Litigation funder IMF (ASX: IMF) has completed the heavily oversubscribed placement of 18.5 million new shares, raising $31.4 million. This will be followed by a share purchase plan to raise another $10 million. New shares will not be entitled to the 2013 dividend. Proceeds will be applied to the redemption of any outstanding convertible notes and working capital in the international business.
To date IMF has funded 10 cases in the US through offices in Los Angeles and New York. Preparations are underway to potentially open offices in London and the Netherlands. IMF states that it sees "material opportunities" in these jurisdictions and a physical presence is required to take full advantage. In Europe IMF has commenced proceedings against various rating agencies involved in the wash-up from the GFC.
IMF is one of the world's most successful litigation funders, which just demonstrates what an infant this industry is. Generally, a litigation funder pays the legal fees and all associated costs in the undertaking of a legal action. In exchange the funder is entitled to a share of any successful settlement – in IMF's case this has averaged 34% gross and the average life of an action is 2.3 years. Of course, net proceeds are considerably less.
A litigation funder is essentially an investment manager and it follows that the key to success is the accurate selection of potentially rewarding cases to pursue and fund. Possessing astute management IMF has an outstanding record here having only lost 3% of 149 cases since listing in 2001; 65% of cases are settled before final court decisions.
IMF's current portfolio of case investments have a claim value of $1.66 billion, which should deliver a substantial and growing net profit stream over the next few years. Management's intention is to get the portfolio to over $2 billion in the short term.
Other legally related companies on the stock exchange include lawyers Slater & Gordon (ASX: SGH) and Shine Corporate (ASX: SHJ). However legal firms in Australia cannot fund litigation proceedings and are compelled to use external parties. This convention is unlikely to change as lawyers can't be seen to have a financial interest (other than fees) in case outcomes – very confusing but that's the way it is!
Assuming all outstanding convertible notes (in practice, a good proportion will be converted into shares) are fully paid out, IMF will have cash on hand of $68.3 million and equity of $164.1 million – placing it in a strong position to take advantage of growth opportunities when they occur.
Foolish takeaway
Due to the nature of the business IMF's earnings are lumpy and dividends variable so it doesn't fit into one of the neat little boxes many investors like to see. However this presents an opportunity for the patient investor to get into a stock with genuine material upside. The intention to pursue further offshore expansion carries some risks, however management has a lengthy record of cautious progress.
In my opinion, IMF is a sound buy for investors with a medium and long term horizon; it is definitely not suitable for those seeking a regular predictable income and annual earnings certainty.
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Motley Fool contributor Peter Andersen owns shares in IMF and Slater & Gordon
