Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: cameronfen on July 21, 2019, 06:10:31 PM

Title: IMF.ASX - IMF Bentham
Post by: cameronfen on July 21, 2019, 06:10:31 PM
So if you are new to litigation finance, I recommend you read the Burford thread first: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bur-l-burford-capital/

I have attached a write-up.  The basic idea behind IMF Bentham is you are getting the same things as Burford, but better and cheaper.  It has a lower valuation and higher proportion of asset management business which is the best vehicle for compounding capital in this space.  At first glance, this looks like the worst in breed business and trades at a comparably low 2.2x book value compared to comps.  On closer inspection though, management has probably the most effective and best long-term oriented strategy (which is why they are losing money right now), successfully executing a pivoting towards an asset management business model on track to post forward steady-state one year earnings of 50% of its entire market cap in a couple years down the road, which at the same time can grow exceptionally fast off that base at attractive ROIs. 
Title: Re: IMF.ASX - IMF Bentham
Post by: Gregmal on July 22, 2019, 06:01:04 AM
 Good stuff and thanks for sharing.

I am speaking with a couple senior partners at Chapman Tripp and Sparke in AU soon and I hope to pick their brains a bit about these sort of situations, so I have a better understanding from the law firm side of things. It was said in the other thread I believe that lawyers aren't trained to think like MBA's, but to be honest I think that's bullshit. There are plenty of lawyers who are entrepreneurial and one doesn't need an MBA(the most overhyped and useless degree in the world) to see $ signs. So I am curious why there isn't more competition or structurally different setups for funding these things. Law firms have great margins and should have zero problem reinvesting in their businesses for things like this.
Title: Re: IMF.ASX - IMF Bentham
Post by: merkhet on July 22, 2019, 07:56:26 AM
Good stuff and thanks for sharing.

I am speaking with a couple senior partners at Chapman Tripp and Sparke in AU soon and I hope to pick their brains a bit about these sort of situations, so I have a better understanding from the law firm side of things. It was said in the other thread I believe that lawyers aren't trained to think like MBA's, but to be honest I think that's bullshit. There are plenty of lawyers who are entrepreneurial and one doesn't need an MBA(the most overhyped and useless degree in the world) to see $ signs. So I am curious why there isn't more competition or structurally different setups for funding these things. Law firms have great margins and should have zero problem reinvesting in their businesses for things like this.

I think the actual issue isn't that they're not trained to think like MBAs but that most lawyers are fairly risk-averse (at least in the US). This is even more true if you're at one of the big law firms as opposed to hanging a shingle yourself -- there's significant self-selection happening there. So the big law firms with fantastic margins are full of people who self-selected away from the entrepreneurial option.
Title: Re: IMF.ASX - IMF Bentham
Post by: cameronfen on July 22, 2019, 07:59:22 AM
Good stuff and thanks for sharing.

I am speaking with a couple senior partners at Chapman Tripp and Sparke in AU soon and I hope to pick their brains a bit about these sort of situations, so I have a better understanding from the law firm side of things. It was said in the other thread I believe that lawyers aren't trained to think like MBA's, but to be honest I think that's bullshit. There are plenty of lawyers who are entrepreneurial and one doesn't need an MBA(the most overhyped and useless degree in the world) to see $ signs. So I am curious why there isn't more competition or structurally different setups for funding these things. Law firms have great margins and should have zero problem reinvesting in their businesses for things like this.

On the other forum, pondside had a good video about people discussing litigation finance: https://youtu.be/kBvQ3kln1W0.  They discuss increasing competition and the advantages bigger public firms have. 

I think one reason there isn't more competition is because it is a new field.  Previously it was an ethical grey area and only recently did countries pass laws really clarifying/allowing litigation finance a space to function.  It would be nice if you could report the stuff you learn from the lawyers.  I think one advantage IMF has (and Burford) is that they relatively well know so they can raise capital for their asset management firm more easily.  You can't do that if you are a sole proprietor just investing in these things.  Also, I don't think law firms could get into the funding business mainly because you have to be picky with the cases you choose to fund and I think that could ruin relationships with clients that don't get funding, but that is speculation. 

To add to merkhet's comment, I think lawyers are even more risk-averse in the UK.  I think it was mentioned in the video that UK lawyers culturally don't even take fees contingent on the outcome of the case. 
Title: Re: IMF.ASX - IMF Bentham
Post by: Gregmal on July 22, 2019, 08:25:26 AM
Good stuff and thanks for sharing.

I am speaking with a couple senior partners at Chapman Tripp and Sparke in AU soon and I hope to pick their brains a bit about these sort of situations, so I have a better understanding from the law firm side of things. It was said in the other thread I believe that lawyers aren't trained to think like MBA's, but to be honest I think that's bullshit. There are plenty of lawyers who are entrepreneurial and one doesn't need an MBA(the most overhyped and useless degree in the world) to see $ signs. So I am curious why there isn't more competition or structurally different setups for funding these things. Law firms have great margins and should have zero problem reinvesting in their businesses for things like this.

I think the actual issue isn't that they're not trained to think like MBAs but that most lawyers are fairly risk-averse (at least in the US). This is even more true if you're at one of the big law firms as opposed to hanging a shingle yourself -- there's significant self-selection happening there. So the big law firms with fantastic margins are full of people who self-selected away from the entrepreneurial option.

This might be accurate moreso than the idea that they aren't entrepreneurial. I will also add, as what you stated kind of triggered it for me, but people who work high margin(nice way of saying -easy money-) professions, I have found, dont fully appreciate that concept of IRR's or things of that nature. Not to say that dont understand them, but I think when you charge $900 a hour and your partner spilt means you take home $3,500 a day for doing desk work(not to demean it but its still white collar stuff)... your business overhead is low because of the business structure... accumulating is easier than investing. Taking money out of the pocket just isn't something they are used to. Ive encountered tons of insurance and investment firm principals who when it comes to growing their business think exactly the same way. Sign up new annuity clients, take home $xx with 90% margins; thats the business they do.... But then you propose to these people, hey you could triple your office production by bringing in this segment of contractors, but it will require upfront sign on money... and the response is "that'll take me 6 months to recoup". And to me its like. "yea that's tremendous. Usually getting your investment back in 3 years is good, 6 months is crazy"... but to these people they think that is terrible and not worth the capital outlay.

At the same time, as a lawyer, the $900 an hour cost to a client, isn't really a cost of $900. Sure if you take that hour of billable time and spend it doing something that isn't paying you up front, its opportunity cost. But that $900 an hour of "work" is stuff you've been trained to do and know how to conduct through a skillset. It costs you pretty much nothing to execute that work. So in relation to this stuff, I do find it interesting that the finance opportunity comes largely through IMF or Burford, because of the need to pay for litigating. When the litigator's true cost of this, is pennies on the dollar relative to what they charge, and something that if they wanted to, they cost subsidize through their in house advantages.
Title: Re: IMF.ASX - IMF Bentham
Post by: SHDL on July 22, 2019, 08:43:45 AM
Another related point is that a lot of these high wage earners have themselves locked into (very) high fixed cost of living lifestyles via jumbo mortgages on homes in expensive cities, private school for 2+ kids, etc.  I think itís very difficult for them to change that even if they saw these opportunities and had the right skills and temperament to pursue them. 
Title: Re: IMF.ASX - IMF Bentham
Post by: cameronfen on July 22, 2019, 11:28:57 AM
Another related point is that a lot of these high wage earners have themselves locked into (very) high fixed cost of living lifestyles via jumbo mortgages on homes in expensive cities, private school for 2+ kids, etc.  I think itís very difficult for them to change that even if they saw these opportunities and had the right skills and temperament to pursue them.

I think the other thing that shouldn't get lost in the shuffle is even if IRRs go down to 20%, this company still trades around 7 times earnings before factoring AUM growth, which still should happen as this is an uncorrelated asset that even with those harsh assumptions earns twice as much as equities. 
Title: Re: IMF.ASX - IMF Bentham
Post by: Gregmal on July 25, 2019, 07:33:27 PM
So I still have a few more contacts I hope to speak with, but after the first couple, the consensus in regards to the above is basically:

Top level lawyers dont sign on new clientele unless there is the expectation of 7 figure annual billings and retainers to match. These guys, and particularly the partners at the senior levels, aren't terribly interesting in passing up the above fees and four figure hourly billings on a maybe. Even if the maybe is substantial. Once you get to partner, you are already financially secure, and the objective is to position your associates and laborers in a way to maximize revenue for the firm partners.

On the lower levels, there is just too much work to occupy ones time with projects, like many of these cases. This type of work has typically been reserved for ambulance chasers and sleazy class actions law firms. Kind of the lowest of the low in the world of the elite lawyers.

I dont find these reasons to make a whole lot of sense when the IRRs are what some of these firms state. However this seems to be a culture thing and not something that changes overnight with the major global law firms. There is definitely room for disruption and a window to do it. I think eventually these guys realize this is low hanging fruit. But for now, you have the old guard kind of keeping the door shut because life is good and fees are both high and easily attainable. Bodes well in the short term for companies like Burford, IMF, LIT, etc.
Title: Re: IMF.ASX - IMF Bentham
Post by: cameronfen on July 26, 2019, 07:13:28 AM
These guys, and particularly the partners at the senior levels, aren't terribly interesting in passing up the above fees and four figure hourly billings on a maybe.

With regards to litigation finance, what do you mean by a "maybe"? 
Title: Re: IMF.ASX - IMF Bentham
Post by: Gregmal on July 26, 2019, 07:32:31 AM
These guys, and particularly the partners at the senior levels, aren't terribly interesting in passing up the above fees and four figure hourly billings on a maybe.

With regards to litigation finance, what do you mean by a "maybe"?

Some of my concerns regarding the future returns here revolve around the question of "what if the law firms start doing this on a contingent basis or taking more of the pie that the current setup allows people like Burford to grab?". As I mentioned in a different post, the bulk of the need here is people can't afford to pay the lawyers. Look at the Hulk Hogan case for instance. The edge goes away if the law firms start approaching these from an entrepreneurial standpoint rather than a fee collector position.  But from what I've gathered, given their positions and culture(which is probably the biggest aspect at the top law firms), they just dont want to work unless the billings are guaranteed. Using the Hogan case for instance, where Peter Thiel apparently made a killing doing exactly what Burford and co do... from the law firm's perspective, they rather just take the monthly billings and a smaller cut, or turn down the case and lets say do work for a larger corporate client at $40,000 per month.... than go whale hunting for little up front cash. I bought a little more BUR and have been putting on positions in some of the other names as well(taking the basket approach) because I think for the short to intermediate term... returns here are safe. Compeition will not be a intense as people think. The Legalist's and Mighty's can continue to pop up, but the pie is very big and I think the more experienced players do have a competitive advantage. However longer term, I definitely expect that to change.
Title: Re: IMF.ASX - IMF Bentham
Post by: Gregmal on July 26, 2019, 07:40:15 AM
I guess to simplify it, while many who look at the threat to the investment thesis as competition from other litigation finance co's, I view the threat as moreso coming from the law firms. They make a ton of money, can do the work for whatever price they want, and because of the partnership structure of most of these firms, have the flexibility to charge the approach faster than a traditional company. That said, this, being the biggest threat IMO, is still not really something to worry about for the time being. Other litigation finance companies can pop up, but they dont have any data or sourcing advantages that the bigger guys dont have as well, which then begs the question, why would anyone go with the newer, lesser known funds, all else being equal?
Title: Re: IMF.ASX - IMF Bentham
Post by: cameronfen on July 26, 2019, 11:43:56 AM
These guys, and particularly the partners at the senior levels, aren't terribly interesting in passing up the above fees and four figure hourly billings on a maybe.

With regards to litigation finance, what do you mean by a "maybe"?

Some of my concerns regarding the future returns here revolve around the question of "what if the law firms start doing this on a contingent basis or taking more of the pie that the current setup allows people like Burford to grab?". As I mentioned in a different post, the bulk of the need here is people can't afford to pay the lawyers. Look at the Hulk Hogan case for instance. The edge goes away if the law firms start approaching these from an entrepreneurial standpoint rather than a fee collector position.  But from what I've gathered, given their positions and culture(which is probably the biggest aspect at the top law firms), they just dont want to work unless the billings are guaranteed. Using the Hogan case for instance, where Peter Thiel apparently made a killing doing exactly what Burford and co do... from the law firm's perspective, they rather just take the monthly billings and a smaller cut, or turn down the case and lets say do work for a larger corporate client at $40,000 per month.... than go whale hunting for little up front cash. I bought a little more BUR and have been putting on positions in some of the other names as well(taking the basket approach) because I think for the short to intermediate term... returns here are safe. Compeition will not be a intense as people think. The Legalist's and Mighty's can continue to pop up, but the pie is very big and I think the more experienced players do have a competitive advantage. However longer term, I definitely expect that to change.

Ahh I see.  I guess one problem from a law firms perspective is reputational.  How do the clients know you are acting as a fidutiary when you not only get paid for acting as a lawyer but get large payouts based on contingents?  I'm espeically thinking about cases where clients also want something other than money like for example a company wants a copyright or patent enforced or a individual wants some vindication.  I think (although not sure) this is one reason why the British legal system is even hesitant for lawyers to accept any contingent fees. 
Title: Re: IMF.ASX - IMF Bentham
Post by: cameronfen on August 07, 2019, 08:52:43 AM
So one thing that seems to be lost in all the hubbub around Burford is IMF is primed to benefit.  Money is still going to flow into litigation finance, but with Burford looking tainted, where will it flow but the second-largest asset management player? 
Title: Re: IMF.ASX - IMF Bentham
Post by: Gregmal on August 12, 2019, 05:06:16 PM
I added to this the other day at 3.20. If nothing else the drama around BUR has put into perspective how Bentham has been able to quietly go about business for nearly two decades, while posting similar, more easily verifiable returns. MW actually highlighted IMF as "how you should do your accounting".
Title: Re: IMF.ASX - IMF Bentham
Post by: cameronfen on October 16, 2019, 07:17:17 PM
IMF announced a private placement in conjuncture with a rights offering: 

https://www.imf.com.au/docs/default-source/investor-presentations/investor-presentation-october-2019

The directors are all taking part in the rights offering.  It looks like some institutions were backstopping it, but I'm not sure.  I can't tell though if directors will be able to get the remaining shares based on people that didn't undertake the rights offering or were ineligible.  Doesn't help that this situation is in Australia and I have no good handle on how its suppose to go.  I can't partake as I don't like in Australia or New Zealand, but I'm wondering if people who know more about these special situations have a handle on if the BoD is trying to increase there stake in the company, or if they basically just sold off 20% of their high ROI mainly asset management business for a company that makes money with predominantly financing litigation through portfolio investments.