Most Scots I've met have been anything but dour so it was no surprise to learn that a Library of Mistakes was recently opened in Edinburgh. Part of the library is focused on the history of financial markets and the seemingly perpetual addiction of investors to 'do the same thing over and over again and expect different results' – to quote Albert Einstein's definition of madness.
Although many of the 'mistakes' are merely well intentioned but unsuccessful attempts to forecast the future, the records show corporate shenanigans and investment related deceptions have been with us through many generations and are sadly certain to continue.
Which brings us to litigation funder Bentham IMF Ltd (ASX: IMF). With net profit down 29% and earnings per share down 41% (due to share placements and conversion of notes) 2014 looked very ordinary for shareholders. However the litigation industry is by nature subject to erratic earnings and can't be judged by conventional measures such as PE ratios or any one year's return on equity.
Despite these results Bentham IMF's achievements over the 2014 year were considerable, and include:
1. Case portfolio increase of 26% to $2.07billion – this is the gross claim value of cases underway and doesn't represent net profits or revenues. It does indicate the level of activity which can be expected over the next few years.
2. Move into US now gaining traction with US cases representing 16% ($320m) of portfolio. So far management has been cautious in entering the US market, preferring to adopt a step by step approach whilst learning the ropes. They report a strong pipeline of opportunities in the US and now have offices in Los Angeles and New York.
3. Co-funding arrangement with the highly astute US-based Elliott Management covering large cases in Europe, Australia and Asia. Elliott Management is deeply experienced in litigation and this move will bring significant opportunities for growth.
4. Directors have announced an intention to increase insurance cover – although at some cost to profits this will take a lot of perceived risk out of the business.
5. Although Hugh McLernon has done outstanding work as managing director, he will be replaced by Andrew Saker (recently Ferrier Hodgson) in January 2015. Pleasingly, Hugh McLernon will continue to be involved with major case management and special projects.
All of the above indicate Bentham IMF is readying itself for the next major stage of growth. With superior risk management, high returns on capital and a substantial case portfolio, I believe this company ($2.00) offers investors the opportunity for strong returns over the next few years.
