Assets Under Management AUM

A poorly rated funder

  • Adjusted operating profit up 23% to A$20.2 million
  • Two-thirds of the second third-party fund raised

Litigation capital management (LIT:72p), a litigation funding provider that enables third parties to sue and recover funds from legal claims, issued a profit warning over the summer, citing Covid-related delays. 19 and disruptions to the justice system.

As it happens, adjusted operating profit rose 23% to A$20.2m on revenue up 28% to A$47.3m in the 12-month period to June 30, 2022. Commitments of A$104 million, including third-party funds, were only slightly down on the prior year, which in turn led to a 23% increase in assets under management (AUM) of A$414 million, rising to A$452 million after the end of the period.

Importantly, over $200 million of the group’s second third-party fund has been raised from investors and the trustees expect it to close by the end of 2022. Litigation Capital receives $25 % profits on each fund investment on a minimum rate of 8 percent and earns a performance fee of 35 percent on an IRR of 20 percent, providing an attractive income stream to complement the achievements of its directly held portfolio . Over the past 11 years, the group has delivered an IRR of 79% on all completed cases, including losses, so managing third-party funds is one way to leverage this impressive track record.

Investec analysts have reset their earnings forecast to reflect a more realistic profile of liquidity events and now forecast annual pre-tax profits of A$25.3 million and $47.7 million for next two fiscal years, significantly lower than previous estimates. This implies EPS of 9.6p and 18p, but there is a degree of risk as to the timing of likely settlements. Currently, six investments are awaiting judgment or award and six more final hearings are scheduled in the next six months. However, with shares trading at just 1.5 times book value and a forward price-earnings (PE) ratio of eight, the potential for the group to continue to generate such high returns on investment is modest, even if the duration of the investments should increase from 27 months historically to 36 to 42 months.

So, although the share price fell slightly below the 77.5 pence entry point in Cheap Stock Portfolio 2019, I have a feeling that the holders will eventually be rewarded. Recovery buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

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