IMF Bentham (IMF) was traditionally a litigation funder which provided finance to legal firms purely using its own balance sheet. This business model has worked well with 90% of cases settled or won, generating a ROIC of 144%. However, it has meant very volatile cashflows and as such the share price has traded at a discount.
Growing the Funds Management model
Under CEO Andrew Saker, IMF has evolved significantly over recent years to one where its key growth engine is now its Funds Management operations. For example, as of June 2016, 100% of IMF’s investments were funded via its own balance sheet whereas as of 31 December 2018, this has declined to only 26%. Importantly, much of the infrastructure to develop and run this global funds management business is now in place.
Interest in investing into the company’s investment products has been extremely strong with subsequent inflows being very positive as investors look for alternative asset classes in which to deploy capital. This combined with stringent case selection has enabled IMF to establish four funds to date with progress being made on the launch of Fund 5. The EPV of its investment portfolio as at 1H19 stood at $6.4bn (which increases to $7.6bn if conditionally funded and Investment Committee approved investments are included) with case results expected over FY19 – FY21+. We believe IMF’s EPV can exceed $10bn over the next few years as existing cases roll off and new cases come on. As these cases mature the company should begin to see a far smoother cashflow profile and significant boost in return on shareholder funds.
On balance sheet book:
IMF continues to carry two large cases on its own balance sheet which are its Wivenhoe (Brisbane floods) and Westgem Investments. As recently reported by the Courier Mail, IMF expects the Wivenhoe case to complete mid-year although this could slip into the second half. Maurice Blackburn who are the leading lawyers are quoted as saying they are more likely to win than the defendants. Any such win should lead to a significant financial gain for IMF albeit we believe the case could potentially head to mediation as the defendant stands to lose billions of dollars if unsuccessful. Any legal loss for IMF we estimate, will lead to a sub $20m accounting hit to the P&L for the year of which much has already been sunk and so will largely be an accounting treatment rather than cash outflow.
Similarly, with the Westgem Investment any loss is mitigated by costs already incurred by IMF as opposed to a large cash outflow.
Where could IMF be in 3 years?
With its established distribution network, investment committee and global infrastructure, we believe IMF could be a large-scale funds management business over the next 3 years. As it continues to successfully build this out, improves ROIC and smooths its cashflow we see significant growth in earnings potential and a rerate of its trading multiples to more closely align it with its closest rival – the UK listed Burford Capital (BUR.LN). Under such a scenario we value IMF. at ~$5.00 per share.
Surrey Asset Management owns shares in IMF