My assessment of the litigation funding industry is that it is not really suited to be a listed business. The reason is that cash flows and earnings are highly variable and unpredictable. The market is usually not patient through the slow times which makes for too many ups and downs over time.
That doesn't mean this isn't a good business or good investment though - particularly when the company is in a "harvesting phase" and as a result reporting strong earnings and cash flows.
Be warned that IMF went through a phase of underinvestment over the past 2 years which will lead to a large hole in earnings and settlements in the next few years.
Over the long term returns should be strong and I agree that IMF may gain from a strong position and be dominant. At this stage the business still has too high a cost base and overheads relative to the book size (by that I mean aggregate capital invested in cases). Comparing IMF which is effectively managing money to invest in legal cases vs funds management or banking, the cost base to assets is very high indeed. Individual cases are also very lumpy relative to the overall portfolio as well which means there will be many ups and downs from year to year.
Should be good for the medium term but harder over the long haul.
Going back to Impact Capital (ICD) - they deal with individuals involved in personal injury and family law cases and lend money directly to individuals involved in the cases at high interest rates (over 20% on average including fees). They only lend when liability has been admitted in personal injury (ie minimal legal uncertainty) and there is a clear pool of funds (typically from work cover or a large insurer). In family law Impact lends typically to wives who are divorcing wealthy husbands but have been cut off from their usual cash flow source. In that case there must be clear title to property at a low LVR (loan to value ratio) for a loan to be made.
Impact has bank funding so in effect borrow at 9-9.5% and then re-lend at 20-25%. Loan losses are sub 1% because all lending is to borrowers who have a certain means of payment. Losses typical occur when a borrower dies (and receives much less than expected as a result) or administration errors from lawyers managing the cases.
I can't think of a better business than one that can borrow at sub 10% and re-lend at over 20% with minimal risk!!!!!
The point is that for Impact cash flows are not unpredictable, individual cases are small and have minimal effect on total profitability and because loans are being made which pay interest over time, delays in settlements or court don't disadvantage the company in any way.
Thats my assessment - but do your own thinking!!!
ICD Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
