantial number of investments which we would expect based upon our historic experience to come to maturity during the next financial period. Now, we're not in a position where we can give guidance to the market, both in respect of what the financial performance of those are going to be or their timing. But just through observing the maturity of these investments and the average time to completion historically, we can see that we are moving into a period where we should expect to see some significant realisations or maturity of investments. The other observation to make about those investments is the more mature of our investments are the ones where LCM is funding 100% of the capital commitment from their balance sheet. So they are the ones that provide the largest returns for a single investment to LCM's balance sheet and then through the balance sheet to equity investors. And then finally, with respect to this slide, we look at the portfolio by claim size. And what we're really trying to achieve when we build a portfolio is diversity in the way that I previously described it, but also ensuring that what we're doing is we're not building a portfolio of giant, risky, binary outcome claims. So what we've got depicted there is we have a nice, even bread of claims right across the spectrum from being sort of 10 million and below right up to 500 million and above. And it's a nice steady and even split between those. I next want to move to some of the profiles of LCM's business that might be particularly attractive to equity investors and something to observe. And this is really the tremendous ability for LCM's business to generate significant returns in terms of organic capital over a relatively short period of time. So if we take the life of our investments conservatively at 36 months as opposed to the 27 months which they've historically performed at, And we take a nine-year cycle. So we do three plus three plus three. So every dollar we invest, we flip or compound that or reinvest that dollar over a nine-year cycle. You can see with LCM's existing capital invested into projects, just how large the compounding effect has the potential to grow LCM's capital-based buy. So this business really has the tremendous ability to generate meaningful amounts of capital through the compounding effect. I next want to move to another somewhat interesting characteristic of LCM's investments, which is their asymmetric nature. And what I mean by that is, is the disconnect really between the potential for loss with respect to these investments as compared to the potential for returns. Now, what these two bar graphs depict here is every single investment that LCM has concluded, again, over that 10-year period. And you can see there that there's a small amount of losses to the left-hand side of that slide. And then you can see very buoyant returns that are asymmetric to the potential losses in respect of that. So a really interesting profile of these investments that is very often absent from any other asset class that is available in the marketplace. And I'm going to hand over to Nick just to talk about some of the favourable market dynamics that we are seeing and expect to see into the future.