If for some reason you were forced to hold two of your market investments for eight years based on the criteria below, which investments would you choose?
1. Must be a smaller company with a current market capitalisation less than $500m
2. Must occupy a niche with high barriers to entry
3. Management must have significant personal stakes in the company
4. Must have a strong company culture with high expertise and a sound performance record
5. Must have a conservative financial structure with low reliance on outside finance
For what it's worth these would be the two selections from my own portfolio.
Bentham IMF Ltd (ASX: IMF) is a litigation funder which invests mainly in highly prospective corporate cases. For example the bank fees class action is funded by Bentham IMF, as is the potential class action against Forge Group.
To date most completed cases have occurred in Australia and Bentham IMF has established an outstanding record here – 3% of cases lost; 23% withdrawn and the rest either settled before judgement or won in court. There were 159 cases altogether.
In a recent announcement Bentham IMF ($1.95) has signed a joint venture agreement with the large employee owned US hedge fund manager Elliott Management Corporation. The agreement covers the Asia Pacific region (including Australia) and Europe. Essentially Elliott has the option to co-fund larger cases in these regions and share equally in the results. Being an activist investor, Elliott has extensive litigation experience in Europe although not as a funder. Achieving this 50/50 agreement is a real feather in the cap for Bentham IMF as Elliott Management Corporation is regarded as a highly astute and demanding investor.
Bentham IMF already operates two offices in the US (New York & Los Angeles) and a number of cases on its own account are in process – the US is not presently included in the above agreement.
Servcorp Limited (ASX: SRV) is the world's second largest serviced / virtual office provider and currently operates 135 floors across 21 countries. An aggressive move into the US over the past few years has now reached breakeven and the US is likely to underwrite strong profit growth for some years ahead. Other robust areas include China, Japan and the Middle East. SE Asia and Australia are sluggish.
Servcorp's ($4.59) competitive advantages include industry leading technology, decentralised management and high service standards.
I deliberately haven't covered this year's profit expectations for either company as long-term investing is concerned with the long run, not the short run. For one thing Bentham IMF's year-on-year profits are erratic as cases don't finalise on convenient fiscal dates. However its case investment portfolio now stands in excess of $2billion (estimates), with an average investment period of 2.3 years. Recent moves indicate a strong upturn in portfolio value and subsequent realisation is likely over the next three years.
Servcorp will start reaping the benefits of the large US expansion from calendar 2015 onwards.
Taken together these two companies are set to give long-term investors premium profits over both the medium and long term.
