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 Investor Meet 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. 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. I want to start with some highlights in terms of the interim period. The first one is the maintenance of our performmance. We had seven realisations during the period, which generated revenue of AUD 51 million, and that revenue was generated at a multiple of 3.6x . 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 2.4x . The next thing I want to highlight in the period was some outstanding results that we've achieved in respect of some arbitrations. These arbitrations 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. 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. If we look at the combined performance of both of those two awards, which were successful, for an investment of around $15 million, we've generated over $400 million worth of awards on behalf of our clients. 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 $8.4 million.
In respect of GreenX Metals, although we haven't had a realisation yet in respect of that, our investment currently today is $2.8 million and has generated an entitlement of $26.6 million. Really buoyant results in a traditionally quite tricky part of the market. 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. Two, I think probably significant points to make here. The first one is just momentum in respect of the fund.
In respect of the performance of Fund One, we are now ranked in the top 5% when you compare us and the performance of Fund One to private equity investments across the whole of the US market, across all of the data points that they measure us on. Really, really strong performance in respect of Fund One and projecting that forward is expected to land in that top 5%. Fund Two, $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 Three. We expect the size of Fund Three to be similar to the size of Fund Two, 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're showing good signs of progress there. As we've described before, looking at the US market, it is the largest disputes market globally. 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. 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.
In the period moving forward, we're going to start to utilise that platform to originate opportunities for us, not only in the treaty part of the market, but more generally. That is a constant process for us. We are building that out. We are testing new initiatives. 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 $75 million facility available to us. We've slightly upsized that from before.
Importantly, we've lowered the cost of capital there. We are now tracking below 13% when previously we were paying 13% in respect of that. Moving on, a couple of setbacks during the period, a couple of losses at first instance. I'm going to talk about those in a little more detail. I think what we need to emphasize here is this is an investment business. Not every investment is going to be successful. Part of what we do is build a platform with diversity. We look at this on a much longer-term basis than simply the last couple of resolutions that we've had. A not positive outcome in respect of Queensland Electricity and the shareholders of Quintis. Both of those we are pursuing appeals in respect of. 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 balance sheet as distinct from the funds management business. I want to emphasize 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. What I really want to emphasize here is that we really are sticking very closely and we are applying the same discipline to that underwriting process.
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. That is something that from time to time we have been criticized for. Not only does 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. We are expecting that the temporary slowdown in respect of that conversion to increase. Again, we will go into a little more detail as we progress through this presentation.
First of all, strong momentum in terms of our transition from being a balance sheet direct investor across to a funds management model. We are going to, as we have done in the past, look at how we can leverage third-party capital to enhance the performance of these investments. Just to touch on Fund One and Fund Two, as we mentioned, Fund One tracking really, really strongly. 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. 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.
Performance fees today in respect of that $29 million, we will talk about what the potential upside is in terms of performance fees for Fund One as we move through this presentation. In terms of Fund Two, we're coming to the end of the investment period in respect of that, and that allows us really to move into Fund Three. Too early in terms of really measuring the performance of that. We're not getting an enormous amount of realisations coming through. Expectation probably is by about 2027, we will really see some momentum in respect of Fund Two and realisations. 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.
Moving to Fund Three, in a pretty tough market, in a market where many of our competitors are not able to raise capital at all to continue their funds management business, we have got some really positive feedback. We are really just starting that process now, really encouraging feedback from potentially new investors of a really high calibre. We are expecting a first close in respect of Fund Three in Q2, and then a second and probably a final close in Q3. Importantly, we have an expectation that with an early first close, we will have continuity of capital. As I mentioned, Fund Three is expecting a similar size to Fund Two. We can just go on to that next slide. I talked in opening, really touched upon two really successful awards that we have funded. The first one, Indiana Resources.
Now, this was a treaty claim or a claim brought under a treaty in respect of a nickel mine in Tanzania, which had been compulsory 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 compulsory acquired. If you look at LCM balance sheet, we recovered $8.4 million in respect of that. Through a combination of direct investment and performance fees, that yielded a multiple of 8.4x . If we just move across to the fund performance in respect of that, performance of revenue of that of $11.2 million generated a net return of 3.7 multiple on capital.
Now I'm going to move across into GreenX, 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, both one brought under a treaty, one under the Energy Charter. 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. It's generated current gross entitlements for our investment of $67 million. 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 9.5x , really showing how we can leverage third-party capital. A really good return on behalf of those who've participated as an investor in the fund. Revenue event or an entitlement now of 40.9, which would imply a multiple of 4.9x . A couple of factors here to think about. When you look at the quote from the Prime Minister of Poland, it would suggest that the risk associated with having to enforce this award ultimately is probably pretty low. We are feeling pretty good about that.
Just pausing there and thinking about those two recent results, in a part of the market which has traditionally been very difficult, we underwrote and managed 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. 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 and because of its size, that it would ultimately be determined at an appellate level. Clearly, we would have liked to have been the successful party at first instance. Other than that, this 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. We are 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-2026.
We're feeling positive about that. Obviously, a setback nonetheless. Quintis shareholder class action, probably a source 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 did not 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 succeeding 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 2026 with a decision sometime thereafter. We're standing 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'll go into in a lot more detail as this presentation progresses. I want to finish 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 a granular detail in respect of this. Just a couple of points to think about in respect of this. We have adjudicated wins and adjudicated losses, and then settlement wins and settlement losses. What I'd 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.
You can see the multiples that are generated by settlements are in the order of 2.8x invested capital. Part of that portfolio is going to go to an adjudicated outcome. You can see that the performance of those adjudicated outcomes, although they're accompanied by losses, are much, much greater. Although you have a binary outcome at the end of those, the success really generates and drives a very significant multiple of 5.2x . Over that extended period of multiple turns of capital of 13.5 years, across that entire portfolio, inclusive of losses, that's generated a 2.4x multiple at an IRR of 76%. I'm going to hand over to David now to talk about the financials in more detail.
Good morning, everybody. I'm starting on slide 11, as I did six months ago. I've set out in this slide a brief summary of what happened in terms of concluded investments, new investments, and ongoing investments. 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 statement. On the left-hand side, we had seven investments conclude in the first half. There was four wins and three losses. In aggregate, those cases delivered a 3.7x multiple of invested capital, which is a strong performance and that generated revenue of $51 million. As Patrick described, that result was driven by two significant wins that we had in the investment treaty arbitration space. Those are complex, high-value claims. When you get them right, there can be very significant rewards.
It's encouraging that we're building a good track record there. In the middle, you've got new investments. We had 274 applications for funding in the period. That is consistent with what we'd expect. There was probably a lack of high-quality opportunities, and that led to the total new commitments figure of $34 million being down on the prior period. I would not read anything into that. Lumpiness is a key part of our business, not only on the case conclusion side, but also on the origination side. We actually expect new commitments to bounce back nicely in the second half. We have a good pipeline of opportunities as things stand today. 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 really private markets. 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. 57 individual investments ongoing at the period end. 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. Let's move now to talk about the P&L statements. 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 realised gains, we have a negative net fair value movement of $32 million. Now, let me just spend a little bit of time on that. That 32 is comprised of two items. The first is the write-off of fair value in relation to cases that concluded in the period. Secondly, there's the net movement in the fair value of cases that are ongoing at the period end. If we start with the first, which is the driver of the negative movement, the fair value write-off on concluded cases was $34 million. 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. They were being held at a fair value multiple of 3.
As they came in at 3.7x, you can see that there was not much uplift versus the value that we had them in the accounts. As we back out that value in the accounts, as I say, that was the AUD 34 million. That is 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. That item was positive $1 million in the period. 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.
That was offset by, 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, you can see total income in the period of AUD 4.7 million. Below that, operating expenses of AUD 10 million. That is in line with the sort of guidance that we provided previously. I would expect a similar amount of OpEx in the second half. We had foreign exchange losses in the period of AUD 2.5 million. 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 AUD 8 million operating loss versus the AUD 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 of the first half level. Bringing that all together gives us a loss before tax of $11.6 million or $8.3 million on a post-tax basis. We move now to the balance sheet. Cash declined in the period. I'll talk through that on the next slide, which is on the cash flow statement. We just moved down to debtors. The debtors at the end of December stood at around AUD 37 million. The vast majority of that relates to the GreenX award, where we've recorded a debtor balance at a reasonable discount to our contractual entitlements, just to be on the side of conservatism.
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. The total value of investments on our balance sheet was AUD 232 million, which comprises the three legacy investments that many of you will remember are held at cost. That is the AUD 47.4 million. The remaining 54 investments are held at a total fair value of AUD 184.8 million. 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, 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. As that value has come down, similarly, the deferred tax comes down. 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 AUD 181.8 million. That is equivalent to around GBP 0.87 per share. I'll just pause to note that our RNS that went out this morning said net assets was GBP 0.86 per share. That is a typo. The correct answer is GBP 0.87. If we move now to the cash flow statement on slide 14.
In the period, we collected AUD 29 million of cash from concluded investments and invested AUD 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 AUD 7.9 million. Over the life of the AUD 10 million buyback that was announced after our FY2023 results, we repurchased 4.9 million shares, and they have all now been cancelled. The debt repayment of AUD 11 million represents the amount that we paid down on the facility at the time of the refinancing alongside a few transaction costs. All of those movements brings us to net debt increasing to AUD 40 million at the end of the period. If we move now to slide 15.
This is a key slide that we've provided. First of all, six months ago, we'll report on this every time that we communicate with you guys. We think it adds value because this is a lumpy business. If you look over the medium term, you can see the underlying trend in terms of what's really happening. 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. On the right-hand side, you can see the invested capital against those commitments. 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.
If we look in the middle, you can see committed capital declined in the last six months. That is just a temporary issue reflecting the lower new commitments levels that we discussed earlier. As I signaled, we expect that to pick up in the second half. Importantly, invested capital continued to grow. If we can keep driving that invested capital up into 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 are reporting this time and the recent losses that we have experienced, I want to talk about three key areas being concentration risk, first of all. Secondly, we will talk about losses and how I think investors should think about these.
Finally, we'll talk about the future cash flow potential of the business. If we start with concentration risk on slide 16, the pie chart on the left-hand side of the slide takes LCM's invested capital, the $142 million that you saw on the prior slide, and divides that among the 57 ongoing cases. You can see the concentration risk on the slide reflecting largely a small number of cases, primarily legacy cases from before the fund management business was established, those cases that we are funding 100% of the commitments. 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.
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 investing or co-investing 25% of its own capital to back any individual investment alongside 75% from the funds. That will naturally bring the concentration risk down. 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. 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. 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. As Patrick mentioned, like any investment business, not every investment is going to work out. 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. You can see the number of individual cases along the bottom. They sum to the 72, which is the entire track record. We've bracketed the capital invested 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. 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. The corollary to that is when you win at trial, you have the potential to win big. We will talk about that as we move through. 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 is 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 is that 83% win ratio. When we do win, we are typically making 2-4x on individual cases against the 1x downside of losses.
Finally, our pricing is designed to capture the upside from big wins if a case performs really well. You can see that on the right-hand side of the chart. You can see there is a single case that delivered $58 million of profits outweighing actually the sum of all the capital losses across those 12 individual losses. An attractive asymmetry of risk. If we move to the fund management model on the next slide, you can see how that risk profile accentuates even further. 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 3 losses from Fund One and Fund Two to date. We have dispersed the outcomes, as I said, on an LCM-only basis.
This includes the performance fees. The aggregate of this outcome for LCM is a multiple of invested capital on concluded cases of 4.7x, which is very encouraging. Half of the profits actually in this scenario comes from the performance fees, really demonstrating that improved risk profile of the fund management model. As our business ages, this is the direction that we are heading in. We think encouraging for investors over the medium to long term. Finally, on slide 20, before I hand back to Patrick. We're often asked to provide sort of short-term profit guidance. Like other litigation funders, we really say we can't do this because predicting the exact timeline of litigation is extremely difficult. We can't give you that sort of revenue forecast, if you like, for the next 6 or 12 months.
What we can set out is how we think about the revenues and the future cash flow that we are ultimately playing for. That's what's captured on this slide. I've broken this down into the enforce business on our books. That's current invested capital plus the potential performance fees from Fund One and Fund Two. I 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. If we start with the enforce, we've got around $142 million of LCM invested 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. Moving along to Fund One.
To date on Fund One, we've earned $45 million 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 One. If we then move to Fund Two, where it's still relatively early days in terms of realizations, but again, if that delivers a sort of 2x MOIC net to investors, then we're looking at potentially $150 million of performance fees to be collected from that fund. If you aggregate all of that enforced business, you're looking at towards AUD 500 million of future cash flow 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.
A few recent losses does not change that capability. You have the potential from future business, future funds that we raise, and also future co-investment from LCM's own balance sheet. 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 is inherent in a funds management model to kick in, we continue to believe there is a significant share of the value to play for over the long term. With that, I will hand back to Patrick.
In talking about the outlook for LCM's business, I think we should pause and think about where we are in the economic cycle and what is happening generally in terms of conditions in the world. We very much are in unprecedented times. There's an enormous amount of uncertainty in global markets. There's an enormous amount comparatively of geopolitical risk currently. We have got an enormous amount of disruption that's being occasioned to global markets as a consequence of tariffs. We've got an enormous amount of uncertainty generally. When you think about that, that sort of feeds directly into demand for LCM's capital.
If you think about this at a high level, if you've got a dispute, whether you are an insolvency practitioner who is looking for funding for that dispute, or you're an SME, or you're any size business, right up to a really large, sophisticated, and well-capitalized corporate, it's exactly the conditions which are prevailing currently where you would give consideration to using an external source of capital, not only to reduce risk, but to help you manage those disputes efficiently. That's the market conditions. Now, let's just apply that to sort of the outlook of LCM. The first thing is we're going to market in respect of Fund Three. We're getting really strong investor feedback in respect of that. Let's just think about what those investors are thinking about in the current market conditions. They're looking for investments which are uncorrelated.
They're looking for investments which are not affected by the turmoil that's happening and the uncertainty that's happening. If we think about disputes and investing in disputes, they are utterly uncorrelated to what's going on elsewhere in the market. Secondly, we've got changeable market conditions. We are still not out of the woods yet in terms of a market correction. I think when we look at the barometer in terms of economics globally and in respect to the U.S. market, the % risk associated with the recession sort of fluctuates on a daily basis depending on what's happening with the market. You've had equities corrections, and you're having an enormous amount of disruption to global supply lines. They are all circumstances which would drive investors in Fund Three towards a strategy like we are offering them.
Secondly, we have the benefit of a really, really good track record, if not the best, compared to our competitors. I just want to move next to our opportunity for ongoing commitments. As I say, the conditions are really very good for us to increase the commitments moving forward. We are doing that in circumstances where we are not reducing the standards to which we apply to ourselves in terms of underwriting the risk and only investing in those particular disputes which we have high conviction for. Finally, looking at our US strategy, we are doing that in an incredibly disciplined way. We are mapping that market. We have got to a point now where we are starting to engage in the US market.
The AI and Data Platform that we have acquired is putting us in a really good strategic position to take advantage of the US as the biggest global market. Tying all of that back to one of the areas that we have performed very strongly and produced some of our best returns is treaty claims. Treaty claims are occasioned as a consequence of a particular sovereign or a sovereign government acting in a way which causes loss to investors. Now, if we think about what is happening globally now, one would think that in the years to come, there is going to be a lot more reliance upon treaties in respect of losses occasioned by decisions which are currently being made in the market. That is why I feel that we have a really strong and positive outlook. Questions?
Perfect. Patrick, that is great. If I may just jump back in there, thank you all very much indeed for your presentation this morning. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab that is situated on the right-hand corner of your screen. Just while the company takes a few moments to review those questions that were submitted already, I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can all be accessed via your investor dashboard.
Guys, as you can see there, we have received a number of questions throughout your presentation this morning. Thank you to all of those on the call for taking the time to submit their questions. Jamie, at this point, sir, if I may hand over to you just to chair the Q&A with the team. If I pick up from you at the end, that would be great. Thank you.
Thanks, Jake. The first question we have for the team is, in the past, you've mentioned possibly issuing a retail bond. Is this still on the agenda?
Yes. Before we completed the refinancing of the debt facility with Northleaf, I think it is probably 6 to 12 months before the company explored the retail bond market. The conditions in the market at the time were not particularly conducive. We chose to essentially refinance with our existing lender. The retail bond market is certainly of interest. It is something that we will think about in the future. It is not something we need to do in the very short term, having just completed the Northleaf refinancing. We do think it is a good market. The investors in that market are familiar with the sector, and it is a good audience that we want to interact with. It is something that is certainly on the table in the future, potentially to be done.
Thanks, David. Next question is, is Burford's migration back towards balance sheet funded investments already reflecting the benefits of LCM's transition to an asset manager model? Look, from my perspective, and I'll get David to back this up, and we've just really gone through this presentation and demonstrated the leverage that we can generate in terms of returns for LCM using third-party capital. I don't think it's particularly beneficial for us to comment upon other business strategies, but certainly utilizing third-party capital through a funds management arm is really, first of all, reducing risk for LCM's balance sheet and secondly, enhancing the returns that we're able to generate through running the strategy.
Yeah, I would just say we think that if you can make the fund management model work, which really means driving scale into the business and being really productive, we think we're at the more end of the right end of the productivity spectrum across our sector. Our general view is the entire sector needs to raise its productivity, just simply looking at measures like operating expenses versus invested capital and thinking about comparing that to very profitable industries like private equity and hedge funds and so on. That's the journey that we think we need to go on. Look, we think there's more ways to sort of, it's not just a single way of baking the cake. There's different ways of doing it. That's what we're focused on. As you think about Burford, I don't really want to comment on their business.
It's better for their management to do that. I would just remind you where we are, we are very much focused on single cases. We've got a really strong track record on that, delivering very high multiples in invested capital. I think they've evolved their business more towards portfolio, law firm lending, that sort of thing. It isn't really a direct comparison. We think we're doing, we're applying the right strategy for our business. Again, as we scale the business and get the operational leverage to kick through, that is what we think can ultimately drive interesting share returns.
I think one more point in respect of that is I don't think either of those two options are mutually exclusive. I mean, if you think about what LCM's model is now, it's really a blend of both. We can dial up the amount of capital that we apply from our balance sheet, or we can dial it down. You have seen that in a transition from Fund One to Fund Two. I think really we are trying to get the benefits of both worlds.
Thank you both. The next question is regarding the buyback program, which recently concluded during the period. Are you able to summarize the rationale and benefits of undertaking the buyback program?
Yeah, I think the buyback program was announced after LCM's FY2023 results. In that period, we produced some fantastic wins. It is LCM's best year yet. The company at that time was in a strong net cash position. The board saw value in the shares. I think you will know that Patrick owns about 10% of the company. Our Chairman has bought about 5% of the company again with his own money. He sees the value, the long-term value that we're all playing for. The decision at the time was taken to proceed with that buyback.
Obviously, where we are today, the share price is a bit lower in light of the couple of recent R&Ss that we've released on the first instance losses on the Queensland electricity and the Quintis claim. This business is a bit lumpy. There will be some volatility in the share price, but we hope that over time, the board will be able to look back and say the average purchase price, which I think was around GBP 1.03 on those share buybacks, ended up being a really good value decision as we hope to generate value for shareholders over the longer term.
Thank you. The next question is an accounting question. When do you record income on the P&L, at entitlement, realization, or at another time?
If you think about an individual case, as that case sort of goes live and moves through the stages of the proceedings, typically in the early stages, we just hold that case at one time's cash investors. That will mean there is no fair value profit recognition and therefore no credit to the P&L. As that case moves through some of the key stages and starts to make progress and we start to get real conviction that the case is evolving in line with our expectations at the time of underwriting the case, you will see that fair value uplift as it moves through and as we sort of get more positive feedback, if you like, on how the case is developing.
As each case uplifts to a multiple that is greater than one time's cash investors, that will lead to a credit being taken into the P&L through the fair value line. If you go back to slide 12, it will come through that net fair value movement line as a positive as the case moves through. That is while the case is sort of ongoing, if you like. What happens at the back end? When the case concludes, what we are interested in and what shareholders are interested in is how much money did you make on that case, not the fair value. What we do then is we back out all of the fair value that has historically been recognized and replace that with the actual realization, the actual MOIC.
For this period, that would be the 3.7x multiple of invested capital. Ultimately, as you would expect, shareholders get in the P&L the actual cash result. In the time leading up to the case concluding, we recognize some fair value. We try to do that in a sort of conservative manner. As we look at the balance sheet, which is on slide 13, you can see that we're holding all the cases on the balance sheet in aggregate at 1.7x cash investors, which is a bit of a discount compared to the track record, which, as Patrick highlighted, is currently around 2.4x.
Thanks, David. A few investors have asked for an update. I know you touched on this in the presentation on the GreenX case and how things are going in Poland. Could you please just provide an update on sort of cash outcomes there?
I think the first thing to observe is from a legal perspective. We, in respect of both the Energy Charter claim and the treaty claim, were successful in aggregate an award of over AUD 500,000,000. Both of those two awards have been challenged. The first one's been challenged in Singapore, and I think we have a hearing date in respect of that challenge already. Statistically, the prospects of succeeding in one of those challenges is exceptionally low. This is not an appeal on legal issues. It's not an appeal on factual issues.
It's a really, really narrow challenge. Secondly, there's been a challenge brought here in the London Superior Courts. Both of those, if they go their full distance, will probably take around 18 months to conclude. I think then we look beyond that to think about whether we will need to actually enforce those. I'd be really surprised if it was necessary for us to actually enforce.
Thank you. Sort of speaking more generally, what additional operating expenditure, for example, new hires or investing in AI, would be required for expansion into the US market?
Sorry, Jamie, the TV is threatening it's going to turn off. We're a bit distracted there. Let me just complete the answer on the GreenX. The key thing to note is, as Patrick was saying, we've got two awards there. For Poland to overturn, they have to win twice. Now, the likelihood of winning on one is very low. Winning twice is very difficult. You'll see from the quote that we put from Donald Tusk on the slide that we think they realize they're going to have to pay.
It's just a matter of time. In terms of the sort of financial recognition, if you like, we funded that case 25% from our own balance sheet and 75% from Fund One. Across the aggregate of that, we're entitled to $67 million currently. That's actually growing with time. We may also provide more funding for the enforcement, the set-aside proceedings. Jamie, can you still hear us?
Yes, I can hear you.
Sorry, the TV's turned off, but I'll keep going. We may end up putting more capital in to finance the enforcement proceedings. Currently, as things stand, we're entitled to $67 million. We have split that on slide seven so you can see how much flows to LCM, inclusive of performance fees, and how much would flow to the fund. We have booked a debtor at the moment, a little bit below LCM's entitlement. You can see that on the slide. That is just a conservatism thing. We are still interested in getting our full contractual entitlement. That is how we will proceed from there.
I can see that there is another question about expropriations and what have you. It is probably not a bad segue. I can see that on the screen. This part of the market is a part of the market. When I am talking about that, I am talking about energy charter and treaty claims, which has been poorly addressed by our competitors. Now, I think the vast majority of litigation funding outfits now lean away from doing anything in the treaty space. There's only a very small handful of us that actually are prepared to invest in this part of the market. It's incredibly specialized. It is something that you really got to have a really firm handle on how to underwrite the risk of those. You've got to have really good experience in terms of that. Now, we've built that track record over a period of time.
We've only just enhanced our ability to do that, both the underwriting process and the origination component of that through the acquisition of the AI and Data Platform. Now, if you think about what's happening globally, globally, not only are expropriations increasing, but there's also an enormous amount of turmoil happening currently in respect of tariffs and the like. One would expect that there's going to be a lot more activity and a lot more resort being had to entitlements which arise under treaties in the future.
I think one of the questions, or part of this question is, how do we compete with Burford in respect of this? Burford and LCM, and probably a tiny handful of other investors, are the only really funders which are investing capital into this part of the market. I think we've got a significant advantage over others because of the AI capacity that we've got. I think we compete really well with Burford in that part of the market.
Jamie, there's a question there from Paul Ora, I can see on the screen. Why is the market difficult for litigation funders? Talk us through that, please. Let's have a go at that one. Basically, litigation finance is still a relatively new asset class. The investors that invest into our funds historically would have invested into private equity, venture capital, and so on. They compare the performance of our asset class versus those other asset classes. I would say litigation finance in general as an asset class has probably done a bit worse than those. What's interesting is the dispersion of performance is much wider in this asset class than it is in those more mature classes. We interpret that as being basically the good managers. You get more alpha, if you want, from the better managers.
LCM is really to the right-hand side of that distribution where we want to be among the best performers in the sector. Hence, we think we can raise capital. A lot of our competitors have not done a fantastic job. The track record that they would show is not up to what LCM is showing. That is sort of why we think we are in a strong position. We are confident around fund three. If our competitors are out there struggling, that is actually not a bad thing. Hopefully, that will mean more opportunities flow to us over time.
Okay. Thanks, David. I think it is sort of time for one last question. Just going back to what I asked you earlier in terms of what additional operating expenditure would be required for US expansion. Can you just elaborate on that?
Jamie, just to be clear, we are happy to go for another 10-15 minutes. There are a lot of questions, and I think there are a lot of questions answered, so we do not need to cut off. OpEx, what I mentioned earlier on, the guidance for the full year is essentially a doubling of what we did in the first half. We have actually had a big focus on productivity across the business in the last six months. I'd like to see that OpEx coming down over time. For now, we'll just say expect in the second half a sort of doubling of the $10 million that came through in the first half. In terms of financing the US expansion, Patrick spoke about this earlier on, what we're not going to do is just pile in there and hire a load of former lawyers and build up.
We could very easily sort of spreadsheet, hire six or seven lawyers. Each of them is going to produce so many cases. In Excel, it would look fantastic in terms of the potential profits. The real world is much more difficult than that. We are thinking about how we can be intelligent as we move in. We have got discussions underway where we are seeing business from other successful funders in that market. We may look at co-funding opportunities. Patrick spoke about the AI technology and some of the internal pilots that we are going to run in the second half. Those are very much focused on the US market where the data environment is richest. We are trying to do this in an intelligent way.
We have seen other funders go into that market and then several years down the line have to retreat because they have built up too much OpEx and they have not got the faster payback that we would be looking for. At the moment, we're not giving analysts or investors a number to stick into models in terms of that's the cost that you can expect. We're still formulating that strategy and just thinking about what's the smart way of doing it rather than just piling in and hiring a bunch of people. I hope you can sort of understand the context there. We're trying to do this in the right way rather than just go into it for the sake of being able to say that we've entered that market.
Thank you, David. The next question's more in the detail in terms of the FX loss that you highlighted earlier. Can you just give a little bit more color on that?
Yeah. If you think about the nature of our assets and liabilities, on the asset side of the balance sheet, we are primarily, because of the history of the business, Australian dollar assets and GBP assets. The financing from the debt side, the first debt facility was just US dollars. You essentially had US dollars on the liability side of the balance sheet, not matched by US dollars on the asset side of the balance sheet. The FX loss in the period is just that stronger dollar, the impact on that US dollar loan. What we have done in the refinancing is we now have the ability to draw on that facility in US dollars, GBP, and Aussie dollars. Basically, where we are now, we are better positioned from a foreign exchange asset liability matching perspective.
We've got some of the loan facility in Australian dollars and GBP. Over time, as we use that facility, we'll try to align that so that the currency matching is better from an asset liability perspective. Therefore, that FX movement in the P&L will be less noticeable. It is worth noting that the US dollar did strengthen a lot in the back end of last year, which is the first half for us. That is why it was perhaps more pronounced than you might expect.
Very good. A few investors have asked in terms of Fund Three, why the co-investment by LCM will drop to 10% and whether that will alter your performance for your return on capital. Could you explain that, please?
If you think about it, it's that transition to the fund management model. When we first started out with Fund One, we obviously had a balance sheet of historic cases, and there was an expectation of cash flow coming off of that balance sheet. We could very happily co-invest 25% of the capital, and we did the same thing on Fund Two. Where we are now, there is less historic balance sheet cases, if you like. We think, I showed some of my slides, the improved asymmetry as we moved to that funds management model. This is sort of the next step in my mind. The beauty of it is a 10% co-invest.
If we compare to other hedge fund managers, venture capital managers, and so on, 10%, the investors in our funds still like that because that is a high number from their perspective in terms of alignment of interest. They do not typically see anywhere near 10% from other fund managers. That is attractive from our perspective. It is really just trying to transition more to the funds management business. The key thing is driving the scale. If you can achieve that and keep the high multiples, the potential shareholder returns will drop out and will be much more interesting. Essentially, as we diagnose where we are, we think we are really good, the investment in good business with the investment track record performing really well. We just need to scale it more for it really to spit out compelling returns at a bottom-line level for shareholders.
Thank you, David. The other question that has come in here is, how many cases was the AUD 35.4 million invested in?
Yes, it was a rare and eight cases in the period.
Okay. The final question is, in terms of cash return to shareholders, are management willing to pause dividends to buy back shares when the market presents opportunity, or are dividends still the priority?
We think the decision on that, as ever, the dividend has always been, we've never been an interim dividend payer. That is a decision that the board will take at the year end. That is a decision for the board to consider six months from now.
Great. Thanks, David. I'll invite Jake back on from IMC just to wrap up now.
Perfect. Thank you, guys. That's great. Thank you very much indeed for being so generous of your time there and addressing all of those questions that came in. Of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended. Patrick, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments just to wrap up with, that'd be great.
Look, I think market conditions globally, the general uncertainty in respect of global economies, I think geopolitical risk and all of the uncertainty which is created as a consequence of those factors are really going to drive demand for LCM's capital. Secondly, you're seeing a market correction, which is really going to reduce the competitive landscape for LCM. You have enhanced circumstances where we can get the money to work. We have a really strong track record, which we should be able to attract meaningful amounts of investment capital in an environment where competition is reducing. I think all of those factors position LCM incredibly well for the time ahead.
Perfect, Patrick. That's great. Thank you all once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order for the management team to really better understand your views and expectations? This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Litigation Capital Management Limited, we would like to thank you for attending today's presentation. That now concludes today's session.