IMF Bentham Ltd (ASX: IMF) provides funding for businesses and individuals with legal claims of loss and damage. The company covers the cost of lawyer and court fees and pays any amounts awarded to the other side, but does not provide legal advice. In return, IMF recovers its costs from amounts awarded to clients as well as taking an additional share as profit.
Essentially, IMF must back as many winning cases and as few losing cases as possible to maximise profits. Up to 30 April 2015, the company had won or settled 127 of 172 cases funded since listing in January 2000, a win ratio of 74%. This translates into a total return after costs of $318 million before overheads and tax.
A small number of large cases or a large number of small ones?
IMF has changed since listing, it now has operations in the US, UK and Asia and is big enough to fund much larger cases. An example of this is the class action against ANZ regarding late payment fees which has been ongoing since 2010.
There are pros and cons of funding larger cases.
Pros
- It is easier to administer a smaller number of large cases than a large number of small ones.
- Bigger cases have bigger pay-outs.
Cons
- They take longer to complete.
- Defendants generally have more money to hire top lawyers and build a stronger case.
- Big cases can mean big losses as well as big gains, requiring IMF to hold more cash.
Today, IMF is funding very different cases to what was the case a decade ago and so historical success rates should not be used as a guide to the future.
International expansion
Litigation funding was illegal prior to the introduction of a statutory exemption in 1995 and so to date, IMF has benefited as a first mover in a new industry. It has now reached a size where it has outgrown the Australian market and is pursuing opportunities abroad.
The trouble with this strategy is that IMF will come up against established competition in foreign countries and must adapt to different legal systems. This is likely to erode profits and there is the risk that more foreign companies will enter the Australian market in retaliation.
Foolish takeaway
IMF's prospects largely depend on management's ability to back winning cases and they have a good track record, although the team has changed since the company first listed.
IMF is difficult to value because no one knows how long a case will last or if it will be successful. Using history as a guide is not likely to be very accurate because the types of cases that IMF funds today are very different from those in the past.
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