Litigation Capital Management Limited

Good morning, ladies and gentlemen, and welcome to the Litigation Capital Management Investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Just please simply type in your questions at any time and press send. The company may not be in a position to answer every question received in the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your investor meet company dashboard and will notify you when they're ready for your review. Before we begin, we'd like to submit the following poll and your attention will be most appreciated. I'd now like to hand over to CEO Patrick Mullaney. Good afternoon or good morning, should I say.

Good morning and thank you for participating in LCM's half-year or interim results for the six-month period ending 31 December 2022. Starting off with highlights, there's really two principal factors which have dominated the six-month period to 31 December. And they are growth and the building of scale in this business, which has occurred at a rate more significant than ever in LCM's history. And the second one was our first resolution in respect of a fund one investment, which allows us really to demonstrate the leverage and the power that we are able to bring to equity investors through that model. So just starting with, you know, the growth in LCM's business, most investors will be familiar with us branching out into asset management or funds management in March 2020. We now have two funds under management. The first one, Fund 1, fully committed, and Fund 2 we are now committing into. So as at 31st December, $79 million had been committed, and as at the date of this presentation, we are at $114 million. assets under management we've just tipped over half a billion dollars worth of assets in under management at 31 december and as that 28 february you know 537 million dollars um the largest amount of assets under management that lcm's um ever had in its history In terms of commitments, they were up very significantly as compared to the previous period. So to 31 December, we had commitments at 107 million, the largest level of commitments that we have ever had in LCM's history. Similarly with capital invested, up very significantly from the prior period, 31.5 prior to 56.9 million. So not only are we increasing the commitments, we're increasing the funds under management, we're also increasing the capital which we're invested into that. In terms of financial performance, we suffered a loss for the period of $5.5 million, which is really a reflection of the timing of revenue recognition. As most investors know, we don't fair value our book or our portfolio. Therefore, we recognise revenue only when it is actually earned and when it's received. Had we recognised a few of the resolutions which have occurred very early in this second period, in other words, two of those investments which were post-period, it would have generated or converted across into a profit of $6.3 million. In terms of our performance over the period, at the 11 and a half year mark, measuring the performance of every single investment that LCM has completed, we've generated a return on invested capital across that entire portfolio of 154% and an internal rate of return of 79%. So we're getting very consistent performance in terms of our investment performance over that period. During the half year to 31 December, we've increased our team globally, but most particularly here in the London office. So we've had a few incredibly experienced practitioners in litigation finance join our London team. And then touching finally upon those two post-period resolutions, the first one in the Carillion matter, which we'll talk about in a little more detail as an example of how the funds management business model really leverages our funds, and also a class action in Australia, both contributing very significant sums to our revenue line. In terms of LCM's business model, most people or investors are familiar with the way we run our business. We're running two models. First of all is direct balance sheet investments. That's utilising LCM's balance sheet capital to make direct investments into disputes. And the second one is our asset management business where we are managing third-party pools of capital through which we generate performance fees. And what we do is we... have a crossover in respect to those two business models by co-funding every single investment that we generate across our platform. Just moving on to talk about the business model in some more detail. So what is LCM's investment proposition at this point in time? First of all, and really importantly in the current market is the returns on our underlying investments are utterly uncorrelated with what else is happening generally in the market. And what I mean by that is we've come out of a period of COVID disruption. We've come out into an economic cycle which involves inflation at a very high rate. We've got interest rates being increased by central banks in an effort to bring that inflation under control. We've got political risk. We've got disruption to supply lines. None of those factors influence the outcome of our investments. They're utterly uncorrelated. Secondly, with all of those features of the market, they have a tendency historically to increase the opportunities available to the litigation finance sector. So we operate in that regard kind of cyclically to the market cycle more generally. So not only are our underlying investments unaffected by what's happening in global markets, it's actually producing more opportunity for investment. We're in a market with low market penetration, which gives us many opportunities across the sector. We've got growing demand globally for litigation finance. We're seeing an increase in the demand for the capital in our industry year by year. Next, we are shifting to an asset management model or a co-funding model, and that's allowing us really to leverage LCM's balance sheet capital and increase the returns for equity participants. And then you've got the shifting legal market dynamics, which really puts lawyers in a situation where they're recognising the benefits of offering litigation finance to their clients, really to help defray the very large costs associated with pursuing disputes through the court system or the arbitral process. We look at then LCM's business model again, as I mentioned, two business models, crossover through co-funding. We're still running our single case investment model. We are investing in portfolios of disputes globally and through acquisitions of claims. In terms of our asset management business, a number of features of this model which are worth observing. And the first one is being able to leverage LCM's own capital by using third party capital and defray the risk associated with every dollar that we invest from our balance sheet across a much wider range of investments. Just looking at the type of investor into our asset management business, we're looking at large and sophisticated investors such as US university endowments, UK and European pension funds, large global investment banks, family offices and funds of funds. The really important observation to make in addition to the sophistication of those investors is the fact that they've entrenched rights to participate in our third and fourth fund moving forward. We're looking next at market dynamics as they're presenting. I touched upon the COVID disruption, high inflation, increased interest rates, geopolitical disruption through the war in the Ukraine, supply logistics disruption and economic risks. um all placing pressure on capital allocation into the disputes market so all of those factors are really driving the demand for capital in the litigation finance industry and in particular lcm secondly we've got economic uncertainty so we've got the risk of recession in many global markets and the effect of that uncertainty and the risk of um recession really drives demand by large and well-capitalized corporates to participate and use risk management tools such as LCM's capital. We're seeing a significant increase in the number of insolvency events and restructuring. We've seen, you know, in the last seven days, the corporate collapse of two U.S. banks. And that is really driving the number of insolvency and restructuring related disputes that we're seeing coming through our pipeline. We're also seeing an increase in the number of investments that we're seeing in shareholder mis-selling and fraud claims. And we're also seeing an increase in the number of investments which we're seeing in the competition space as that market develops, most particularly here in the United Kingdom. So the market conditions across all of those sectors is increasing the demand for LCM's capital. In terms of operations, we have had the largest capital commitments in LCM's history in the first half of this financial year at 107 million. In addition, we've had the largest amount of capital investment over that half year period at 57 million. In terms of our performance metrics, we're still achieving a very similar performance metric of our investments as we have over the last 11 and a half years. In terms of assets under management, we just tipped over the half a billion point as at 31 December, and we're at now $540 odd billion at 28 February. So we're seeing really an increase in all of those parts of our business. What we're seeing in LCM now is really a transition from direct balance sheet investments where LCM was contributing 100% of the capital required to bring a dispute through to conclusion to a co-funding model. And some of the factors which really weigh into that are the ability using third party leveraged funds to increase the overall assets under management. If we look and compare financial year 2019 through to 2023, we see very, very strong growth in the total assets under management, which is really building that portfolio and building LCM's business at scale. The second and middle graph there shows the contribution of LCM's balance sheet capital. So whilst we are increasing assets under management, we're utilizing less of LCM's balance sheet capital to fuel that growth. And then finally, in the last bar chart there, we're showing the diversity of those investments. So even though we're using less of LCM's balance sheet capital to grow an ever increasing and diverse portfolio, we are defraying that balance sheet capital across a much larger number of investments, thus reducing the risk. So we're getting all of those benefits by transitioning across to an asset management or funds management model. And whilst we're achieving that phenomenal growth, we're doing that in a really disciplined way. So we as a management and an executive team have been highly focused on making sure that we keep our OPEX under control. And if we look at the last sort of two, three, four years, we've been able to maintain that within a range of five to 3% of our overall assets under management. So we've been very focused upon making sure that we deliver growth in terms of asset management and assets under management at the same time as maintaining that level of OPEX. And looking at the portfolio, so LCM's portfolio of direct investments, as I mentioned before, in a period of transition across, so we have a historic portfolio of investments where LCM is still contributing 100% of that capital commitment. All of those investments are at a very mature stage and we're starting to see resolutions come through and we should expect to see more of those resolutions coming through in the next six to 12 months. In terms of co-investment, you can see that the amount of capital allocated towards co-investment has now increased above 100% investments and through that mechanism, we're defraying the risk across many more separate investments. We look at the portfolio as a whole. We're still seeing great diversity across industry sector, across jurisdiction, across territory, and we're seeing a portfolio which is not punctuated by concentration risk in any one single investment. We're also seeing an increase in the number of investments which we're seeing in the Northern Hemisphere in the EMEA region, which is really healthy. So what we're seeing really is us gaining traction in the UK market. If we now move to the profile of fund one, as investors know, this is a fully committed fund of 150 million US. We have currently deployed just over half of or invested just over half of that capital. We look across again at the composition of that portfolio. We see diversity across industry sector. We see diversity across jurisdiction and we don't see a portfolio which has concentration risk. And then finally, we look at the profile of Fund 2 in its very early stages. So in terms of Australian dollars, 114 million so far committed. We're seeing, although early stages, the diversity which we have seen in our other portfolios of investments, we would expect over a period of time as we fill Fund 2 or totally commit Fund 2, that it will exhibit sort of similar characteristics as Fund 1 and our direct balance sheet investments. Although with current trends such as increasing insolvency, increasing competition claims, we might see a few more by way of percentage of those types of disputes present in the Fund 2 portfolio. Really importantly, I want to just spend a little bit of time focusing upon the Carillion matter, which is our first substantive resolution in Fund 1. And I want to do this really to demonstrate the leverage that we are able to obtain to LCM's balance sheet and through the balance sheet to equity investors of using third-party capital. So if we look at the left-hand column, that is the investment performance of this standalone investment. So we see that it generated a return on invested capital of 140%. We see that it generated an IRR of 79%. So pausing there, those performance metrics are very characteristic of what LCM has been able to achieve over the last 11 and a half years. So very commensurate with our track record in terms of performance metrics. We then move to the middle column. This is LCM's balance sheet performance once it's paid its performance fees by Fund 1. So it increases the return on invested capital coming back to LCM's balance sheet to 278% and it increases the IRR to 109%. So we can see that we are really maximising the return that comes back to LCM as a manager of third-party funds. And then finally, we look at the performance of Fund 1 for those who have invested in Fund 1 directly. And this is net of fees still generating a return on invested capital of 90% and an IRR of 61%. So really, really strong performance metrics across that spectrum. So enhances LCM's performance. and the amount of revenue that we are able to post to our profit line and balance sheet, and really good metrics for those who invested in fund one. We then look at sort of the maturity profile of LCM's overall investment. We are seeing a real transition and we're seeing that those investments which are at their most mature are those ones where LCM's capital has been funding those investments at 100%. We should expect to see those investments coming to a maturity and reaching liquidity event in the medium term and in the near future. And then we see a very good mix of LCM's balance sheet capital and our funds management capital across the balance of those portfolios. As we have said now, for a number of years, we should expect to see an elongation of the time for those investments from historically 27 months to between 36 and 42 months. That's what we are predicting that the current portfolio will be. And there's a bit more granular detail around what our investment portfolios look like. We start with direct investments. One direct investment in Australian class action has completed and concluded just past the post period. That's generated a gross profit for the balance sheet of $5.8 million. Two investments have been successful at first instance, which are subject to appeal or challenge. We then have one arbitral investment which has been unsuccessful during the period. That is a feature of any investment class that we, from time to time, will sustain losses. We're awaiting a judgment or award in three further direct balance sheet investments, and we have final hearings scheduled during the 2023 calendar year in respect to three further investments. So really good progress in advancing our direct investment portfolio. With respect to fund one, we've resolved two of the overall portfolio. One had just passed the, or a post period for the six month. The successful conclusion of the Carillion investment contributed $6.3 million gross profit, and we've talked about the metrics in respect of that. Two additional Fund 1 investments have been successful at first instance and are subject to appeal or challenge. So those investments have been largely successful and de-risked but are subject to challenge. One Fund 1 class action investment in Australia has had a partial resolution through settlement, and we're expecting a resolution in that in the near future, the balance of the defendants in that matter. Six further Fund 1 investments have final hearings and are awaiting judgments or awards, and two further Fund 1 investments have final hearing dates scheduled in this calendar year. In respect of Fund 2 investments, Early stage, we're really in the commitment period of that fund, but things are looking really good. And the emphasis there is that we have had a large level of commitment in the sixth month of 31 December than we've ever had in LCM's history. Building out our team of investment managers, two very senior investment managers have joined LCM in the sixth month of 31 December. Fiona Hayes has joined from one of our competitors to take up a position as head of underwriting. And Tim Mayer has joined again from one of our competitors as a senior investment manager. Both joined our London office, both very, very senior in their field. and really building out our bench and our level of experience here in London. And then we have Daniel Kinnear, who has joined from the investment banking community, ready to head up our focus upon corporate funding opportunities and portfolios. And then two other practitioners, one out of Hong Kong joining our Singapore office, and Alice joining Sydney with particular expertise in class actions. And I'll hand over to Mary just to talk about the financial review for the period.

Thank you, Patrick. For the interim results for the period ended 31st of December on a standalone basis, so LCM-only performance. Investments at cost increased to $119 million. More importantly, drawing upon a point that Patrick made earlier, is as we grow assets under management, and we've now tipped over the half a billion mark, we are investing less, whilst investing 100% was delivered buoyant returns. Investing alongside third-party fund investors is showing through the Carillion Matter that we are able to enhance those returns by investing less into the underlying matters. Total capital invested in the period was $21.3 million, again, up on the prior period. Gross revenue was $3 million, but again, that is a product of the timing of recognising the revenue on the resolution of matters. More importantly, had the two matters previously announced post the 31st of December been brought forward, gross revenues would have increased by 22.5 million and would have delivered an adjusted operating profit of 6.3 million. However, as a consequence of the timing of recognising revenue, we had a loss of 5.8 million for the six-month period end and cash at the period end was at 16.6 million. Turning over to the balance sheet, we've touched upon capital invested. Total equity, again, is down as a result of the timing of recognising the revenue. Cash generation, again, timing of revenue. We expect that to increase in the second half of the year as a result of the two most recent resolutions. Cash has at the period end was $16.6 million. Post period end, we had $23.2 million as a result of the resolution coming through from Carilion. Subsequent to that, there is also the performance fee that we are owed on that Carilion matter, as well as the class action in Australia, which would increase the cash position to over $40 million following those two resolutions. The cash flow waterfall tends to follow a very similar trend every period with the main cash generated and the main cash deployed in the investments. expenses broadly remain in line with prior periods. We have seen an increase in the interest charge as a result of the third party, sorry, the Northleaf facility. Pavements placement fees are increased due to the fund two raise that we just recently did. And pretty much everything else remains in line