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.
Elevator pitch:
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.
