Litigation Capital Management Limited

Good morning, ladies and gentlemen, and welcome to the Litigation Capital Management Limited four-year results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Just simply type in your question and press send. Given the significance of attendance on today's call, not every question will be able to be answered during today's meeting. However, the company can review your question submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand over to CEO Patrick Maloney. Good morning.

Good morning or good afternoon, good evening, depending upon where you are in the world. Welcome to LCM's full year results presentation for the financial year ending 30 June 2023. I'm accompanied by Mary Ganjemi, our Chief Financial Officer, who will talk to our financial performance throughout this presentation. So if I could start with highlights, this for LCM some really focused efforts to build the scale of this business. And what we're seeing in this financial period was some of the realizations which are coming through or the results of that building scale. So first of all, realized revenue or income for the period on a consolidated basis of 181 million, which is a record for LCM. $84.2 million of that revenue or that income was directly attributable to LCM and its balance sheet. Moving to adjusted profit before tax for the relevant period. related to fair value movements. So statutory profit before tax of 42.7 million. Again, that's our best result historically for LCM. This is a year where we have transitioned into fair value. That really brings us in line with our peers and makes us comparable on that basis. It also increases the transparency and the information set that investors will have. through its evolution. So we've got a total portfolio value at the end of the period of $428 million applying fair value to it. In terms of assets under management, we've had a significant increase, $484 million at the end of the financial period, 30 June 2023, as at the end of August that had risen to $552 million. Commitments were up significantly on the prior period, so $104 million for the financial year ending 22, up to $176 million in the period just past. Capital invested similarly up significantly, 68 in the prior period. to 30 June 23, $95 million. As a consequence of the financial performance during the relevant financial period, the board has declared a dividend of 2.25p, which is encouraging because it's a reflection of us really transitioning out of the period which was interrupted as a consequence of of our efforts to build scale in this business. The board's also announcing a buyback of 10 million Australian dollars over the next 12 months. It's really in recognition of what the board sees as, you know, value in us buying back our own shares from the market. We think and we recognise, I think, that shares are trading below what the inherent value of this business is. Moving forward now, looking at the KPIs, which we have set for ourselves in terms of measuring the performance of this business, and really that's across three broad sectors. So the first one, at the front end of that is through applications. So we've had applications commensurate with a prior period, 434 as against 442. We have a significant increase in the amount of capital committed. Now that tends to indicate that the quality of those applications is improving because we're getting more commitments out of a similar number of applications. And then in terms of capital actually invested across our portfolio, that's gone from 68 million up to 95 million. So we're seeing encouraging increases in all of those numbers. The next thing that we measure ourselves is in terms of investment performance. On a 12-year basis, our return on invested capital has actually gone up from our previous reported number from a return on invested capital of 1.63 times to 1.78 times. If we look at the cumulative or portfolio IRR, it's reduced by 1%, but still holding at a encouraging level. So that is every single investment which we have completed over the past 12 years inclusive of losses. If we then look at the return on invested capital on a three year running period, we're still seeing very healthy numbers of 2.09 times compared to our 12 year track record. Then if we can move to assets under management at the end of the financial period, we've just under half a billion of assets under management as at the end of August that has increased to just above that at 0.55 billion. And then move across to our financial review, I'll hand over to Mary to talk to that.

So this year has been a transformational year for LCM and we really are starting to see the benefits of the asset management model and we're very pleased with the realisations of some of the investments we've made in our first fund. They have translated into realisations from investments of $84.2 million. That's up 78% on the prior year. This slide is trying to actually create a bridge to show investors that what it would have looked like under our old reporting standards and then overlaying fair value. So the realised gross profit like for like to with what investors are familiar with seeing in the prior year was 51.5 million compared with 30.9 million. So again, an increase of 67% there. Adjusted profit before fair value and tax at 37.7 million is an increase of 95% on the prior year. Overlay on that, the realised gains from the fair value transition That's an extra 16.2 million. And that brings our adjusted profit to 53.9 in line with the prior year based on a fair value basis. Statutory profit before tax is 42.7 million, broadly in line with the prior year. And the resolutions from the investments in the fund have increased cash to 83 million from 29.3 million, placing us in a strong position. Total capital invested, Again, broadly in line with last year at 36.3 million and the value of the assets in our portfolio of investments is sitting at 203 million versus 186 million in the prior year. This slide is just providing a financial snapshot broadly on an LCM only basis with the exception of the assets under management which is sitting at 484 as at the year end and it's increased to 550 million as at the end of August. The value of the portfolio of investments, what we've tried to show here is we've demonstrated how that's moved under the restated numbers year on year, moving from $137 million at the end of 2021 up to $203 million at this last financial year period. Cash generation was strong. As I said, a lot of resolutions in the first fund flowing through now and increasing our cash position to $83 million at the period end. A lot of investors will be familiar with this slide. This is just a waterfall which shows the movement in our cash. The starting position, $29.3 million. Again, a lot of the movement in our cash position is attributable to cash generated from the realisation of investments as well as capital deployed into those investments we have. We've maintained discipline with our operating expenses and they're broadly in line with the prior year. We have seen an increase in the interest expense and we did draw down on the facility early on in the fiscal year post balance sheet. We have actually started to pay down some of that balance, but our closing position is 83 million. This year we looked carefully and we worked carefully with our advisors at transitioning to fair value. There was a lot of work that went into this with our external advisors as well as applying a lot of our experience historically and testing that on the book retrospectively. The valuation methodology which we've come up with we believe is, and we'll demonstrate this in the next slide, is providing us with a lot more transparency in the underlying value of the portfolio of investments on a line by line basis. We take a look at the individual investment What we see is observable milestones, whilst not to the external market, but observable milestones in that particular investment as it progresses through the judicial system or the arbitral system. And we apply discounted cash flow to each and every one of those investments based on certain risk profiles, the cost of capital, and we just measure that at each period end. We've drawn upon 25 years of experience and our unparalleled track record with respect to the resolution of investments, and we subjected that valuation framework to extensive backtesting. And our investment process has not changed, nor has our underwriting process. So we believe that we've come up with a good framework that provides more clarity and more visibility to investors on how our portfolio is progressing. This slide is just showing the impact of the last four resolutions. The light blue bar chart basically shows the last four resolutions and how they were held at cost at each period end. And then the dark blue on the right-hand side of the light blue chart is showing how that when those investments were run through our framework and our valuation framework under the current model, how they would have been valued, and through the restatement, what they would have been held at at each period end. And then the grey bar chart on the right-hand side then shows what the final resolution with respect to those investments were. And you can see the valuation framework is providing a fairly reliable measure there.

I do want to just go back and just make a of the added transparency and the information set that investors will get through fair value. So if we look at the bar chart on the right hand bottom, That's an arbitration which we funded. It's our most recent revenue event or realisation. Under the old holding at cost, investors would have had visibility on $8.4 million worth of investment at December 22, and that's resolved prior to the end of the financial year, and we have generated 67%. million worth of revenue from that one investment. So you can see now if you look across the dark blue bar charts in respect to that investment, you can see progressively that investment increasing in value over the period of its life, sitting at $58.3 million and then yielding an actual cash result at realisation of 67.7%. So I just wanted to highlight that this really is providing investors with a lot more information and a lot more transparency and visibility on the progress of these investments or the pool of investments. Just moving on to our operational review. So I want to touch first of all on the market conditions. Now, there's probably three aspects of these market conditions which I want to highlight. And the first one is the uncorrelated nature of these investments, particularly in a pretty volatile market, which is pretty unpredictable. So if you think about what we invest in, we invest in a dispute. Ultimately, that dispute is adjudicated by a judge of a court or it's resolved through a commercial negotiation. Now, irrespective of what the prevailing economic circumstances are, the political circumstances that might be prevailing, the geopolitical risks associated with the war in the Ukraine and the like, the judge does not apply different legal principles depending upon what those conditions are. So the ultimate result of these investments is utterly uncorrelated to what's happening more widely in the market. So a really, really important feature, I think, of our investment class or our investment strategy, particularly in markets such as these. The second highlight that I want to identify is the counter-cyclical nature of the litigation funding industry more generally. And what I mean by that is what happens when we have market conditions as they present at the moment? So we have a lot of uncertainty in global markets at present. We have an environment of high interest. We have geopolitical risk associated with the war in the Ukraine that is disrupting supply lines and making business very difficult. Now, the culmination of those in respect of the across the territories in which we operate. Now those market conditions tend to drive demand for LCM's capital and indeed capital across our whole industry. So we tend to operate in uncertain times and in recessionary cycles, we tend to operate and see a lot more opportunity than potentially we do when the markets are more stable. So market conditions for us are really conducive to driving demand. And then finally, I just want to touch upon some market consolidation, which we're seeing generally in the litigation funding industry in some of the jurisdictions or the territories in which we operate. So we're actually seeing a reduction in the competitive landscape, which is really providing us with some really great opportunities to, you know, get a foothold and get more market share in some of those areas. markets in which we operate. So those are the three really market conditions that I wanted to touch upon most importantly in respect of the market conditions which we're seeing in the marketplace. Next I want to move on to the portfolio of disputes which we're managing so the first slide here depicts our direct investments that is the investments where we are utilizing directly balance sheet capital to directly invest into these investments and they fit into two categories the first one is we have a 73 investments which LCM is funding 100% of the capital commitment. Secondly, we have a co-investment portfolio where we're using LCM's balance sheet capital to co-invest with our funds management business. That currently sits at $153 million from LCM's balance sheet side. Of those, we've already invested or deployed 105 million, leaving 121 million still to invest. What you can see from that is we are very much transitioning from LCM using its balance sheet capital to fund 100% of a capital commitment. the risk, which is obviously very healthy. As investors would be familiar with me saying, we build these portfolios What we can see here is in a split between the APAC region and the EMEA region, we're seeing an increase of our portfolio here in the Northern Hemisphere or in the EMEA region. And we should expect to see that because we are operating in large economies, and in larger economies you have more economic activity, which leads to more disputes. so just moving on now to um fund one as investors know fund one was 150 million us it's been fully committed we have 221 um aussie dollars worth of commitments there 138 million of that has already been invested or deployed we're seeing again a similar um a similar diversity across that portfolio so we're ensuring not only did we have disputes coming from a diverse range of jurisdictions but also diversified by type and by industry sector and we're ensuring that no one individual investment dominates that portfolio such as to create concentration risk and finally moving to fund two fund two we closed during the past financial period at 291 million us dollars just shy of the $300 million that we were targeting. We have started to commit that. We are currently at about 40% committed. We should expect to see that probably fully committed within the current financial year or in the next 12 months, which will allow us to move on to Fund 3. So we have $148 million Australian dollars committed of that fund, and we're starting to see early deployment of about $12 million as at the end of the financial period. Again, we'll build this out in a similar way to what we have with our direct investments and with Fund 1, such that we have diversity across industry sector, jurisdiction, and it won't suffer from concentration risk. I want to touch upon the discipline that we apply in respect of growth. So you've seen LCM and the management team really build out the platform we've got that we're operating. That really gives us access to more disputes globally for investment. But we're doing that in a disciplined way. So this slide really depicts assets under management at any particular time. It dates back to prior to us listing on the first public market back in 2016, the Australian Security Exchange, right through to 2018 when we listed in London. And you can see that we've settled in to a position where we've got pretty predictable OPEX at 3% of our assets under management. So we do really focus upon applying discipline at the same time as growing our platform. And then finally, I want to look at the performance metrics of the dispute investments, which we've concluded. I touched early upon in the presentation on our 12 year track record. This breaks that 12 year track record up into three year running periods or rolling periods. We should think about three year rolling periods as being important, because that is a sensible time or an average time that we think that we will ultimately land in terms of the lifetime of these investments. So historically, the life of these investments has been between 25 and 27 they're probably sort of 36 to 42 months is where they will land. So we've split our performance metrics up into three-year rolling periods. And really interesting what we can see here is across that 12-year period in terms of the IRRs, they're remarkably similar and they stay within a relatively tight band. And we're seeing fluctuation in the multiple invested capital, the return on invested capital. encouraging. And then move to outlook. So LCM continues to build the scale of its platform. And we're looking at really three aspects to that in terms of building out the scale. And the first one is our capacity to select the best quality disputes to invest in. So it's our underwriting process or our rigorous due diligence process. And as we build that scale, we need to ensure that we maintain the discipline of that task so that we can maintain the performance metrics which we've enjoyed over our full history, but most particularly in the last 12 years. So we're very focused on building but really very much having the discipline to stick to the methodologies which we've developed over many years to work out what the risk of these investments are and to pick only the best of those investments. The second aspect to building growth is to have a diversified capital structure. So in terms of that, we are thinking and we are exploring going to the market with a retail sterling bond issue. We're in the early stages of looking at that, but that will really give us access to another capital source in addition to the ones that we're already utilising. Secondly, we expect that we will fully commit our second fund within the next sort of 12-month period, which will allow us to go to market and raise a third fund. So we're in the fortunate position, based upon our performance really in terms of investments of being of having access to a number of different diversified capital sources in terms of building the scale of our business and most importantly building out the portfolio of dispute investments we've got such that we can diversify investors are exposed to. And then finally, it's the origination capacity of our platform. And that is really utilizing the skills that we have developed over many years to underwrite the risk of these investments and the capital that we have got access to. We need to identify the best possible quality disputes globally. And that requires us to build out our platform such that we can get access to those. And those are the three aspects of our business which we are very much focused upon in terms of building the scale of this business. Then finally, I want to look at the outlook of the business. So first of all, we've got a growing funds management business. We are seeing the resolution of a number of disputes in Fund 1. metrics, those performance metrics are increasing the demand of LP investors to participate in future funds. So we anticipate fully committing fund two and then sort of moving into our third fund, I should say. Now, that funds management model is a or it's adding to the organic generation of capital onto our balance sheet. And through our balance sheet, equity investors get the benefit of that. We're looking continually in terms of new territories that we can consider in respect of moving into. So we're getting a lot of inquiry coming to us out of the US and out of Canada presently. And that is a reflection of the fact that in terms of competition in those markets. We're not currently marketing into those jurisdictions or those territories, but we are seeing incoming inquiry. So we're looking at those territories, obviously in a very disciplined way, in the same way that we have enjoyed expansion in the past. We're also looking at our capital structure more generally, the retail bond, diversifying the capital that we have available to us, which is a distinct difference as against most particularly some of our private competitors. The market conditions, as I've touched upon previously, are very conducive to driving demand for LCM's capital. We expect that those uncertain market conditions will continue for some time. We're seeing increased numbers with respect to and across the balance of the territories in which we operate, which is a real sweet spot for LCM because we have vast experience in terms of funding, insolvency and restructuring related disputes. So when we look at the general outlook and the availability of capital that we've got, we're looking very positively in terms of the years ahead. And we'll now move to questions.

That's great, Patrick. Mary, thank you very much indeed for updating investors this morning. Ladies and gentlemen, please do continue to submit your questions using the Q&A tab just situated on the right-hand corner of your screen, but just while the company take a couple of moments to review some of the questions submitted already, I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your InvestorMeet company dashboard. Firstly, thank you to everybody for your engagement this morning. There was a considerable number of questions. If I may just hand back to you, Katie, if I may Just ask you to read out the questions where it's appropriate to do so, and I'll pick up from you at the end.

Thank you very much. Firstly, will the company continue to produce the accounts under the Health and Historical Costs and Fair Value Accountant? There's great value to both approaches, as historical shows the most conservative view.

We won't be producing accounts under historical cost accounting moving forward. It's obviously a transition period here where we wanted to provide investors with a level of comfort with respect to the transition. We will be providing just enough disclosure for investors to be able to understand the position in a similar manner. pulling out the fair value realisations and the deployments, both on a third-party basis, a consolidated basis, an LCM standalone basis, and where we feel that there's value added with respect to more disclosure around how we account for this moving forward. We'll obviously refine that messaging and ensure that we provide as much transparency around that as possible.

Thank you. There's a few questions around the Greenex case. Are you able to give any updates about that?

So the Green X case has attracted quite considerable interest from investors. We have had a final hearing before the arbitral panel in respect of that particular dispute. We are waiting on an award or a partial award, depending upon how that comes through. We can't really give any guidance in respect of that. It's very much in the hands of the tribunal. But, you know, we would expect to get a resolution in respect of that most definitely in this current financial period that we're in.

In terms of the fair value accounting, can you provide any detail about what effect we're moving to have on cash flow in respect of tax payments?

So fair value won't have any effect in terms of the actual cash outflow. It's a timing difference very much akin to a provision or an accrual. The tax becomes payable upon realisation.

Thanks. Looking at the closing of Fund 2, can you provide any details about the final amount raised and the timing?

So in terms of Fund 2, we were targeting US$300 million. We ended up doing a final close at US$291 million. $9 million short of that target. I think that the fact that we were able to close that fund to very, very close to what our target was in pretty difficult circumstances in terms of what the market was is a real testament to LCN's track record. So we were very, very pleased with closing that fund in such close proximity to what our target was. So I think it's really a direct reflection of market conditions. I should add that, you know, one of the reasons why we're seeing a bit of consolidation in some of the territories in which we operate is because other participants in the market have not been able to gain access to capital in the same way as LCM. So we feel pretty confident and fortunate to close very close to our target of $300 million.

Has the company been approached by private equity?

No.

What has been the feedback from the Fund One investors? Have they recommitted to future funds already?

Yeah, so first of all, in terms of the closing of Fund 1 and into Fund 2, all of the institutional investors in Fund 1 participated in Fund 2. They all increased their investment going into Fund 2. Some of those cornerstone investors have contractual rights in respect of future funds, I think in respect of at least Fund 3 and perhaps even Fund 4. So we are seeing tremendously respect to the funds management business.

How will LCM deploy the large cash balance with limited balances left on Fund 2 to commit? Are the gains being recycled back into Fund 1 for future investment?

So we have the capacity in respect of Fund 1 and Fund 2 to recycle our capital and reinvest depending upon the timeline in respect of those. In terms of fully committing Fund 2, we are currently at or around 40% committed in respect of that. Given the demand for our capital and economic circumstances and us building out our platform, so we have added some really experienced talent to our London office. We've expanded our Singapore team really to respond to demand coming out of both of those jurisdictions. We're very confident that we will have funds who committed to such, to an extent that we within the next 12 months.

Thanks again just looking at the fair value accounting and how that's in line with the broader litigation finance industry. Question one would be what plans the management have to build trust with the broader investing companies?

Let me start with that and then I'll hand on to Mary. I mean, I think what investors really need to recognise is the fact that LCM has a really long history in this industry. So we're one of the pioneers of this industry. You know, LCM has been operating in this industry now for 25 years. Over that period of time, we have managed invested and managed those investments, 250 of them through to completion. We currently have a portfolio of somewhere between sort of 55 and 60 separate investments. So we have a data set to draw upon which is, you know, larger than most litigation funders in the market. So we have, you know, a very large, very long history, a lot of experience and a data set which enables us accurately predict the value of these and the outcome of these investments. So the second observation I'd make is that LCM has been very conservative in the way that it has accounted historically. LCM's business has evolved, particularly in terms of funds management, such that we nine in respect of the way we report to the market. But we have chose historically to be very conservative. with the same conservatism. I'll just hand over to Mary who's probably got some additional points.

Yeah, I mean, there's not much to overlay on that. The slide that we prepared was in an effort to try and provide visibility around how those last four investments would have looked under historical cost accounting versus IFRS 9. But in developing our framework, there are a number of things that we looked at and the I think to probably give investors comfort is there is a framework that's in place and that framework has been built in a manner that it minimises management override. And we are relying on the observable milestones with respect to those individual investments. And that's how the matters progress throughout the process. And so there is minimal management intervention and the framework has been developed in such a way hopefully to provide investors with comfort.

Thanks. And then part two to that, which I think we've already answered, was will the old cash accounting disappear or will there be a note of disclosure?

We will provide as much disclosure as we can to ensure that there is transparency, but it's just not feasible to be able to provide two sets of accounts moving forward under both historical and IFRS 9 accounting.

Given the improved book asset backing of the company due to recent awards, is the company considering future limited debt leverage to accelerate growth?

So I think we have announced to the market, together with these financial results, that the board is exploring a retail sterling bond issue. We're still exploring the options associated with that, but what we're endeavouring to do is really diversify our capital structure. We think it's very important to have a number of different sources of capital to increase We want to explore all options associated with our cost of capital and, you know, a retail bond issue is part of that process.

Great. An investor says, well done on these excellent results, but please can you provide your rationale for the dividend, the level and the future dividend policy, please?

So I think if I can start with the dividend which the board has declared, it's really in recognition of the very strong financial performance of the company over the period and the levels of cash that we are holding within the company at the end of the period. We've balanced that against what our future opportunities are and the opportunity we're seeing in the market. The board is contemplating what our dividend policy is. And as we build scale, we'll be able to report and refer to what that dividend policy is as it evolves.

Great. And someone else has asked about the buyback and you achieving 78% IRR. And can they interpret the share buyback as an indication as to how you feel you're undervalued?

Yeah, I mean, I think that the board approaches the buyback of LCM's capital, we see the company is undervalued by the public markets and we see that as an opportunity to buy LCM stock as being a prudent way of allocating LCM's capital. So I think investors should interpret that the board is of the view that the public markets are currently undervaluing LCM and its platform as a business.

And staying on the share buyback, How did the board decide on the 10 million cheque buyback?

I think we as a board really sort of looked at available capital at the end of the period. We looked forward in terms of what we expected the inflows were going to be in the upcoming financial period. We looked at the opportunities and after giving consideration to all those factors, we settled upon the 10 million figure as being a meaningful amount for us to allocate in that way.

Great. So you mentioned a few times in the annual report that competition is down within the industry. Can you elaborate on the reasons for this and also elaborate a bit more on the conversations you've had with particularly North America and Canada?

So let me start with North America and Canada. So what we've seen is we've seen a bit of a contraction in terms of those jurisdictions. We've seen... which has sort of increased the incoming demand through applications coming out of those jurisdictions into LCM. Now, those are territories which we don't market into. We don't currently have a presence in those markets, but we are seeing an incoming inquiry via application. So I think more generally in terms of competition, I think we're seeing a couple of litigation funding outfits exit the market and exit those territories. I think in addition to that, we're seeing that some of our competitors are finding it more difficult running the strategy that they're running. So that really puts LCM in a very good position having access to capital in the market conditions as they are to really capitalise on that reduction in competition.

So you mentioned increased activity levels that will not need to be matched with proportionate increases in overall costs as a differentiator for LCM. Are there any particular participants you can think of are exposed to this, some of the smaller insolvency players perhaps?

Look, I don't think it's right for me to sort of provide commentary in respect of our competitors. But what I can say is that we have been very particular as a management team to keep our operating costs as low as possible. And I think that that really places us in a very strong position certain markets to really capitalise on the opportunities that we're seeing.

Great. And how do you view progress towards regulations of the litigation financial industry within the EU?

Look, I think LCM has been pretty consistent in saying that, you know, I think that forms of regulation in whatever jurisdiction, whether it be Europe or whether it be Australia or whether it be the UK, ultimately will favour those who have been in the market for a long time. And, you know, we would welcome a form of regulation at the appropriate time and we would offer to participate in discussions and deliberations.

Thanks. In terms of debt and interest rates increasing substantially, would it be best to focus on paying off all the debt and keeping capital back to co-funding potential investments?

Yes, so LCM has started a program in terms of repaying its current modest facility. We have started to pay down that facility already. We, as we've announced, as a at other options such as a retail sterling bond, and we're looking at that most particularly associated with the cost of capital. So we are actively looking at options which might give us access to capital at a more efficient rate than we're currently paying.

Can you give any explanation as to why the number of applications has been decreasing over the past few years?

I think that the number of applications this year were commensurate with the prior year, but I think rather than focusing on how many applications, it's more important to focus upon what the commitment that it is to have an increase in the number of applications. So what I think the numbers are really telling us is that the quality of those applications are becoming better in the markets and the territories in which we operate.

Do external investor funds stay with you or do you pay out profits and capital?

The accounts are actually prepared in a way to show the LCM standalone balance and the profits that are directly attributable to LCM as a business. Anything to do with third party investors is carved out.

Someone just wants to double check if you're still investing directly into fund cases or will this tail off moving forward with regards to the co-investment strategy?

Look, I think in terms of LCM's position in its current evolution in terms of building SCAR, we're very happy with the co-investing model. The co-investing model really gives us access to a pool of capital that we are managing, but it also gives us the opportunity to put our balance sheet capital to work with less risk because diversified across a larger number of investments and that balance sheet capital can enjoy the full economic upside of the resolutions. So we think that we're striking the right balance. business and utilising a proportion of LCM's balance sheet capital at the same time as allowing us to grow.

How does LCM materially increase applications to support asset growth, for example, geographical or case type extensions?

So I think generally in the market, we are looking at strategies continually about different parts of the market that we may focus upon in terms of investing. So we're currently looking at the resources sector as being a sector that we've enjoyed growing. um some buoyancy in the past um we continue looking at other sectors we are looking at other jurisdictions and we're also in an environment where we're seeing a bit of a contraction in terms of competition so i think a number of those factors will lead to not only increasing the number of applications but as i said before you know increasing the quality

Looking at the regulations again, have you seen any changes in the UK market in response to the Supreme Court judgment?

Look, I can't talk across the entire market. What I can talk to is how that decision impacted LCM. So for those investors who may not be across this, there was a decision recently of the Supreme Court here in the United Kingdom, which has constrained the way in which litigation finances can be remunerated. So in circumstances where a funding arrangement with a funded party remunerates the funder as a percentage of the pool of capital, the damages recovered in that dispute, they are now subject to the regulations which regulate damages-based retainers between solicitors and their client. Now, that's quite wordy, but what it does is it restricts In terms of LCM, there was a tiny handful of our funding arrangements, which had a small component, which was a percentage. We're in the process of renegotiating that we will be able to do so. Some of them we have renegotiated already. And more generally, if I look sort of at our past resolved matters, there's no issue associated with that in the United Kingdom. In terms of our current book, I've just described that. In terms of the future, we overwhelmingly are remunerated on a multiple of invested capital rising over time. So it will have very little, if any, impact upon LCM at all.

A question about the second half bump. Do you think that is the catch-up of COVID-19 and do you think this is going to continue or do you think that was a one-off catch-up?

Look, I think there's a couple of ways to give consideration to that. The first is that as our portfolio grows and with the transition to fair value accounting, you're going to see the recognition of the incremental growth of the book. So you're gonna see a smoothing and you should not see as a pronounced difference between one accounting period and the next. Secondly, I think you're probably seeing some of the backlog being resolved, which were delayed as a consequence of COVID, but you're also seeing LCM managing a larger portfolio of investments model has changed, the scale of LCM's business has changed, so we shouldn't see as marked or pronounced difference between the first half and the second half moving forward.

Looking at the litigation space in general, there's maybe more of scepticism about doubts of getting paid. Can you give any details about how you get paid, who pays you and have you had any problems in getting paid in the past?

We have had historically in the 25 years that we have operated very little problem associated with that. One of the reasons for that is, you know, we run a very rigorous due diligence process across the into an investment for LCM. One of the specific criteria that we look at long and hard very early in that process is recoverability or our ability to be paid in circumstances where we receive a judgment or an award which we need to enforce. So we are looking at that recovery issue very early in the in matters unless we can see sort of a very clear pathway to a recovery. So it's something that we have been very acutely aware of for many, many years. And we have the benefit of being an experienced litigation financier in the market. We've had very little problem with that aspect of our business, but it's ever present.

Someone has asked if you could go into any more detail about the bond at all.

Not at this stage. So we are still exploring the bond. as I think everyone will probably appreciate, the market's fairly unpredictable, you know, the debt markets at present. So, you know, we are monitoring that in circumstances where we move forward, we'll be keeping the market fully informed.

Great. Again, looking at the fair value accounting, how would you manage the increased volatility of the profit and

So, again, we are working to a framework which values the assets as they progress through the judicial process. So you are only accruing value as those matters progress to the next stage, which is usually de-risking that particular investment. But with fair value, there will no doubt be volatility if something moves in a negative direction. fashion we will obviously have to reflect that in our accounts so i don't think you can avoid it but i do believe that the framework is built in such a way that we would like to hope that we minimize the fluctuation and the volatility and looking forward do you see expansion into the north american market in the medium term and is there an opportunity for managing a u.s focused fund um

fund. As I said, we are seeing more applications coming out of North America than we've ever seen historically. We're seeing, you know, a more mature market in the US. So we're seeing more law firms looking to recommend that to their clients than we've ever seen in the past. So we're seeing a growing market there. We're seeing some contraction in that market in terms of the offerings through our competitors. So, you know, we have been looking at that market for some time. We continue to look at that market. And if we can move into that market in a disciplined way, we will do so.

How does Burford's LCM fair value differ to LCM's?

Yeah, so there's not a great deal of difference. Obviously, the underlying inputs will differ because they will be specific to the particular company. But in terms of the approach and using a discounted cash flow model, taking into account the cost of time, the cost associated with risk for those individual assets, and, you know, the assumptions around, you know, what the estimated budget and the estimated future cash flows are around those individual investments is broadly in line with our peers.

And I should add to that, like LLCM, together with its advisors, have spent a long time sort of working upon this valuation methodology. And I think if we look at Burford's experience, it's recently just overhauled the methodology that it uses as well. So we've seen a lot of rigour brought into our industry, both through LCM and through Burford, with respect to looking at this issue and trying to work out a methodology or a valuation methodology insight into the progression of our portfolios.

Great, we've got about five minutes left so we'll try and squeeze a few more questions in. How many investments do you currently have in process and what is your current view regarding their completion profile time-wise?

I can talk to the number of investments that we have and then I'll let Patrick take over with regards to their progress. So currently balance sheet is 20 investments and Fund 1 is sitting at 20 investments following the resolution of a number of those, and Fund 2 is 12 investments. We've made a few additional investments post the year-end period into Fund 2, and Patrick can talk to how those matters are actually progressing.

There's also a number of direct investments of 100% as well. So if I look at where we are in the progress, so in terms of our direct investments, we've got four of those investments. or partial appeals. We've got one direct investment which has an award in respect of fund one investments we've got another four investments which have received positive judgments or awards which are subject to challenge and we've got three um fund one investments which have had a final hearing awaiting awards as well so you can see there's quite a bit of um activity in terms of our book and and there's a number of our investments which are very mature given the benchmark interest rate has increased considerably

What impact does it have on the cost of capital and how will the company address it?

So with respect to the cost of capital, the credit facility that we took out was structured in such a way that it was capped at 13%. So it has not impacted, there hasn't been a change or a shift with the underlying increase in base rates because it was always structured in such a way that it attracted a 13% interest rate. In terms of what we're doing more broadly, Patrick has touched upon the fact that we're looking at the retail bond market in order to optimise the cost of capital for the business moving forward.

And just to add to that, you know, we're very conservative in the way that we think about debt. So, you know, as a proportion of our overall balance sheet, you know, our debt levels are very, very modest. So, you know, and we intentionally look at that and we monitor that continually.

Looking at applications, what proportion of applications currently get approved?

Yeah, so historically, it's been between 3% and 7%. And we're sitting, you know, around the 3%. And I think that's really a reflection of the unpredictability of the market more generally. So if we, you know, one of the previous questions that we were asked was, you know, how do you manage recovery risk? I think, you know, probably we're at the lower end of that conversion spectrum because we're pretty conservative about how we look at recovery risk associated with a market such as it presents at the moment.

I'll just do one final question to close off and then the rest of the investors will look at answering them after the meeting. You put forward great metrics upon which investors can judge the progress made at LCM. Other than AUM, which metrics or KPIs do you feel are most instructive as a board?

So I think when we look at LCM's business, I think the KPIs that investors should focus upon is, first of all, our investment performance. So we need consistency associated with investment performance. Investment performance drives not only a revenue line, but it drives demand for, you know, the opportunity to invest with us and a whole series of other things. So by that, I'm not suggesting that we need to increase our performance. There's, you know, it's a very buoyant performance. have tremendous demand for investors to participate in our funds. So I think that is one factor. So it's really it's how many commitments we have in a given financial period. So how much of the capital that we have, have we committed during that period? A less important metric invested during a period, financial metrics I've talked about, and then look at the availability of capital, which is are we increasing our funds under management over a period of time? So we've gone from fund one to fund two. We'll be moving in the next four months in all likelihood into fund three. And then the diversification of those capital sources. So not only balance sheet capital, but the leverage on our balance bond or what have you. So it's really those factors that I'd encourage investors to look at in terms of measuring LCM's growth over time.

That's great. Patrick, Mary, thank you very much indeed for updating investors this afternoon. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback. in order that the company can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Litigation Capital Management Limited, we'd like to thank you for attending today's presentation. May we wish you all a very good afternoon.