Good morning, ladies and gentlemen, and welcome to the Litigation Capital Management Limited full year results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Just simply type in your question and press Send. Given the significance of attendance on today's call, not every question will be able to be answered during today's meeting. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and if you could give that your kind attention, I'm sure the company will be most grateful, and I'd now like to hand over to CEO Patrick Moloney. Good morning.
Good morning or good afternoon, good evening, depending upon where you are in the world. Welcome to LCM's full year results presentation for the financial year ending 30 June 2023. I'm accompanied by Mary Gangemi, our Chief Financial Officer, who will talk to our financial performance throughout this presentation. If I could start with highlights. This for LCM is really the culmination of some really focused efforts to build the scale of this business. What we're seeing in this financial period was some of the realizations which are coming through or the results of that building scale. First of all, realized revenue or income for the period on a consolidated basis of AUD 181 million, which is a record for LCM.
AUD 84.2 million of that revenue or that income was directly attributable to LCM and its balance sheet. Moving to adjusted profit before tax for the relevant period, AUD 53.9, of which AUD 16.2 related to fair value movements. So statutory profit before tax of AUD 42.7 million, again, that's our best result historically for LCM. This is a year where we have transitioned into fair value. That really brings us in line with our peers and makes us comparable on that basis. It also increases the transparency and the information set that investors will have in terms of the progress of our portfolio through its evolution. So we've got a total portfolio value at the end of the period of AUD 428 million applying fair value to it.
In terms of assets under management, we've had a significant increase, $484 million at the end of the financial period, 30 June 2023. As at the end of August, that had risen to $552 million. Commitments were up significantly on the prior periods. They were $104 million for the financial year ending 2022, up to $176 million in the period just passed. Capital invested similarly, up significantly, $68 million in the prior period to 30 June 2023, $95 million.
As a consequence of the financial performance during the relevant financial period, the board has declared a dividend of GBP 2.25 P, which is encouraging because it's a reflection of us really transitioning out of the period which was interrupted as a consequence of COVID and the like, and the culmination of our efforts to build scale in this business. The board is also announcing a buyback of AUD 10 million over the next 12 months. That's really in recognition of what the board sees as, you know, value in us buying back our own shares from the market. We think, and we recognize, I think, that shares are trading below what the inherent value of this business is.
Moving forward now, looking at the KPIs, which we have set for ourselves in terms of measuring the performance of this business, and really, that's across three broad sectors. The first one is, you know, building the portfolio, and that at the front end of that is, you know, through applications. We've had, you know, applications committed with the prior period, 434 as against 442. We have a significant increase in the amount of capital committed, and that tends to indicate that the quality of those applications is improving because we're getting, you know, more commitments out of a similar number of applications. Then in terms of capital actually, you know, invested, you know, across our portfolio, that's gone from AUD 68 million up to AUD 95 million. We're seeing, you know, encouraging increases in all of those numbers.
The next thing that we measure ourselves is in terms of investment performance. You know, on a 12-year basis, our Return on Invested Capital has actually gone up from our previous reported number from a Return on Invested Capital of 1.63x to 1.78x. If we look at the cumulative or portfolio IRR, it's reduced by 1%, but still holding at a very high and encouraging level. So that is every single investment which we have completed over the past 12 years, inclusive of losses. If we then look at the Return on Invested Capital on a 3-year running period, we're still seeing very healthy numbers of 2.09x compared to our 12-year track record. Then if we can move to Assets Under Management.
At the end of the financial period, we're just under AUD 500 million of assets under management. As at the end of August, that has increased to just above that at AUD 550 million. Move across to our financial review. I'll hand over to Mary to talk to that.
This year has been a transformational year for LCM, and we really are starting to see the benefits of the asset management model, and we're very pleased with the realizations of some of the investments we've made in our first fund. They have translated into realizations from investments of AUD 84.2 million. That's up 78% on the prior year. This slide is trying to actually create a bridge to show investors what it would have looked like under our old reporting standards, and then overlaying fair value. The realized gross profit, like for like with what investors are familiar with seeing in the prior year, was AUD 51.5 million, compared with AUD 30.9 million. Again, an increase of 67% there.
Adjusted profit before fair value and tax at AUD 37.7 million is an increase of 95% on the prior year. Overlay on that, the realized gains from the fair value transition, that's an extra AUD 16.2 million, and that brings our adjusted profit to AUD 53.9 million, in line with the prior year, based on a fair value basis. Statutory profit before tax is AUD 42.7 million, broadly in line with the prior year. The resolutions from the investments in the fund have increased cash to AUD 83 million from AUD 29.3 million, placing us in a strong position.
Total capital invested, again, broadly in line with last year, at GBP 36.3 million, and the value of the assets in our portfolio of investments is sitting at GBP 203 million versus GBP 186 million in the prior year. This slide is just providing a financial snapshot, broadly on an LCM-only basis, with the exception of the assets under management, which is sitting at $484 million as at the year-end, and it's increased to $550 million as at the end of August. The value of the portfolio of investments, what we've tried to show here is that we've demonstrated how that's moved, under the restated numbers year-on-year, moving from GBP 137 million at the end of 2021, up to GBP 203 million at this last financial year period. Cash generation was strong.
As I said, a lot of resolutions in the first fund flowing through now and increasing our cash position to AUD 83 million at the period end. A lot of investors will be familiar with this slide. This is just a waterfall which shows the movement in our cash. The starting position, AUD 29.3 million. Again, a lot of the movement in our cash position is attributable to cash generated from the realization of investments as well as capital deployed into those investments. We've maintained discipline with our operating expenses, and they're broadly in line with the prior year. We have seen an increase in the interest expense, and we did draw down on the facility early on in the fiscal year.
Post-balance sheet, we have actually started to pay down some of that balance, but our closing position is AUD 83 million. This year we looked carefully, and we worked carefully with our advisors at, transitioning to Fair Value. There was a lot of work that went into this with our external advisors, as well as applying a lot of our experience historically, and testing that on the book, retrospectively. The valuation methodology, which we've come up with, we believe is, and we'll demonstrate this in the next slide, is, is providing us with a lot more transparency in the underlying value of the portfolio of investments on a line-by-line basis. We take a look at the individual investment.
What we see is observable milestones, while not to the external market, but observable milestones in that particular investment as it progresses through the judicial system or the arbitral system. We apply discounted cash flow to each and every one of those investments based on certain risk profiles, the cost of capital, and we just measure that at each period end. We've drawn upon 25 years of experience and our unparalleled track record with respect to the resolution of investment, and we subjected that valuation framework to extensive fact-testing. Our investment process has not changed, nor has our underwriting process, so we believe that we've come up with a good framework that provides more clarity and more visibility to investors on how our portfolio is progressing.
This slide is just showing the impact of the last four resolutions. The light blue bar chart basically shows the last four resolutions and how they were held at cost at each period end. And then the dark blue, on the right-hand side of the light blue chart is showing how that... When those investments were run through our framework and our valuation framework under the current model, how they would have been valued, and through the restatement, what they would have been held at, at each period end. And then the gray bar chart on the right-hand side then shows how the-- what the final resolution with respect to those investments were. And you can see the valuation framework is providing a fairly reliable measure there. Put it on the next slide.
I'd actually like to just go back and just make a couple of other points in respect of, you know, the added transparency and the information set that investors will get through fair value. So if we look at the bar chart on the right-hand bottom, that's an arbitration which we funded. It's our most recent revenue event or realization. You know, under the old holding at cost, you know, investors would have had visibility on $8.4 million worth of investment at December 2022, and that's resolved prior to the end of the financial year, and it's we have generated $67.7 million worth of revenue from that one investment.
So you can see now, if you look across, the dark blue bar charts in respect to that investment, you can see progressively that investment increasing in value over the period of its life, sitting at $58.3 million and then yielding an actual cash result at realization of $67.7 million. So just wanted to highlight that this really is providing investors with a lot more information and a lot more transparency and visibility on the progress of these investments or the pool of investments. Just moving on to our operational review. So I want to touch first of all, on the market conditions. Now, there's probably three aspects of these market conditions which I want to highlight.
And the first one is, the uncorrelated nature of these investments, particularly in a pretty volatile market, which is pretty unpredictable. So if you think about what we invest in, we invest in a dispute. Ultimately, that dispute is adjudicated by a judge of a court, or it's resolved through a commercial negotiation. Now, irrespective of what the prevailing economic circumstances are, the political circumstances that might be prevailing, the geopolitical risks associated with the war in the Ukraine and the like, the judge does not apply different legal principles depending upon what those conditions are. So the ultimate result of these investments is utterly uncorrelated to what's happening more widely in the market. So a really, really important feature, I think, of our investment class or our investment strategy, particularly in markets such as these.
The second highlight that I want to identify is the countercyclical nature of the litigation funding industry more generally. What I mean by that is, you know, what happens when we have market conditions as they present at the moment? We have a lot of uncertainty in global markets at present. We have an environment of high interest. We have geopolitical risk associated with the war in Ukraine that is disrupting supply lines and making business very difficult. Now, the culmination of those in respect of the economy is there's a lot of strain generally in economies across the territories in which we operate. Now, those market conditions tend to drive demand for LCM's capital and indeed capital across our whole industry. We tend to operate in uncertain times and in, you know, recessionary cycles.
We tend to operate and see a lot more opportunity than potentially we do when the markets are more stable. So, you know, market conditions for us are really conducive to driving demand. And then finally, I just want to touch upon some market consolidation, which we're seeing generally in the litigation funding industry in some of the jurisdictions or the territories in which we operate. We're actually seeing a reduction in the competitive landscape, which is really providing us with some really great opportunities to, you know, get a foothold and get more market share in some of those markets in which we operate. So those are the three, really, market conditions that I wanted to touch upon, most importantly in respect of the market conditions which we're seeing in the marketplace.
Next, I want to move on to the portfolio of disputes which we're managing. So the first slide here depicts our direct investments. That is, the investments where we are utilizing directly balance sheet capital to directly invest into these investments, and they fit into two categories. The first one is we have a $73 million portfolio of investments, which LCM is funding 100% of the capital commitment. Secondly, we have a co-investment portfolio, where we are using LCM's balance sheet capital to co-invest with our funds management business. That currently sits at $153 million from LCM's balance sheet side. Of those, we've already invested or deployed $105 million, leaving $121 million still to invest.
What you can see from that is we are very much transitioning from LCM using its balance sheet capital to fund 100% of the capital commitment of a dispute or the budget of a dispute, into a co-investment model with our asset management business. So in respect of every dollar that we have of balance sheet capital, we're diversifying the risk, which is obviously very healthy. As investors would be familiar with me saying, we build these portfolios of disputes with diversity, both across jurisdiction and across industry sector and across time. What we can see here is in the split between the APAC region and the EMEA region, we're seeing an increase of our portfolio here in the Northern Hemisphere or in the EMEA region.
We should expect to see that because we are operating in large economies, and in larger economies, you have more economic activity, which leads to more disputes. Just moving on now to Fund I. As investors know, Fund I was $150 million. It's been fully committed. We have AUD 221 million worth of commitments there. AUD 138 million of that has already been invested or deployed. We're seeing again, a similar, a similar diversity across that portfolio. We're ensuring not only that we have disputes coming from a diverse range of jurisdictions, but also diversified by type and by industry sector. We're ensuring that no one individual investment dominates that portfolio, such as to create concentration risk. Finally, moving to Fund II.
Fund Two, we closed during the past financial period at $291 million, just shy of the $300 million that we were targeting. We have started to commit that. We are currently at about 40% committed. We should expect to see that probably fully committed within the current financial year or in the next 12 months, which will allow us to move on to Fund Three. So we have AUD 148 million Australian dollars committed to that fund, and we're starting to see early deployment of about AUD 12 million as at the end of the financial period.
Again, we'll build this out in a similar way to what we have with our direct investments and with Fund One, such that we have diversity across industry sector, jurisdiction, and it wipes out from concentration risks. I want to touch upon the discipline that we apply in respect of growth. So you've seen LCM and the management team really build out the platform we've got that we're operating. That really gives us access to more disputes globally for investment, but we're doing that in a disciplined way. So this slide really depicts our OpEx against the size of our assets under management at any particular time.
It dates back to prior to us listing on the first public market back in 2016 on the Australian Securities Exchange, right through to 2018, when we listed in London. You can see that we've settled in to a position where we've got pretty predictable OpEx at 3% of our assets under management. We do really focus upon applying discipline at the same time as growing our platform. Then finally, I want to look at the performance metrics of the dispute investments, which we've concluded. I touched earlier upon in the presentation on our 12-year track record. This breaks that 12-year track record up into 3-year running periods or rolling periods.
We should think about three-year rolling periods as being important, because that is a sensible time or an average time that we think that we will ultimately land in terms of the lifetime of these investments. Historically, the life of these investments has been between 25 and 27 months. We've encouraged investors to think moving forward, for a number of reasons, that probably sort of 36-42 months is where they will land. We've split our performance metrics up into three-year rolling periods. Really interesting, what we can see here is across that 12-year period, in terms of the IRRs, they're remarkably similar, and they stay within a relatively tight band. We're seeing fluctuation in the multiple invested capital, the Return on Invested Capital .
So we're actually seeing a strengthening of the performance in the last 2- to 3-year rolling periods, which is really encouraging. I then move to outlook. So LCM continues to build the scale of its platform, and we're looking at really three aspects to that in terms of building out the scale. And the first one is our capacity to select the best quality disputes to invest in, so it's our underwriting process or our rigorous due diligence process. And as we build our scale, we need to ensure that we maintain the discipline of that task, so that we can maintain the performance metrics which we've enjoyed over our full history, but most particularly in the last 12 years.
We're very focused, not only building scale, but really very much having the discipline to stick to the methodologies which we've developed over many years, to work out what the risk, the risk of these investments are, and to seek only the best of those investments. The second aspect to building growth is to have a diversified capital structure. In terms of that, we are thinking and we are exploring going to the market with a retail Sterling bond issue. We're in the early stages of looking at that, but that will really give us access to another capital source, in addition to the ones that we're already utilizing.
Secondly, we expect that we will fully commit our second fund within the next sort of 12-month period, which will allow us to go to market and raise a third fund. So we're in a fortunate position, based upon our performance, really in terms of investments, of having access to a number of different diversified capital sources in terms of building the scale of our business, and most importantly, building out the portfolio of dispute investments we've got, such that we can diversify the risks that investors are exposed to. And then finally, it's the origination capacity of our platform, and that is really utilizing the skills that we have developed over many years to underwrite the risk of these investments and the capital that we have got access to.
We need to identify the best possible quality disputes globally, and that requires us to build out our platform such that we can get access to those. Those are the three aspects of our business which we are very much focused upon in terms of building the scale of this business. Then finally, I want to look at the outlook of the business. So first of all, we've got a growing funds management business. We are seeing the resolution of a number of disputes in Fund One. They are showing exceptional performance metrics. Those performance metrics are increasing the demand of LP investors to participate in future funds. So we anticipate fully committing Fund Two, and then sort of moving into our third fund, I should say...
Now, that funds management model is allowing us to, or it's adding to the organic generation of capital onto our balance sheet, and through our balance sheet, equity investors get the benefit of that. We're looking continually in terms of new territories that we can consider in respect of moving into. So we're getting a lot of inquiry coming to us out of the U.S. and out of Canada presently, and that is a reflection of the fact that there's a contraction in terms of competition in those markets. We're not currently marketing into those jurisdictions or those territories, but we are seeing incoming inquiry. So we're looking at those territories, obviously, in a very disciplined way, and the same way that we have enjoyed expansion in the past.
We're also looking at our capital structure more generally, the retail bonds, diversifying the capital that we have available to us, which is a distinct differentiator for LCM against most particularly some of our private competitors. The market conditions, as I've touched upon previously, are very conducive to driving demand for LCM's capital. We expect that those uncertain market conditions will continue for some time. We're seeing increased numbers with respect to insolvency events, both in the United Kingdom and across the balance of the territories in which we operate. Which is a real sweet spot for LCM because we have vast experience in terms of funding insolvency and restructuring related disputes. So when we look at the general outlook and the availability of capital that we've got, we're looking very positively in terms of the years ahead. And we'll now move to questions.
That's great, Patrick. Mary, thank you very much indeed for updating investors this morning. Everyone, please do continue to submit your questions using the Q&A tab just situated on the right-hand corner of your screen. But just while the company take a couple of moments to review some of the questions submitted already, I just wanted to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your Investor Meet Company dashboard. Firstly, thank you to everybody for your engagement this morning. There was a considerable number of questions. If I may just hand back to you, Katie, if I may just ask you to read out the questions where it's appropriate to do so, and I'll pick up from you at the end.
Thank you very much. Firstly, will the company continue to produce accounts under the historical cost and fair value accounting? There's great value to both approaches, and historical shows the most conservative view.
We won't be producing accounts under Historical cost accounting moving forward. There's obviously a transition period here where we wanted to provide investors with a level of comfort with respect to the transition. We will be providing just enough disclosure for investors to be able to understand, you know, the position in a similar manner, pulling out the Fair value realizations and the deployments both on a third-party basis, a consolidated basis, an LCM standalone basis, and where we feel that there's value added with respect to more disclosure around how we account for this moving forward, we'll obviously refine that messaging and ensure that we provide as much transparency around that as possible.
Thank you. There's a few questions around the GreenX case. Are you able to give any updates about that?
So the GreenX case has attracted quite considerable interest from investors. We have had a final hearing before the arbitral panel in respect of that particular dispute. We are waiting on an award or a partial award, depending upon how that comes through. I can't really give any guidance in respect to that. It's very much in the hands of the tribunal. But, you know, we would expect to get a resolution in respect to that most definitely in this current financial period that we're in.
In terms of the fair value accounting, can you provide any detail about what effect moving to will have on cash flow in respect of tax payments?
Fair value won't have any effect in terms of the actual cash outflow. It's a timing difference, very much akin to a provision or an accrual. The tax becomes payable upon realization.
Thanks. Looking at the closing of Fund II, can you provide any details about the final amount raised and the timing?
So in terms of Fund 2, we were targeting $300 million. We ended up doing a final close at $291.9 million, short of that target. I think that the fact that we were able to close that Fund 2 very, very close to what our target was in pretty difficult circumstances in terms of what the market was is a real testament to LCM's track record. So we were very, very pleased with closing our funds in such close proximity to what our target was. So I think it was really a direct reflection of market conditions.
I should add that, you know, one of the reasons why we're seeing a bit of consolidation in some of the territories in which we operate is because other participants in the market have not been able to gain access to capital in the same way as LCM. So we feel pretty confident and fortunate to close very close to our target of $300 million.
Okay. Has the company been approached by private equity?
No.
What has been the feedback from the Fund I investors? Have they recommitted to future funds already?
Yes, so first of all, in terms of the closing of Fund One and into Fund Two, all of the institutional investors in Fund One participated in Fund Two. They all increased their investment going into Fund Two. Some of those cornerstone investors have contractual rights in respect to future funds, I think in respect of at least Funds Three and perhaps even Fund Four. So, we are seeing tremendous support from those institutional investors in respect of the funds management business.
How will LCM deploy the large cash balance with limited balances left on Fund Two to commit? Are the gains being recycled back into Fund One for future investments?
We have the capacity in respect to Fund I and Fund II to recycle our capital and reinvest, depending upon the timeline in respect to those. In terms of fully committing Fund II, we are currently at around 40% committed in respect to that. Given the demand for our capital and the economic circumstances and us building out our platforms, we have added some really experienced talent to our London office. We've expanded our Singapore team really to respond to demand coming out of both of those jurisdictions. We're very confident that we will have Fund II committed to such an extent that we can start marketing Fund III within the next 12 months.
Thanks. Again, just looking at the fair value accounting, and how that's in line with the broader litigation finance industry. Question one would be: What plans does management have to build trust with the broader investing company?
Let me start with that, and then I'll hand on to Mary. I mean, I think what investors really need to recognize is the fact that LCM is a really... LCM has a really long history in this industry. So we're one of the pioneers of this industry. You know, LCM's been operating in this industry now for 25 years. Over that period of time, we have managed, invested and managed those investments, 250 of them through to completion. We currently have a portfolio of somewhere between sort of 55 and 60 separate investments. So we have a data set to draw upon, which is, you know, larger than most litigation funders in the market.
So we have, you know, a very large, a very long history, a lot of experience, and a data set, which enables us to draw upon to, accurately predict the value of these and the outcome of these investments. So the second observation I'd make is that, you know, LCM has been very conservative in the way that it has accounted historically. LCM's business has evolved, particularly in terms of funds management, such that we have to move into, IFRS 9 in respect of the way we report to the market. But we have chose historically to be very conservative, and investors should, assume that we will continue with the same conservatism. I'll just hand over to Mary, who's probably got some additional points.
Yeah. I mean, there's not much to overlay on that. The slide that we prepared was in an effort to try and provide visibility around how those last four investments would have looked under historical cost accounting versus IFRS 9. I-in developing our framework, there are a number of things that we looked at, and the... I think to probably give investors comfort is there is a framework that's in play, and that framework has been built in a manner that it minimizes management override. We are relying on the observable milestones with respect to those individual investments, and that's how the matter's progressed throughout the process. There is minimal management intervention, and the framework has been developed in such a way, hopefully to provide investors with comfort.
Thanks. And then part two to that, which I think you've already answered, was: Will the old cash accounting disappear, or will there, whether there'll be a note disclosure?
We will provide as much disclosure as we can to ensure that there is transparency, but, it's just not feasible to be able to provide two sets of accounts moving forward under both historical and, IFRS 9 accounting.
Given the improved book asset backing of the company due to recent awards, is the company considering future limited debt leverage to accelerate growth?
So I think we have announced to the market, together with these financial results, that the board is exploring a retail Sterling bond issue. You know, we're still exploring the options associated with that, but what we're endeavoring to do is really diversify our capital structure, and we think it's very important to have a number of different sources of capital to increase, you know, the strength of LCM's offering. We want to explore all options associated with our cost of capital, and, you know, a retail bond issue is part of that process.
Great. An investor says, "Well done on the excellent results, but please, can you give, please can you provide your rationale for the dividend, the level, and the future dividend policy, please?
So I think if I, if I can start with the dividend, which the board has declared, it's really in recognition of the, you know, very strong financial performance of the company over the period and the levels of cash that we are holding within the company at the end of the period. We've balanced that against what our future opportunities are and the opportunity we're seeing in the market. The board is constantly giving consideration to, you know, what our dividend policy is, and as we build scale, we'll be able to report and refer to what that dividend policy as it evolves.
... Great. And someone else has asked about the buyback, and you were achieving a 78% IRR. Can they interpret the share buyback as an indication as to how you feel you're undervalued?
Yeah, I mean, I think that, the board approaches the buyback on, really an allocation of capital basis. You know, what is a prudent, allocation of LCM's capital? We see, the company is undervalued by the public markets, and we see that as an opportunity to buy LCM stock as, as being, a, a prudent way of allocating LCM's capital. So I think investors should interpret that the board is of the view that the, the public markets are currently undervaluing, LCM as a platform, as a business.
Staying on the share buyback, how did the board decide on the 10 million share buyback?
I think we as a board really sort of looked at available capital at the end of the period. We looked forward in terms of what we expected the inflows were going to be in the upcoming financial period. We looked at the opportunities, and you know, after giving consideration to all those factors, we settled upon the GBP 10 million figure as being a meaningful amount for us to allocate in that way.
Great. So you mentioned a few times in the annual report that competition is down within the industry. Can you elaborate on the reasons for this, and also elaborate a bit more on the conversations you've had with particularly North America and Canada?
So let me start with North America and Canada. So what we've seen is we've seen a bit of a contraction in terms of those jurisdictions. We've seen a couple of funders exit those markets, which has sort of increased the incoming demand through applications coming out of those jurisdictions into LCM. Now, those are territories which we don't market into. We don't currently have a presence in those markets, but we are seeing an incoming inquiry via application. So I think more generally, in terms of competition, I think we're seeing a couple of litigation funding outfits exit the market and exit those territories.
I think in addition to that, we're seeing that some of our competitors are finding it more difficult to get access to investment capital running the strategy that they're running. So that really puts LCM in a very good position, having access to capital in the market conditions as they are, to really capitalize on that reduction in competition.
So you mentioned increased activity levels that will not need to be matched with proportionate increases in overall costs as a differentiator for LCM. Are there any particular participants you can think of are exposed to this? Some of the smaller insolvency players, perhaps.
Look, I don't think it's right for me to sort of provide commentary in respect of our competitors, but what I can say is that, you know, we have been very particular as a management team to keep our operating costs as low as possible. And I think that that really places us in a very strong position, you know, where you've got uncertain markets to really capitalize on the opportunities that we're seeing.
Great. And how do you view progress towards regulations of the litigation finance industry within the EU?
Look, I think LCM has been pretty consistent in saying that, you know, certain forms of regulation are really good. I think that forms of regulation in whatever jurisdiction, whether it be Europe, or whether it be Australia, or whether it be the U.K., ultimately will favor those who have been in the market for a long time. And, you know, we would welcome a form of regulation at the appropriate time, and we would offer to participate in discussions and deliberations about what that regulation should be.
Thanks. In terms of debt and interest rates increasing substantially, would it be best to focus on paying off all the debt and keeping capital back to co-funding potential investments?
Yes, so LCM has started a program in terms of repaying its current modest facility. We have started to pay down that facility already. We, as we've announced, as a board, are looking at other options such as a retail Sterling bond, and we're looking at that most particularly associated with the cost of capital. So we are actively looking at options which might give us access to capital at a more efficient rate than we're currently paying.
Can you give any estimation as to why the number of applications has been decreasing over the past few years?
Well, I think that the number of applications this year were commensurate with the prior year. But I think rather than focusing on how many applications, it's more important to focus upon what the commitments were. So in other words, looking at the quality or inferring the quality of those applications as opposed to the quantity of those applications. It's far more important to have an increase in the number of commitments than it is to have an increase in the number of applications. So what I think the numbers are really telling us is that the quality of those applications are becoming better in the markets and the territories in which we operate.
Do external investor funds stay with you, or do you pay out profits and capital?
... The accounts are actually prepared in a way to show the LCM standalone balance and the profits that are directly attributable to LCM as a business. Anything to do with third-party investors is carved out.
Great. And so I just want to double-check if you're still investing directly into funding cases or will this tail off move, moving forward with regards to the co-investment strategy?
Look, I think in terms of the firm LCM's position in its current evolution, in terms of building scale, we're very happy with the co-investing model. The co-investing model really gives us access to a pool of capital that we are managing, but it also gives us the opportunity to put our balance sheet capital to work with less risk because it's diversified across a larger number of investments, and that balance sheet capital can enjoy the full economic upside of the resolutions. So we think that we're striking the right balance currently between the utilization of third-party funds in our asset management business and utilizing a proportion of LCM's balance sheet capital at the same time as allowing us to grow.
How does LCM materially increase applications to support asset growth, for example, geographical or case type extensions?
So I think, generally in the market, we are looking at strategies, continually about different parts of the market that we may focus upon in terms of, of investing. So we're currently looking at, the resources sector as being a sector that, we've enjoyed, some buoyancy in the past. We're continually looking at other sectors. We are looking at other jurisdictions, and we're also in an environment where we're seeing a bit of a contraction in terms of competition. So I think a number of those factors, will lead to, not only increasing the number of applications, but as I said before, you know, increasing the quality of those applications, because that... Oh, then we can operate in a far more efficient fashion.
Looking at the regulations again, have you seen any changes in the U.K. market in response to the Supreme Court's judgments?
Look, I can't, I can't talk across the entire market. What I can talk to is how that decision impacted LCM. So for those investors who may not be across this, there was a decision recently of the Supreme Court here in the United Kingdom, which has constrained the way in which litigation finances can be remunerated. So in circumstances where a funding arrangement with a funded party remunerates the funder as a percentage of the pool of capital, the damages recovered in that dispute, they are now subject to the regulations which regulate damages-based retainers between solicitors and their client. Now, that's quite wordy, but what it does is it restricts the basis upon which litigation funders can be remunerated.
In terms of LCM, there was a tiny handful of our funding arrangements, which had a small component, which was a percentage. We're in the process of renegotiating those at the moment. I have every confidence that we will be able to do so. Some of them, we have renegotiated already. And more generally, if I look sort of at our past resolved matters, there's no issue associated with that in the United Kingdom. In terms of our current book, I've just described that. In terms of the future, we overwhelmingly are remunerated on a multiple of investors' capital rising over time, so it will have very little, if any, impact upon LCM at all.
A question about the second half bump. Do you think that is the catch-up of COVID-19, and do you think this is gonna continue, or do you think that was a one-off catch-up?
Look, I think there's a couple of ways to give consideration to that. The first is that as our portfolio grows and with the transition to fair value accounting, you're going to see a smoothing in terms of the recognition of the incremental growth of the book. You're going to see a smoothing, and you should not see as pronounced a difference between one accounting period and the next. Secondly, I think you're probably seeing some of the backlog being resolved, which were delayed as a consequence of COVID, but you're also seeing LCM managing a larger portfolio of investments. I think LCM's business model has changed. The scale of LCM's business has changed, so we shouldn't see as marked or pronounced a difference between the first half and the second half moving forward.
Looking at the litigation space in general, there's maybe more of, skepticism about doubts of getting paid. Can you give any details about how you get paid, who pays you, and have you had any problems in getting paid in the past?
We have had, historically, in the 25 years that we have operated, very little problem associated with that. One of the reasons for that is, you know, we run a very rigorous due diligence process across the applications that we receive, and only a very small proportion of those applications ultimately transition into an investment for LCM. One of the specific criteria that we look at long and hard, very early in that process is recoverability or our ability to be paid in circumstances where we receive a judgment or an award, which we need to enforce. So we are looking at that recovery issue very early in the process, and we are not investing in matters unless we can see sort of a very clear pathway to a recovery.
It's something that we have been very acutely aware of for many, many years, and, you know, we have the benefit of being an experienced litigation financier in the market. We've had very little problem with that aspect of our business, but it's ever present.
... Someone has asked if you could go into any more detail about the bond at all?
Not at this stage. So, you know, we are still exploring the bond. As I think everyone will probably appreciate, the market's fairly unpredictable, you know, the debt markets at present. So, you know, we are monitoring that, in circumstances where we move forward, we'll be keeping the market fully informed.
Great. Again, looking at the fair value accounting, how would you manage the increased volatility of profit and loss due to the need to write off assets when a case is then lost?
So again, we are working to a framework which values the assets as they progress through the judicial or judicial process. So you are only accruing value as those matters progress to the next stage, which is usually de-risking that particular investment. But with Fair Value, there will no doubt be volatility. If something moves in a negative fashion, we will obviously have to reflect that in our accounts. So I, I don't think you can avoid it, but I do believe that the framework is built in such a way that we would like to hope that we minimize the fluctuation and the volatility.
Looking forward, do you see expansion into the North American market in the medium term? Is there an opportunity for managing a U.S.-focused fund?
There's increasing scope for us to be managing a U.S.-focused fund. As I said, we are seeing more applications coming out of North America than we've ever seen historically. We're seeing, you know, a more mature market in the U.S., so we're seeing more law firms looking to recommend that to their clients than we've ever seen in the past. We're seeing a growing market there. We're seeing some contraction in that market in terms of the offerings through our competitors. You know, we are... We have been looking at that market for some time. We continue to look at that market, and if we can move into that market in a disciplined way, we will do so.
How does Burford's LCM fair value differ to LCM?
Yeah. So there's not a great deal of difference. Obviously, the underlying inputs will differ because they will be specific to the particular company. But in terms of the approach and using a discounted cash flow model, taking into account the cost of time, the cost associated with risk, for those individual assets, and, you know, the assumptions around, you know, what the estimated budget and the estimated future cash flows are, around those individual investments is broadly in line with our peers.
Thank you.
I should add to that, like, LCM, together with its advisors, have spent a long time sort of working upon this valuation methodology. And I think if we look at Burford's experience, it's recently just overhauled the methodology that it uses as well. So we've seen a lot of rigor brought into our industry, both through LCM and through Burford, with respect to looking at this issue and trying to work out a methodology or valuation methodology which is as accurate as possible and gives, you know, investors, you know, the most transparent and the most insight into the progression of our portfolios.
Great. We've got about five minutes left, so I'll try and squeeze a few more questions in. How many investments do you currently have in process, and what's your current view regarding their completion profile time-wise?
I can talk to the number of investments that we have, and then I'll let Patrick take over with regards to their progress. Currently, balance sheet is 20 investments. Fund one is sitting at 20 investments following the resolution of a number of those, and fund two is 12 investments. We've made a few additional investments post the year-end period into fund two. And Patrick can talk to how those matters are actually progressing.
There's also a number of direct investments of 100% as well. So if I look at, you know, where we are in the progress, so in terms of our direct investments, we've got four of those investments which have received positive judgments, which are subject to appeals or partial appeals. We've got one direct investment, which has had a final hearing and awaits an award. In respect to Fund I investments, we've got another four investments which have received positive judgments or awards which are subject to challenge. And we've got three Fund I investments, which have had a final hearing and awaiting awards as well. So you can see there's quite a bit of activity in terms of our book, and there's a number of our investments which are very mature.
Given the benchmark interest rate has increased considerably, what impact does it have on the cost of capital, and how will the company address it?
So with respect to the cost of capital, the credit facility that we took out was structured in such a way that it was capped at 13%. So it has not impacted. There hasn't been a change or a shift with the underlying increase in base rates because it was always structured in such a way that it was a 13%... It attracted a 13% interest rate. In terms of what we're doing more broadly, Patrick has touched upon the fact that we're looking at the retail bond market in order to optimize the cost of capital for the business moving forward.
Just to add to that, you know, we're very conservative in the way that we think about debt. So, you know, as a proportion of our overall balance sheet, you know, our debt levels are very, very modest. So, you know, and we intentionally look at that, and we monitor that continually.
Looking at applications, what proportion of applications currently get approved?
... Yeah, so historically, it's been between 3% and 7%, and we're sitting, you know, around the 3%- 3.5% mark, currently. And I think that's really a reflection of the unpredictability of the market more generally. You know, one of the previous questions that we were asked was, you know, how do you manage recovery risk? I think, you know, probably we're at the lower end of that conversion spectrum because we're pretty conservative about how we look at recovery risk associated with a market such as it presents at the moment.
I'll just do one final question to close off, and then we'll let the investors have questions, we'll look at answering them after the meeting. You put forward great metrics upon which investors can judge the progress made of LCM. Other than AUM, which metrics or KPIs do you feel are most instructive as a board?
So I think when we look at LCM's business, I think, you know, the KPIs that investors should focus upon is, first of all, our investment performance. So we need consistency associated with investment performance, because our investment performance drives not only a revenue line, but it drives demand for, you know, the opportunity to invest with us and a whole series of other things. So by that, I'm not suggesting that we need to increase our performance. There's, you know, it's very buoyant performance, and it could, you know, come back from where it is and still, we would still have tremendous demand for investors to participate in our funds. So I think that is one factor. So it's really, it's how many commitments we have in a given financial period.
So how much of the capital that we have, have we committed during that period? A less important metric, but still something that investors should be focused upon, is how much capital we have actually invested during a period. Financial metrics I've talked about, and then look at the availability of capital, which is, are we increasing our funds under management over a period of time? So we've gone from fund one to fund two. We'll be moving in the next 12 months, in all likelihood, into fund three, and then the diversification of those capital sources. So not only, you know, balance sheet capital, but the leverage on our balance sheet and what form that takes, whether that takes the form of, you know, a retail sterling bond or what have you.
So it's really those factors that I encourage investors to look at in terms of measuring LCM's growth over time.
That's great. Patrick, Mary, thank you very much indeed for updating investors this afternoon. Can I please ask investors not to close this session, as we'll now automatically redirect you to the opportunity to provide your feedback in order that the company can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Litigation Capital Management Limited, we'd like to thank you for attending today's presentation. May I wish you all a very good afternoon.