Disclaimer: We are shareholders of Litigation Capital Management.
NB: Litigation Capital Management (“LCM”, ticker: LIT-LN) is listed in the UK while its financial reporting is in AUD, as the company was previously listed in Australia. All figures are expressed in AUD and the GBP/AUD exchange rate used in this write-up is 1.71.
With valuations at or near all-time highs, what if we told you that there is an alternative asset class, litigation finance, where some players have been and will be able to double their capital every 3 years? Let us introduce you to Litigation Capital Management (“LCM”, ticker: LIT-LN), a 15-year-old litigation funder operating in Australia and the UK with a market capitalization of A$170m and a net cash position of A$25m. The company is not only a brilliant capital allocator, averaging 2.35x return on capital every 27 months over the last decade, but it is also on the verge of a significant inflection point, shifting its business from investing its own money to managing over A$700m for institutional investors in the next 2 years. Because of a lack of broker coverage and/or because it is unfamiliar with the industry, we believe that the market is asleep at the wheel, simultaneously undervaluing LCM’s legacy business and giving no credit to LCM’s asset management unit. This provides the perfect set-up for a multi-bagger as LCM keep on delivering impressive returns and signals more clearly to the market the financial implications of its push into asset management. Applying an 8% FCF to EV yield target to LCM’s legacy business would mean a valuation for the entire company of A$376m, or 122% above today’s level. Adding the asset management unit would push the valuation up to A$1,090m, 545% above the current market capitalization. Additionally, we believe there is significant upside to AUMs in the asset management division as institutional investors increasingly look for high, uncorrelated asset classes. We would not be surprised to see more funds or an upsizing of the currently announced funds in the coming months. Finally, LCM’s management is first-class, with the CEO and the non-executive chairman being two of the most highly respected figures in the industry. They own c.12% of the company.