The financial press loves a takeover, and many column inches have been written recently about Slater & Gordon Limited's (ASX: SGH) $1.2 billion takeover deal in the United Kingdom.
But value investing is often about finding businesses that grow their profits and return on equity at a sustainable rate away from the headlines, and IMF Bentham Ltd (ASX: IMF) may fit that bill for investors willing to take the long-term view.
The Business Model
The legal system is expensive for plaintiffs wanting to bring an action, particularly when they are suing businesses with deep pockets. Litigation funding developed in response to this, to fund the legal expenses of small claimants so that they could have their case heard without the risk of running out of money and having to abandon the action.
In exchange, litigation funders like IMF Bentham take a percentage of around 30% of any amounts awarded in a successful action, and wear the financial loss if they lose in court.
And that 30% can add up to some big numbers, with IMF earning $1.47 billion in gross revenue from case wins and settlements since 2001.
The Investment Case
The investment case for a litigation funder depends on the size of the investment portfolio invested in active cases, and the skill in selecting the cases most likely to win and therefore deliver a return on the funds invested.
IMF Bentham currently has a portfolio of over $2 billion, funding cases in Australia, the United States and the United Kingdom against high profile targets like Vocation Ltd (ASX: VET), Tesco Plc and the Big 4 Banks.
As far as skill goes, as of 2014, of 159 cases it funded, the company had won 14, settled 104 on favourable terms, withdrawn 35 and lost just six.
The share price has recently pulled back from all time highs on the back of an unfavourable decision in South Africa, but this is a short-term reaction that does not take into account the strong overall track record of the business.
IMF Bentham has unpredictable earnings and has suffered a setback to its share price recently, but for long-term investors, this may be an opportunity to invest in a high-quality business with a strong management team that is doing its best work away from the headlines.
