Thank you for standing by, and welcome to the Omni Bridgeway Limited Half Year Results 2021 conference call. All participants are in a listen-only mode. There will be a presentation followed by a Q&A session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Andrew Saker, Managing Director and CEO. Please go ahead.
Thank you, Ashley. Good morning, ladies and gentlemen. My name is Andrew Saker, and I'm the Managing Director and CEO of Omni Bridgeway. The purpose of today's call is to present our results for the period ending 31 December 2020. Joining me on today's call is Stuart Mitchell, our Group CFO, and Jeremy Sambrook, our Group GC and Company Secretary. To some extent, this half's performance is typical of litigation funding as a business. There will be periods when measured in six-month increments, where there are few completions or where there are some unexpected losses, or as in this case, where there are both. These are short-term phenomena and not reflective of the long-term model. There is no doubt COVID has affected our business.
Whilst we've seen some positives for the business with the accelerated growth of our portfolio, including 11% jump over the last half to AUD 17.6 billion in EPV, we've also seen some negatives with delays in completions, particularly in the U.S. This is something that our peers have also experienced, and for those with a less diversified portfolio, this will create enhanced risk. However, as you will see later in this presentation, our portfolio is highly diversified with significant growth outside of the U.S. As you will note, this half has generated a loss after tax and NCI of AUD 150 million. This loss is attributable to the provisions for impairment on two material investments, foreign exchange adjustments, both of which are non-cash expenses, a loss in Funds 2/3 coupled with few completions. The provisions for impairments are discussed later in this presentation.
The foreign exchange adjustment relates to temporary movements in the exchange rate, predominantly affected by the strengthening of the Australian dollar against the U.S. dollar. This is also a non-cash expense. The one material loss in Funds 2/3 as a consolidated entity which is on the European waterfall, translates into the loss being attributable to the manager. The adverse cost expense is paid by the fund and exhausts the deductible such that all future losses in Funds 2/3 up to AUD 30 million will be paid by our insurers in relation to adverse costs. With respect to completions, we have seen a continued slowdown in U.S. completions this half, reflecting the effective cessation of jury trials in most U.S. states. Without the stick of a trial, coupled with the defendant's desire to retain cash, we've seen a marked slowdown in settlements and completions in the U.S.
Given the current status of the U.S. legal system with a significant backlog of cases, we expect that the next 6-12 months will also have few completions. However, with most cycles, when the pendulum swings back, there is likely to be a flurry of activity and an acceleration of completions. As such, the long-term cycle will resume its normal operation. We generated a cash surplus from operations during this period from a combination of completions and collections of receivables. Our liquid position at December 31, 2020 remains very strong, with a clear line of sight to completions in the short term that will enhance our liquidity. During this half, our costs were relatively flat, notwithstanding an increase in headcount. We are focused on controlling costs to the extent possible without compromising our operational effectiveness or plans set out in our new five-year strategy.
Consistent with our new five-year strategy, we launched new operations in New Zealand and our Latin America initiatives. The New Zealand business is already starting to bear fruit, with a number of new funding opportunities being identified, building on those that we already had in train. We've now moved into our second year post-merger. The Omni Bridgeway European business has exceeded our expectations in terms of new work generated, contribution to our co-funding opportunities, and integration targets. The EMEA business exceeded its target for new business by 80% and assisted with the acceleration of investments in Fund 5. As you'll be aware from some late-breaking news, a portion of the Wivenhoe matter has now settled. The claims against the State and Sunwater, representing 50% of the total claim, were settled for an amount of AUD 440 million. This is a fantastic result for our clients and for our shareholders.
The balance of the Wivenhoe claim, being the remaining 50% against Seqwater, continues to be progressed on a dual-track process, preparing for the appeal in May, whilst at the same time seeking to progress opportunities for settlement. The interlocutory decisions that have been handed down since the first instance decision in November 2019 have generally supported our positive views on this investment. Our estimates of revenue that may be derived from this matter are conservative, and although subject to various uncertainties, are likely to be at the higher end of the range that we have previously advised the market. We have obtained our AFSL, being the first litigation funder in Australia to do so. We've also launched two MIS compliant class actions, again, being the first funder in Australia to do so.
We have five class actions announced or in the pipeline, including an environmental class action, shareholder class actions, and negligence class actions. This will lead to an increase in multi-party actions as a proportion of our EPV and confirm Omni Bridgeway as the leading class action funder in Australia. Turning to slide three and those impairments. As you'll be aware from our announcements over the period, we experienced setbacks in relation to two investments, being Westgem and an investment in Fund 4. In both instances, we've appealed the first instance decisions and remain confident in the outcome of those appeals. However, following discussions with the auditors and in line with our historical treatment of first instance losses, pending an appeal, the intangible asset balances for each investment was fully impaired and an adverse cost provision raised for the uninsured portion of the estimated adverse cost exposure in Westgem...
For the Fund 4 investment, 100% of the impairment provision was reflected in the group's consolidated accounts, with 80% attributed to the external Fund 4 investors and 20% to the shareholders of Omni Bridgeway with the fund's ownership structure. This approach is consistent with our reputation for transparency and conservatism. If we succeed in our appeals, these impairments will be reversed, and the intangible reinstated. Turning to slide four. As noted in my opening, we experienced a net loss of AUD 150 million, which was attributable to four factors, including a small number of completions resulting in revenue of AUD 44 million in the half, an impairment expense of AUD 107 million, an expense for the derecognition of a material lost investment in Funds 2/3, and FX losses. Most of these expenses are non-cash in nature and expected to reverse in time.
The strengthening of the AUD against the USD has the collateral benefit of reducing our AUD costs for contributions to meet our fund commitments. I note there is more downside risk than upside risk to the exchange rate relative to the USD. As such, this benefit may not be for the long term. As you will note, our liquid assets remain strong at around AUD 250 million. This position will be enhanced by anticipated short-term completions discussed later in this presentation. We have written down the carrying value of our intangibles to reflect the impairments to Westgem and our Fund 4 investment. We expect these write-downs to be reversed on successful completion of our appeals. We have not written down our EPV associated with these impairments, which is a non-balance sheet measure. We remain confident in the diversification of our portfolio.
Turning to slide five. During the half, we had strong collections of receivables, both on our balance sheet and within our funds, which coupled with cash generated from completions, enabled a small cash surplus from operations on a consolidated basis. Measuring cash generation in six-month increments can be skewed by the timing of completions and collection of receivables. If matters complete as we currently anticipate in our quarterly portfolio update, we will expect to see a strong cash generation in the second half. Turning to slide six. Cash costs during the period were reasonably flat compared to those in the last period. The increase in cash costs is attributable to a small discretionary bonus paid to support staff for the last financial year, the timing of collection of an NCI contribution in Fund 6, which occurs in the second half of the year, and an increase in headcount by 5%.
We're not anticipating any material change to the cash expenses during the second half. Turning to slide seven. As you'll note from this slide, our cash and receivables position remains strong at around AUD 250 million. We had strong collections of receivables, which was used to fund operations, contributions to our funds, and investments on our balance sheet. From a balance sheet and EPV perspective, but for the impairments, we've seen a net growth in investments and EPV, which underpins future profit generation capacity. The net asset position has been affected largely by the impairments to our intangible balance, which, as previously noted, will be reversed if we succeed on appeal. Turning to slide eight. The negative movement in intangibles is attributable to the impairments of two investments, the derecognition of completed matters, and FX adjustments.
The FX adjustment is expensed through the P&L, which was the bulk of the non-cash FX movement. As previously mentioned, this is non-cash and more likely subject to reversal given the relative strength of the AUD against the USD. From an operational perspective, you will note investments in new and existing matters exceed those that were derecognized from completions, which in part explains the growth in our EPV. Turning to slide nine. This slide shows our long-term conversion rate and aggregate EPV conversion for the period from FY 2016 to H1 2021. Our LTCR cannot be assessed in six-month increments but needs to be assessed over multiple periods to avoid the impact that occurs in the short term. Over the past five and a half years, our LTCR has been reasonably consistent around 18% and above our 20-year historical long-term conversion rate of 15%. Turning to slide 10.
In terms of the anticipated completions, you will recall from our quarterly portfolio update at 31 December 2020, we anticipate that approximately AUD 1.3 billion of EPV will be completed in the second half of the financial year, some of which has been identified in various judgments and settlements achieved to date. The most significant contribution to revenue in the second half is derived from the completion of the Wivenhoe matter. Whilst we've obtained a successful first instance decision and a series of decisions that are supportive of the positive outcome, the first instance decision is subject to an appeal, which is likely to be heard in May 2021. With the settlement that's now been achieved with the state and Seqwater, that has reduced the amount that will be the subject of the appeal, which will progress with respect to only the portion attributable to the Seqwater claim.
Turning to slide 11. As many of you know, we measure EPV diversification by geography and investment type. Historically, we had a concentration of investments in one jurisdiction or another, with the attendant risks of being exposed to regulatory intervention or competition. As such, we sought to diversify our portfolio to the extent possible. From a geographic perspective, we've largely achieved our diversification goals with a split of investments between EMEA, U.S., and other jurisdictions. With respect to investment type, whilst we've also achieved a high degree of diversification into investments including arbitration, litigation, and post-judgment enforcement, we continue to have significant exposure to class actions, which still represent approximately 30% of the book. These class actions include securities class actions, securities claims, environmental product liability, and other class actions in a variety of jurisdictions, including Australia, EMEA, and Canada.
With the regulatory developments in Australia, we anticipate continuing to have a significant exposure to class actions with several new opportunities in the pipeline. Turning to slide 12. As you will note, our first generation funds are practically fully committed, as such, we now invest entirely from our second generation and acquired funds. Given the capacity limits in Fund 6, we are exploring opportunities with our LP investor to restructure Fund VI to create additional capacity whilst we go to market to raise a new fund for global enforcement investments, EMEA merits opportunities, and distressed debt investments. We expect this new capacity will be required before the end of this financial year. We have scaled back expected completions in Fund I for this financial year, reflecting the continued delays we and others are experiencing in the U.S. court system. Turning to slide 13.
Further to the analysis of our first generation funds, as you will note, notwithstanding the slowdown in completions, particularly in Fund 1 and the loss in Funds 2/3, there remains a substantial number of investments in each fund with significant EPV, which should provide sufficient capacity to seek distributions of preferred capital and returns, a return of capital and fees to OBL, and a distribution of profit. It appears that, subject to the anticipated completions being achieved, distributions will likely be achieved from Funds 2/3 around the same time as Fund 1, both during financial year 2022. Turning to slide 14. Our focus during the next half will be on the continued execution of our five-year strategy with continued geographic and product expansion. We anticipate seeking to raise new capital for our next fund to replace Fund 6 as a potential follow-on fund or new fund.
Finally, the continued consideration of the potential change for our listing venue. As I previously mentioned, I intend to relocate to the U.S., and it's possible that may occur in April of 2021, subject to the current COVID situation. Thank you. That completed the presentation, and I'll hand back to the operator to open the lines for questions.
Thank you.If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask a question. Your first question comes from Michael Peet with Goldman Sachs. Please go ahead.
Hi, Andrew, Stuart, and Jeremy. Can you hear me okay?
Yes. Thank you, Michael.
Thanks. Look, I just wanted a little bit more clarity on the last point you made there, the relocation to the U.S. At this point, are you looking for, on the listing side for the stock, is that still under consideration for the U.K.? I just wonder if you can provide us with more detail on that.
Well, the whole issue is still under consideration in terms of the change of venue of the listing. At this stage, no decision's been made. I was talking about my physical location, Michael. I'm tending to move to the U.S. as part of the execution of the next business plan.
Okay, understood. Just on the cash and receivables, I think it's pretty obvious, but I think Wivenhoe, there's nothing in there in terms of receivable on cash there. That'll slot in, obviously, given today's announcement.
Yes, that's correct, Michael. It literally was late-breaking news. I think the settlement was achieved, subject to documentation and court approval, literally 50 minutes before this call. No, none of those receivables or receipts have been factored into the balance at 31 December.
Every case is different, I guess, but what's your expectation on timing of receiving cash from that one?
Look, I think it's subject to court approval. I would expect the court approval is going to happen before the appeal, I would hope. I expect it to be before the end of this financial year.
Okay. You mentioned new capacity for Fund 2 to replace Fund 6, but was there any other new capacity? Just interested in any update on upsizing Series 2 for Funds 4 and Fund 5 or any overflow fund in the other parts of the business.
At this stage, the upsizing of Funds 4 andFund 5 are on track for our expectations of that to occur during the third year of the life of those funds. At the moment, we're at about 25%, 26% capacity on Fund 4 and about 35%, 36% capacity on Fund 5. There's still plenty of headroom in those funds for the current year and next. We anticipate to be probably closer to around 50% in each of those funds by the end of the financial year, and then up to about 75%-85% by the end of the third year.
Understood. Just slide nine, that conversion rate that you mentioned, around 18% over the last five years or so, is that like for like apples with apples with the 15% that you've talked about? Does the 15 include losses?
The 15 and the 18 includes losses. It's just a different time period. The 15% is a measure over 20 years, and that 18% is just over the last five years or five and a half.
Excellent. Thanks, Andrew. That's all I have for now.
Thanks, Michael.
Your next question comes from Peter Meichelboeck with Select Equities. Please go ahead.
Hi, guys. Can you hear me okay?
Yes. Thanks, Peter.
Yeah. Look, just firstly, just in terms of the delay in releasing the result, it was originally due to come out yesterday and it has come out this morning. Any reason for that?
No, it wasn't anticipated to come out until this morning.
Right. Okay. Well, it just said yesterday on your website. Look, if I can just move on to first generation funds, specifically Fund 1. I'm just trying to work out the return over the rest of the life of the fund. I mean, if I go back to the portfolio report in the December portfolio report that came out last month, you gave some statements there around the confidence that you had around the return of the capital, et cetera. I'm just trying to, once again, in the presentation today, what's the ROIC that you're using on the remaining cases to be able to achieve that position where all the capital is returned?
We're using the long-term conversion rate of 15% as a proxy for what we would generate out of that EPV.
In terms of ROIC? Sorry.
Well, we're using the EPV percentage, Peter.
I see.
Which is our long-term conversion rate.
If I look back to, there were a couple of presentations that came out last year, towards the end of last year in September, October, where it was a similar page to this one, and you referred to the ROIC, the quoted ROIC of 20% and the capital remaining. If I use 20%, maybe if you can just help me where I'm making an error here, but if I look at the total fund commitments of that Fund 1, it's $165 million total committed capital. If I assume a 20% ROIC on that over the life of the fund, I only end up with $33 million. Yet when I look at the total preferred return, that's already $40 million and rising, and then there's your management fee of AUD 5 million and another special distribution of AUD 1.8 million.
I'm just trying to work out how, if the previously quoted ROIC or the current run rate, which is now actually about 15%, how that actually covers everything. Am I missing something here or?
No, I think you're looking at what's been completed to date and applying that to the future. If you do that with the 15% ROIC or a 20% ROIC, then there's no doubt your calculations are probably going to be correct. That's not the numbers that we're using for our views on the performance of those funds. We anticipate to generate 15% long-term conversion rate of EPV of those funds, and that generates sufficient capacity to pay out the preferred returns, the preferred capital, and also Omni Bridgeway's investment and our management fees, and still have sufficient headroom to pay out the.
Yeah. I appreciate that you're focusing now on the EPV, the 15%, but if I look back at those presentations towards last year, you also referred to the 20% ROIC.
No, I don't think that's correct, Peter. I think what we referred to, which is in slide 12, the actual ROIC that had been achieved on historical performance. As I said, you're more than welcome to make whatever assumptions you wish about those funds and future performance. We make our own, you can make yours. What we report is the historical performance.
Right. Okay. You're not willing to share what that 15% EPV would be in terms of ROIC for the remaining cases at this point?
Well, you can do your own calculations on that, Peter. What we've done is 15% of EPV is what our estimate of the revenue generation of these funds, which is the way it's performed historically.
I'll move on. Just in terms of costs, obviously costs have been rising for a number of years, both expense and capitalized costs. You did speak about focusing on controlling costs where possible. This is, I guess, in an environment where revenue has disappointed in recent times, and also being diluted by the fact that you're wearing 100% of the cost, but only getting 20% of the revenue in effect. I'm just wondering what you're looking at in terms of trying to control the cost base.
Sure.
Are there any particular things that you're actually doing?
Sure, Peter. I think there's a number of errors in your statement. The costs increasing in terms of expensed and capitalized costs. Our capitalization rate decreased from 15% to 14% this period. You'll see that in terms of total capitalized costs, that dropped from AUD 11.4 million in the last half to AUD 9.9 million in this half. In terms of employee costs, that dropped from AUD 32.6 million to AUD 28.5 million. Putting aside some of those misstatements, we are looking at focusing on cost control, notwithstanding our headcount has increased from 37 to 175 over the last five years, and increased offices from seven to 18. Costs are being controlled through the usual mitigations of managing marketing costs, managing our overheads with property costs, and managing staff growth costs.
Okay. Just on returns, I guess when I look across the business, I look at it in three buckets in a way. One is the U.S. side of the business, which has been going now for a number of years, and apologies for focusing on ROIC, but the ROIC of the U.S. business is roughly 15% pre-capitalized overheads, and obviously less if you include the overheads. The U.S. business, obviously, has been going now for a number of years, and in my opinion, the returns there have been pretty disappointing.
When I look at the other two groups, the way that I tend to look at it is, you've had class actions and non-class actions, and on the research that we've done, the non-class actions, the ROICs have trended down there for a number of years and are significantly lower than where they were on a rolling average. That's, in my opinion, not looking great. The third area is class actions, and given the possible regulatory and competitive headwinds you're seeing there. I guess my question is two parts. One is, why do you think the returns in terms of ROIC, why do you think they have been trending down, and what's caused that? The second part, where do you see them actually improving going forward?
Again, Peter, I'm not entirely sure I accept many of the comments that you're making, other than I can say we look at our business as a diversified portfolio. That was the whole purpose of expanding to the U.S. into other jurisdictions. Focusing on ROIC in individual jurisdictions misses the picture of what we're trying to achieve as a long-term goal, which is to have a diversified portfolio. The diversified portfolio historically to date is still in the high 2.6x, thereabouts, which isn't materially different from what it has been from five years ago, again, on a diversified portfolio basis. There's no doubt the completions in the U.S. to date have been not to the same standard that we had achieved in other jurisdictions. That, I think, again, needs to be put into the context of the diversified portfolio.
In terms of where we think it's going to stay, we anticipate that ROICs on a historical basis will continue to be around those high twos. Sorry, that's MOIC, I should say. That's what we don't see any reason for that to materially change.
Okay. Can I just ask on class actions and the changes there? We know that you've launched the first class action, well now the second after this morning, with the Freedom Foods one in particular. I just wanted to ask, obviously it's the second action that Freedom Foods is facing here with Slaters obviously putting forward their action a couple of months ago, I think now. It appears to me when I look through both documents that the return for the Freedom Foods shareholders if they were successful, it appears to me that the returns could be more favorable under the Slaters action compared to the Omni Bridgeway action. I'm just trying to work out, if that's the case, if they're more attractive under the Slaters and the Slaters one is being done first, how do you see your class action being competitive in that environment?
Look, Peter, again, we've got over 300 investments. To talk to the specifics of each of those, I think, is going to be challenging. Specifically on Freedom Foods, the difference between a Slaters class action and the Omni Bridgeway class action is one's being run as a GCO and the other one's being run as an MIS. We anticipate that the GCO is going to struggle, as a consequence of it not complying with the MIS regime, and therefore may not proceed. We've got a view that ours provides an opportunity for investors to actually get to the end goal, which is to achieve a settlement or victory at trial against Freedom Foods and their auditors.
Sorry, Andrew, are they subject to the MIS scheme? I didn't think they were. The lawyers with contingency actions. Am I incorrect there or?
We think you are.
Right. Okay. I'll move on from that. Just finally, just on the two impairments. The company, you've quoted that you've got confidence in successful appeals, et cetera, on that. Would either or both of those cases, was that decision based on an independent external review of those or is this the opinion of the counsel that's employed by you guys?
We don't engage the lawyers to act for us. They act for the clients in those cases and they're members of the independent bar and they are based on independent advice, not just the company advice.
Sorry, I probably misphrased. What I meant was either one of those cases reviewed by another external barrister or whatever? Or was it the barrister that's been involved in the case at this point?
Well, again, we have over 300 investments, so descending into the detail of each one of those is going to be a challenge. Specifically on this, to engage an independent lawyer, I think is what you're suggesting, to review, for example, 10 years' worth of court documents, interlocutory information, the evidence, the trial data, to come up with an opinion about merit, would be a significant waste of time and shareholder money. The advice that we have is from the independent barrister that's involved with the case, that's been involved with it for a number of years and understands the case intimately, and they're a member of the independent bar.
Okay. Look, I'm mindful of time. What's one last one, just in terms of the presentation. I think on page seven, where you've put the various history of the net assets, et cetera. I'm just wondering, in terms of the impairment, or the impairments, the impairments are still in EPV, and it also presented the impairment inclusive in the net assets and investments, et cetera. I'm just wondering why the numbers have impairment is not an accounting term, but in terms of net assets and investments, et cetera, why it was decided to present that inclusive of the impairment, because surely if something's been impaired, it's been impaired.
Peter, impairment is actually an accounting term.
Yeah, that's what I'm saying. Yes, I'm wondering why net assets are presented on a pre-impairment basis effectively.
Well, you can see it is clearly identified, and it is there so that investors have the full picture of all of the information that they need to form their own views about the impairments and the impact that has on the financial statements. The statutory accounts obviously do not include them. This graphical representation over five or six years is not part of the statutory accounts. This is our explanation to the market as to what the financial statements say and the other information that is available outside of the financial statements. You are more than welcome to ignore the clearly identified impairments in any part of that presentation.
That just leads me finally to the EPV, the total EPV for, not that I use EPV, but the total EPV you've got is AUD 17.6 billion, but AUD 1.6 billion or 9% of it is impaired. Does that mean, just in terms of your presentation going forward from the quarterly portfolio reports, will that EPV be done on a post-impairment basis? Because I thought it usually was.
This is, I think it's your fifth attempt at the last question, but I'll answer this last question. Our OBL EPV will be shown on a pre-impairment basis with the impairments identified so that people can make their own assessment about the impact of those impairments on their views. The statutory accounts will continue to comply with the statutory obligations of not including impairments in investments or intangibles.
Okay. Thanks, Andrew. Look, I've got a whole lot of other questions, but I'll leave it for now, and hopefully we can catch up after the reporting period this time. Thanks a lot.
Thanks, Peter.
Your next question comes from Nick Maclean with Surrey Asset Management. Please go ahead.
Hi. Morning, guys. Thanks for the accounting lesson. That was very interesting. It's really, really good to hear. My question was, in terms of Wivenhoe Dam.
Yes.
Great results, obviously, for you guys. What do you intend to do with the inflow of that cash as it comes in? Yeah, that's my main question. Thanks.
Sure. No, it's not yet been decided. Clearly, this is something that only happened literally a couple of hours ago. We'll consider when the cash is received, what the best use of that will be, whether it's distributed back to shareholders, whether it's reinvested into the company. A final decision hasn't been made, Michael, and it'd be very premature for me to suggest anything other than that.
Yeah, sorry, what I meant was in terms of for your longer term strategy. Not looking for special dividends or anything like that, it's more how does that play out for your building out of the funds management business?
Look, it definitely could be used to finance our commitments to those funds going forward, but that's one of many uses. As I think we've tried to explain, we do have views about how cash should be coming off from Funds 1, Fund 2, and Fund 3 over the next 12 months. That will also play into how much cash is actually necessary. Look, it'll go into working capital. We'll work out whether or not it's surplus to our needs. If so, it will be distributed if that's where the board would like to take it.
Great. One more from me. When I spoke to you last, obviously, with COVID, there was a slowdown with regards to court cases and whatnot. Has that started to ease up, offshore, I mean, in terms of Europe and in particular the America? Are the court cases starting to flow a bit more freely?
Look, it's probably too early to say. In Europe, it's been less of an impact. It's been significantly more impactful in the U.S. In Europe, what we've seen is a reasonably steady but not significantly influenced impactful consequence of the slowdown. Look, we suspect FY 2022 is going to be more meaningful in terms of an acceleration of completions. There is a backlog, and as a consequence, it's not going to be as free-flowing as it once was. When the pendulum does swing, we do expect it to open completely.
Okay. Sorry, one more from me. In three years, I know you can't give forecasts or whatnot, but where do you think you guys will be in three years in terms of the funds business geographically? I assume in three years, all balance sheet items will be off balance sheet. Where do you think the fund will be positioned geographically for the funds perspective?
Sure. We haven't addressed that in this presentation, obviously, Michael, but in the previous presentation, when we presented our five-year business plan, we had given indications of what our plans are. We will be fully out of balance sheet investing. We will be fully migrated into funds management. That funds management business will be growing, and we've got aspirations of building that up so that we have AUD 5 billion in funds under management and in three or four years, a steady lockup of AUD 3 billion-AUD 4 billion at that stage of revolving commitments.
Okay, fantastic. Sorry, I keep saying last one, but the media reports recently about what's happening with the slackening of direct and obligate, not obligations, but yeah, or slackening of obligations. What do you think about that? I know it's a small part of your business now, but your thoughts on that?
Sorry, can you just repeat that?
The recent media article.
Yeah.
About the lessening of directors' transparency or obligations or whatever you call it.
Yes.
What do you make of that?
Well, look, we've been asked to comment on that at the next Parliamentary Joint Committee. Our views are that we think it's a bit premature for those changes to be made, and there should be full consultation with the market to understand the impact on the capital market. From a pure business operations perspective, we generally don't commence shareholder class action unless there is an element that we think is clear that it's breached an intentional aspect of the law. We don't think this is going to impact on our business too greatly.
Okay, fantastic. Thank Thank you very much for your time.
Thank you.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Alex Dow with Kabouter. Please go ahead.
Hi, Andrew. This is Alex. Can you hear me okay?
Yes. Thanks, Alex.
Okay. First of all, welcome to the U.S. Just I didn't catch the part where which city we'll be located in. Yeah, that's the first question.
Sure. Thanks, Alex. Yeah, I will be moving there, I expect, April. It will be in New York.
Okay. Got it. Great. The second question, it's kind of in a similar line than the last question is, I know there are lean years and there are kind of harvesting years. In five years, I understand right now is kind of a little bit difficult time with no paid position due to COVID. In five years, once the fund structure is up to a kind of full speed with cash out deployed, is it reasonable to assume that every kind of reporting half, you will have steady stream of management income to kind of pad away and you wouldn't be hit hard by delay in case completions?
Yeah, that's the overall objective, Alex. The move away on balance sheet investments to fund investing was to open up alternative income sources, both through management fees and performance fees as well as an investor in those funds. These funds, I think we should remember, only launched three-odd years ago. The average duration of our investment, in normal circumstances, is just over three years. In a COVID environment, is obviously going to be a little bit longer. It, I don't think should come as much of a surprise that there's a little bit of a delay in ramping up to a fully diversified income source. In five years time, assuming all things being equal, we anticipate to move forward to what was our plan.
Has a significant amount of capital deployed, generating management fees that is going to produce income from management fees, performance fees, and LP investments. With the continued diversification of the book, that should reduce the risk to geographic issues that we experience in different markets at different times for different reasons. There was, a couple of years ago, a risk that Brexit was going to be impactful on completions in Europe, but I think that has largely proven to be a non-issue. One thing we can control in terms of diversification of risk is the diversification of our investment portfolio. At 300 investments, we're starting to achieve that diversification. One thing we can't control is duration. That's the biggest issue in the industry. We can only control our side of the equation and can't make these matters complete more quickly.
It is unfortunate that duration is one area that is just literally outside of our control.
Got it. One last question is, with the case delays in the U.S., it seems that kind of hurt everyone in the litigation finance field. Do you see M&A opportunities there, or maybe their partnerships, the ones that are competing in the U.S., the ones that are in private structure, because they don't have to report every half year, they could operate longer without added pressure, or do you see M&A opportunities out there?
We've certainly seen co-funding opportunities where funders are looking to mitigate the cash impact of making new investments. We haven't actively explored any kind of M&A opportunity in the U.S., though obviously, we'd certainly be open to explore opportunities that presented. At this stage, we're primarily focused on bedding down our existing merger with Omni Bridgeway in Europe, which is largely complete. Making sure that works and is effective before we take any more big bites.
Got it. Thank you so much.
Thank you.
Your next question comes from Jessie Cai with Citi. Please go ahead.
Hi, guys. Just some quick questions. Firstly, in terms of costs, I was just trying to clarify in terms of cash costs for second half, did you say that you're sort of expecting this to stay around stable, around AUD 63 million next half? Then more broadly, how should we think about cash OpEx maybe in 3-5 years' time, particularly given your five-year growth plans?
Sure. Our cash costs were at AUD 40 million. That's on slide six. It's probably a little bit high because we weren't able to drag in an NCI recovery out of Fund 6, which doesn't happen until the second half. I think it's probably reasonable to assume it's going to be between AUD 37 million and AUD 40 million a half, in terms of cash costs.
Okay. It's probably like AUD 80 million a year. How should we expect that maybe in three to five years' time as you sort of expand on your five-year growth plans?
Well, even though we've got expansion plans from a geographic perspective, they're reasonably modest expansion plans in terms of headcount. As a consequence, we're not expecting any material increase in costs. I would anticipate they'd increase, but in very low single digits on an annual basis.
Okay, great. Just a second question. Can you talk about how the demand for litigation funding applications are sort of tracking recently? And how you're going in terms of deploying the capital versus your target of AUD 440 million for this year?
Sure. At 31 December, we were very much on track to meet the target. We were, I think, almost exactly at half at 31 December for commitments, both on a conditional and unconditional basis. In terms of funding applications, they are consistent with last year on an annual basis. There has been a slight increase in some jurisdictions, particularly in EMEA. We've seen a slight dip in some jurisdictions like Canada and the U.S., particularly in November, December and January, just as they were going through, I think, the peak of their political as well as social turmoil and COVID was pretty much at its peak. They seem to have fixed themselves again. We're very much on track on both of those.
Great. Thank you.
Your next question comes from Alex Dow with Kabouter . Please go ahead.
Sorry, one last question is on the Fund 4 case. It's a fund case, I understand why a balance sheet case will be impaired. It's a fund case, should I assume that it's just a co-investment piece of Omni Bridgeway into the fund, that piece is impaired? My understanding, maybe I'm wrong, is that if it were a fund case, for other cases in the fund, even if there were rulings that are unfavorable, it would just turn out to be more of returns on the fund. Omni Bridgeway itself wouldn't see impairment.
Sure. Look, I'll ask Stuart to jump in if I mistake this, but the Fund 4 is consolidated into our balance sheet because we control those funds. As a consequence, when we impair, we impair for the full amount. The portion that's attributable to external investors is reversed out through the NCI adjustment so that the net impact is one in 20%.
Got it. That's super helpful. Thank you.
There are no further questions at this time. I'll now hand back to Mr. Saker for closing remarks.
Thanks very much, Ashley. Thanks, everyone, for your attendance today. Appreciate your interest in our company and look forward to speaking with you over the next couple of weeks. Thank you, and have a good day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.