Litigation Capital Management Limited

Good morning, ladies and gentlemen, and welcome to the Litigation Capital Management Limited investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time via the Q&A tab that's just situated on the right-hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and will publish our responses where it's appropriate to do so on the InvestorMeet company platform. Before we begin, we would just like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Litigation Capital Management Limited. Patrick, good morning, sir.

Good morning. Welcome, everyone, to LCM's presentation of its interim results for the period ending 31 December 2004. I'm joined by David Collins, our CFO, and James Parker, our financial controller. So I want to start with some highlights in terms of the interim period and the first one is the maintenance of our performance. So we had seven realisations during the period which generated revenue of $51 million and that revenue was generated at a multiple of 3.6 times. Now, when we think about that in comparison to our 13 and a half year track record, that is tracking at a multiple of invested capital of 2.4 times. Next thing I want to highlight in the period was some outstanding results that we've achieved in respect of some arbitrations. And these arbitrations are brought pursuant to treaties, typically quite a tough part of the sector to perform well in. Many of our peers have really struggled with funding treaty claims. um we have enhanced our ability to invest into this part of the market through the acquisition of our data and ai platform now these couple of results which i want to highlight were achieved obviously before we had access to that data platform which will only enhance our ability to underwrite the risk of these types of investments but if we look at you know the combined performance of both of those two awards which were successful you know for an investment of um around 15 million us dollars we've generated over 400 million dollars worth of awards um on behalf of our clients and the first one i want to touch upon is indiana resources i'll go into more detail in respect of this but in respect of An investment of $1 million in terms of LCM's direct participation generated US$8.4 million. And in respect to GreenEx metals, although we haven't had a realisation yet in respect to that, Our investment currently today, 2.8 million US and has generated an entitlement of 26.6. So really buoyant results in a traditionally quite tricky part of the market. And we are going to delve into a little bit more detail as we progress through the presentation. the third point is really looking at the momentum that we've achieved in respect of the transition from being a balance sheet investor across to being a fund manager and two i think probably significant points to make here the first one is just momentum in respect of the funds so In respect to the performance of Fund 1, we are now ranked in the top 5% when you compare us and the performance of Fund 1 to private equity investments across the whole of the US market, across all of the data points that they measure us on. So really, really strong performance in respect of Fund 1 and projecting that forward is expected to land in that top 5%. Fund to $291 million investments. We are starting to see realisations in respect of that, but we should see significant progress in respect of that from about 2007 onwards. We have now moved into the marketing stage of Fund 3. We expect the size of Fund 3 to be similar to the size of Fund 2, so around the $300 million mark. We've started that engagement process and we're getting some really strong feedback in what is otherwise quite a difficult market to raise capital, not only for our sector but across the board. Again, we'll delve into a little more detail there. In terms of progress of us looking at the US market, and in particular, the use of the data and AI platform, which we acquired during the previous interim period, we've been showing good signs of progress there. As we've described before, looking at the US market, it is the largest disputes market globally. And we look at that market in a very disciplined way. We're looking at all options in respect to that market. And we've started not only mapping the market, but started to engage with some of the operators there which have a similar culture and a similar track record to LCM. In respect of the AI and data platform that we acquired, that is a proprietary platform that we own and we get the full benefit of, we've now not only brought that AI platform up to date in terms of the data that goes into it, we've actually integrated its use in particular in relation to treaty claims. So that is now part of our internal process in respect of underwriting the risk of these investments and really improving the quality of that underwriting process. The next stage in respect of utilizing that technology is to start to utilize that platform, not only to enhance our ability to underwrite the risk of these investments, but also to generate opportunities or to originate opportunities. and in the period moving forward we're going to start to utilize that platform to originate opportunities for us not only in the in the treaty part of the market but more generally and that's a constant process for us we are building that out we are testing new initiatives and over a period of time we should expect that that will bring some significant advantages to us not only in terms of our ability to originate new opportunities but also to underwrite the risk of them The next point is LCM's capital structure and the availability of capital, not only through adding to our funds management business, but also in terms of optimising the cost of capital with our debt facility. We've refinanced the debt facility we formerly had. We now have a US$75 million facility available to us. We've slightly upsized that from before. But importantly, we've lowered the cost of capital there. So we are now tracking below 13% when previously we're paying 13% in respect of that. Just moving on, a couple of setbacks during the period. A couple of losses at first instance. I'm gonna talk about those in a little more detail. But I think what we need to emphasise here is this is an investment business. Not every investment is going to be successful. And part of what we do is build a platform with diversity. And we look at this on a much longer term basis than simply the last couple of resolutions that we've had. So a not positive outcome in respect of Queensland Electricity and the shareholders of Quintus. Both of those we are pursuing appeals in respect of, and the advice that we've received is both have really good prospects of success. We'll delve into that in a little more detail during the course of the presentation. We're addressing the concentration risk, and in particular, how that concentration risk translates across onto a balance sheet. as distinct from the funds management business. But I want to emphasise here, if you look at our track record over the last 13 and a half years, if you look at the win loss ratio there, we're still operating at a win ratio of 83%, which is well above our peers in this industry. Finally, I want to touch in opening upon our commitments during the period, lower than what we did in the commensurate period in the prior year, but it was across a similar level of applications. And what I really want to emphasise here is that we really are sticking very closely and we are applying the same discipline to that underwriting process. And we are disciplined enough to say that, look, if the quality of the applications we are receiving is not up to scratch, we will bear a lower conversion rate into those and lower commitments. As with many things in respect of this asset class and this business, it tends to be lumpy. And that is something that from time to time we have been criticised for. But not only is our revenue line tend to be lumpy, but also you have ebbs and flows in terms of the rate at which we can generate applications and convert those into viable and quality investments as part of our portfolio. So we are expecting that the temporary slowdown in respect of that conversion to increase. Again, we'll go into a little more detail as we progress through this presentation. So first of all, strong momentum in terms of our transition from being a balance sheet direct investor across to a funds management model. We're going to, as we've done in the past, look at how we can leverage third party capital to enhance the performance of these investments. But just to touch on fund one and fund two, As we mentioned, fund one tracking really, really strongly. And this is incredibly important to have this performance level at where it is in order to enable us to be able to raise future funds. So fund one is tracking at a multiple of two times invested capital. We are aiming to target a two times multiple ultimately in terms of the final outcome of that fund one. that will make LCM's ability to raise funds in the future much, much better. So performance fees to date in respect of that $29 million, we will talk about what the potential upside is in terms of performance fees for Fund 1 as we move through this presentation. In terms of Fund 2, we're coming to the end of the investment period in respect of that, and that allows us really to move into Fund 3. Too early in terms of really measuring the performance of that so we're not getting an enormous amount of realizations coming through expectation probably is by about 2007 we will really see some momentum in respect of fun to and realizations again We are targeting a multiple of invested capital across that fund of two times. We have had some early rather modest wins in respect of that, which has allowed us to return some of the invested capital to those who participated as LPs in fund two. And then moving to fund three, In a pretty tough market, in a market where many of our competitors aren't able to raise capital at all to continue their funds management business, we've got some really positive feedback. So we're really just starting that process now, really encouraging feedback from potentially new investors. of a really high caliber. We're expecting a first close in respect of fund one in Q2, and then a second and probably a final close in Q3. But importantly, we have an expectation that with an early first close, we'll have continuity of capital. And as I mentioned, fund three expecting similar size to fund two. We just go into that next slide. I talked in opening, really touched upon two really successful awards that we have funded. The first one, Indiana Resources, and this was a treaty claim or a claim brought under a treaty in respect of a nickel mine in Tanzania, which had been compulsory and acquired as a consequence of a change in the regime. We received not only a really good return for LCM and fund investors, we also produced a really, really good result for the underlying funded party here and helped them really recover the compensation as a consequence of that nickel mine being compulsorily acquired. And if you look at LCM balance sheet, we recovered $8.4 million in respect of that. And through a combination of direct investment and performance fees, that yielded a multiple of 8.4 times. And if we just move across to, you know, the fund performance in respect to that, you know, performance of, you know, revenue event of 11.2 million generated, you know, a net return of 3.7 multiple on capital. And now I'm going to move across into Green X, which is, an investment that many of the equity participants will be familiar with. It's a treaty claim against Poland. It's related to two high-quality coking coal mines, which were being operated by two entities within the group, one listed entity on the Australian Securities Exchange and one a London entity. We funded two claims, one more under a treaty, one under the energy charter. And if we look at that as a snapshot now of what that performance would look like in terms of that investment, we invested $11.2 million and that generated an award in excess of $300 million on behalf of the funded party. and has generated current gross entitlements for our investment of $67 million. And there's further potential in terms of upside in circumstances where it becomes necessary to enforce. Now, if we look at the metrics that sit behind that, LCM's entitlement would be 26.6 now. That gives us an implied multiple of 9.5 times, really showing how we can leverage third-party capital. and a really good return on behalf of those who participated as an investor in the fund. You know, revenue event or an entitlement now of 40.9. which would imply a multiple of 4.9 times. A couple of factors here to think about, like when you look at the quote from the prime minister of Poland would suggest that the risk associated with having to enforce this award ultimately is probably pretty low. So we're feeling pretty good about that. And just pausing there and thinking about those two recent results in a part of the market which has traditionally been very difficult, We underwrite and manage these investments through to really profitable conclusions without the benefit of the data platform, which we now have. That data platform really enriches our ability to identify risk factors in respect of these types of investments. And it allows us to lean in a little harder into these types of investments, which really do add to the performance of LCM's revenue line over time. Setbacks in the period. I'm sure there's going to be questions around this. Queensland Electricity, that was a class action brought on behalf of consumers of electricity in the state of Queensland. We were unsuccessful at first instance. Now, we always had an expectation in respect of this particular investment because of its profile, because of its size, that it would ultimately be determined at an appellate level. Clearly, we would have liked to have been a successful party at first instance, but this really, other than that, is tracking as expected in that it was going to be resolved at an appellate level. The advice that we have received in respect of appeal is strong. The costs associated with running the appeal are minimal compared to the cost of the claim brought at first instance. And we're really happy with the fact pattern that we were able to establish in the first instance judgment, which is really important, which feeds into the success of the appeal. Our best estimate in respect of a resolution to that is a judgment sometime around mid 26. and you know we're feeling positive about that obviously a setback nonetheless quinta's shareholder class action would be a source you know in terms of fact pattern of greater disappointment to us we managed to achieve a finding from the court that not only had the auditors misled the market, but also the CEO had misled the market through the CEO to the company that didn't translate surprisingly to us into an award of damages. Again, the advice that we are receiving in respect of those is we have really strong prospects of on an appeal. Again, the fact pattern that we've established at first instance is really important in respect of success on an appeal. We're thinking at this stage that that appeal will probably go to hearing in early 26 with a decision sometime thereafter. So notwithstanding a setback, I think what I would encourage investors to do is think about this in the context of a much longer track record, which we will go into in a lot more detail as this presentation progresses. I want to finish up with my part of the presentation. Just in this 13 and a half year track record, we have been providing this granular detail and particulars to the market now for some years. What it does is it allows investors really to look very closely at that granular detail in respect of this. And just a couple of points to think about in respect of this. So we've got adjudicated wins and adjudicated losses and then settlement wins and settlement losses. And what I would encourage people to observe here is that when you build a portfolio with these disputes to invest in, some of them are going to result in a settlement. And you can see the multiples that are generated by settlements are in the order of 2.8 times invested capital. part of that portfolio is going to go to an adjudicated outcome and you can see that the performance of those adjudicated outcomes although they're accompanied by losses are much much greater so you get although you have a binary outcome at the end of those the success really generates and drives a very significant multiple of 5.2 times so you know on that um over that extended period of multiple turns of capital of 13.5 years Across that entire portfolio, inclusive of losses, that's generated a 2.4 times multiple and an IRR of 76%. I'm going to hand over to David now to talk about the financials in more detail. Okay.

Good morning, everybody. So starting on slide 11, as I did six months ago, so I've set out in this slide a brief summary of what happened in terms of concluded investments, new investments and ongoing investments. And I think this is a useful way to kick off because this information really informs what then plays out in the P&L balance sheet and cash flow statements. So on the left hand side, we had seven investments conclude in the first half. There was four wins and three losses. And in aggregate, those cases delivered a 3.7x multiple of invested capital, which is a strong performance and that generated revenue of 51 million Australian dollars. As Patrick described, that result was driven by two significant gains that we had in the investment treaty arbitration space. And those are complex, high-value claims. And when you get them right, there can be very significant rewards. So it's encouraging that we're building a good track record there. In the middle, you've got new investments. So we had 274 applications for funding in the period. That's consistent with what we'd expect, but there was probably a lack of high-quality opportunities. And so that led to the total new commitments figure of $34 million being down on the prior period. I wouldn't read anything into that. The lumpiness is a key part of our business, not only on the case conclusion side, but also on the origination side. And we actually expect new commitments to bounce back nicely in the second half. And we've got a good pipeline of opportunities as things stand today. And maybe just lastly, on new investments. If anything, the competitive environment appears to be moving in our favor. We understand that several of our competitors are actually struggling to raise capital. Patrick mentioned it's not an easy market to raise capital, not only in our sector, but across pretty private markets. And perhaps the shakeout that is sort of long overdue in the litigation finance sector, if that starts to come through, we think over time that could work in our favor. On the right-hand side, we've got the ongoing investments, so 57 individual investments ongoing at the period end. And the table underneath shows you the breakdown of our commitments and also the amounts that we've invested to date split between LCM's own balance sheet and the two funds. So let's move now to talk about the P&L statement. So the seven case conclusions that I mentioned, they produced the 37.4 million of net realized gains that you can see on the fourth line down there on this summary view of the P&L. Underneath those realized gains, we have a negative net fair value movement of minus $32 million. Now, let me just spend a little bit of time on that. That 32 is comprised of two items. So the first is the write-off of fair value in relation to cases that concluded in the period. And then secondly, there's the net movement in the fair value of cases that are ongoing at the period end. So if we start with the first, which is the driver of the negative movement, so that the fair value write-off on concluded cases was minus $34 million. And that reflects the fact that the cases that concluded in the period were already pretty well marked up from a fair value perspective prior to conclusion. So they were being held at a fair value multiple of 3. So as they came in at 3.7x, you can see that there wasn't much uplift versus the value that we had then in the accounts. And as we back out that value in the accounts, know that that's the as i say that was the the 34 million so that's the driver of the negative movement there the second component of the net fair value movement relates to the fair value movement in ongoing cases at the period end and that item was positive one million australian dollars in the period and i would just say look fair value recognition fluctuates over time depending on how cases progress through the different stages of the proceedings the movement that was largely neutral this period reflects positive developments on a number of cases and then that was offset by you know frankly actions that I've taken to position the book a little bit more conservatively particularly in relation to areas where market dynamics and precedent are still developing if we move down so to you can see total income in the period of 4.7 million and then below that operating expenses of 10 million. That's in line with the sort of guidance that we provided previously, and I'd expect a similar amount of OPEX in the second half. We had foreign exchange losses in the period of 2.5 million Australian dollars. That reflects the strengthening of the US dollar in the period, in particular in relation to our debt facility, which is in US dollars. The net impact of all those items is an 8 million operating loss versus the 14 million profit in the prior period. Finance costs declined to 3.6 million, reflecting the lower interest cost on the new facility and a lower average gross debt balance in the period. For the second half, we expect finance costs to be similar to that in the first half level. So bringing that all together gives us a loss before tax of $11.6 million or 8.3 million on a post-tax basis. Move down to the balance sheet. So cash declined in the period, and I'll talk through that on the next slide, which is on the cash flow statements. We just moved down to debtors. So the debtors at the end of December stood at around 37 million Australian dollars. The vast majority of that relates to the Green X award. where we've recorded a debtor balance at a reasonable discount to our contractual entitlements, just to be on the side of conservatism. Then if you look at the 15 million of debtors in the prior period, all but 2 million of that was collected in the last six months. Moving down the balance sheet. So the total value of investments on our balance sheet was 232 million, which comprises the three legacy investments that many of you will remember are held at cost. So that's the 47.4 million. And then the remaining 54 investments that are held in a total fair value of 184.8 million Australian dollars. In aggregate, the investments on our balance sheet are held at a fair value multiple of invested cash of 1.7x, which you can see on the bottom row of this slide. If we move down further to the liability section, so we have gross borrowings at the end of the period of $54.9 million. That's a little lower than six months ago as we paid down a portion of the gross debt when we completed the refinancing. Deferred tax underneath that primarily relates to the investments held at fair value. And so as that value has came down, similarly the deferred tax comes down and other creditors primarily reflects case funding invoices that were received at the period end, but not yet paid. All that together produces net assets of 181.8 million Australian dollars. That's equivalent to around 87 pence per share. And I'll just pause to note that our RNS that went out this morning said net assets was 86 pence per share. That's a typo and the correct answer is 87 pence. So if we move now to the cash flow statement on slide 14. So in the period we collected 29 million of cash from concluded investments and invested 35 million into ongoing investments. Below that, you can see operating expenses and interest. Those are in line with what was presented in the P&L. Modest differences to the P&L are some small accruals. The share buyback concluded in the period, and that alongside the dividend cost 7.9 million Australian dollars. And over the life of the 10 million buyback that was announced after our FY23 results, we repurchased 4.9 million shares of and they have all now been cancelled. The debt repayment of 11 million represents the amount that we paid down on the facility at the time of the refinancing alongside a few transaction costs. So all of those movements brings us to net debt increasing to 40 million at the end of the period. So if we move now to slide 15. So this is a key slide that we've provided First of all, six months ago, and we'll report on this every time we every time that we communicate with you guys. We think it adds value because this is a lovely business, but if you look over the medium term, you can see the underlying trend in terms of what's really happening. So on the left-hand side, it sets out the new commitments that we add each period. In the middle, you can see the total committed capital, which is really the accumulated sum of those new commitments. And then on the right-hand side, you can see the invested capital against those commitments. And I always say it's the growth in our invested capital which I'm really interested in because it's that number which ultimately generates our returns. So if you look in the middle, you can see committed capital declined in the last six months. That's just a temporary issue reflecting the low in new commitments levels that we discussed earlier. And again, as I signaled, we expect that to pick up in the second half. Importantly, invested capital continue to grow. And if we can keep driving that invested capital up and to the right and keep delivering good returns on that investment, then as the business scales, we think this can translate into compelling returns for shareholders. Now, in light of the sort of weaker set of numbers that we're reporting this time and the recent losses that we've experienced, I want to talk about three key areas being concentration risk, first of all, and secondly, we'll talk about losses and how I think investors should think about these. And then finally, we'll talk about the future cashflow and potential of the business. So if we start with concentration risk on slide 16, so the pie chart on the left-hand side of the slide takes LCM's invested capitals, the $142 million that you saw on the prior slide, and it divides that among the 57 ongoing cases. So you can see the concentration risk on the slide reflecting largely a small number of cases primarily in legacy cases from before the fund management business was established, those cases that we are funding 100% of the commitments. And these specific cases have longer than average duration and they've gone the full distance to trials. That means they've got quite a large amount of invested capital into them. These cases will naturally roll through over the next couple of years. But as we transition to the fund management model, the concentration risk to any individual exposure will decline over time. It's worth noting for the first two funds, LCM has been co-investing 25% of its own capital to back any individual investment alongside 75% from the funds. So that will naturally bring the concentration risk down. And then as we look at fund three, we're probably going to bring the co-invest down to around 10%. That will further lower the concentration risk that shareholders bear on any individual investment. So the way I think of this is we're sort of transitioning from this, what was previously a fully balance sheet funded model to a fund management model that will have a better profile. And we are a good way through that transition. There's just a few of the sort of legacy cases that need to wash through for us to make it really to the other side and have that much more diversified balance of investments. If we move now to talk about losses. So again, as Patrick mentioned, like any investment business, not every investment is going to work out. And what we've set out on this slide is the profile of the track record, breaking down where we've invested our capital versus the outcomes. So you can see the number of individual cases along the bottom. So they sum to the 72, which is the entire track record. And then we've bracketed the capital investors into the different buckets of multiples that we've achieved. On the left-hand side, you can see 12 investments or totaling $51 million has been invested into cases that have lost. That's 17% by number and 24% by invested capital. And that percentage by invested capital is larger or probably always will be because when you go to trial and invest more capital, the likelihood of loss goes up due to the binary outcome risk associated with trial. But the corollary to that is when you win a trial, you have the potential to win big. And we'll talk about that as we move through. So if we move on to the next slide and bring in the profits generated on the successful cases, you can see the attractive profile that's produced with very clear asymmetry of risk. The points to note, I think, are first of all that the wins far outnumber the losses. It's that 83% win ratio. Then when we do win, we're typically making 2 to 4x on individual cases against the 1x downside of losses. And then finally, our pricing is designed to capture the upside from big wins if a case performs really well. And you can see that on the right-hand side of the chart. So you can see there, there's a single case that delivers $58 million of profits, outweighing actually the sum of all the capital losses across those 12 individual losses. So an attractive asymmetry of risk And then if we move to the fund management model on the next slide, you can see how that risk profile accentuates even further. So what this is showing you is from an LCM only perspective, which means it includes the performance fees, this is the profile of concluded cases, which is 13 in total, 10 wins and three losses from funds one and funds two to date. So we've dispersed the outcomes, as I said, on an LCM-only basis. So this includes the performance fees. And the aggregate of this outcome for LCM is a multiple of invested capital on concluded cases of 4.7x, which is very encouraging. And half of the profits actually in this scenario comes from the performance fees, really demonstrating that improved risk profile of the fund management model. And again, as our business ages, this is the direction that we are heading in. So we think encouraging for investors over the medium to long term. Finally, on slide 20, before I hand back to Patrick. So we're often asked to provide sort of short term profit guidance. And like other litigation funders, we really say we can't do this because predicting the exact timeline of litigation is extremely difficult. So we can't give you that sort of revenue forecast if you like for the next six or 12 months. But what we can set out is how we think about the revenues and the future cash flow that we are ultimately playing for. And that's what's captured on this slide. And I've broken this down into the in-force business on our books. So that's current investment capital plus the potential performance moves from fund one and fund two, and then set out on the right hand side, the future business or the franchise value, if you like, that we think we can play for if we successfully scale the fund management business. So if we start with the in-force, we've got around $142 million of LCM investment capital into those 57 cases. If we assume we can deliver a 2x multiple on that, that would translate into 284 million of potential future cash flow. And then moving along to Fund 1. So to date on Fund 1, we've earned 45 million Aussie dollars of performance fees. If we assume that that fund delivers a 2x net return to investors, which is what it's on track to do, then there's a further 57 million of performance fees to be collected from Fund 1. If we then move to fund two, where it's still relatively early days in terms of realisations. But again, if that delivers a sort of 2x MOEC net to investors, then we're looking at potentially 150 million of performance fees to be collected from that fund. So if you aggregate all of that in-force business, you're looking at towards 500 million Australian dollars. of future cashflow that we're playing for. Now, clearly that's all contingent on our ability to keep producing attractive returns on investments, but that's something that LCM has been doing for a very long time, and a few recent losses doesn't change that capability. Then you've got the potential from future business, future funds that we raise, and also future co-investment from LCM's own balance sheet. So what I would say is, look, if LCM can continue to generate attractive multiples of invested capital, and if we can scale the business in a disciplined manner to enable that operational leverage that's inherent in a funds management model to kick in, then we continue to believe there's significant share of the value to play for over the long term. With that, I'll hand back to Patrick.