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Over his fifty-five years in the investment business, small-cap guru Mark Watson-Mitchell has seen it all. A big claim to fame during his time as a small-cap tipster was getting into ASOS at single figures – that’s pence, not pounds. But since then, his business interests have taken him elsewhere. Today, however, Master Investor is pleased to announce his return to small-cap journalism. Every Tuesday and Thursday Mark will be providing our readers with his pearls of wisdom and scouring the small-cap markets in the hope of uncovering a few gems. So don’t forget to sign up to our newsletter to never miss this exciting column.
A 30% gain in 2019 is very possible
Each year in the UK there are some 14,000 corporate insolvencies and 40,000 bankruptcies. To look after the best interests of the creditors in the UK there are about 1,735 licensed Insolvency Practitioners (IPs), who attempt to achieve maximum returns from the cases that ensue. Often that means litigation against former directors, debtors, suppliers, advisers – and that all costs money.
Generally, the creditors in such situations are unwilling to put up the funds required to cover the litigation costs. The IPs are reluctant to reduce estates further than necessary by paying legal fees etc. – so sums that could well have boosted the creditors’ pot are missed.
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The business of litigation financing may be covered by ‘After the Event’ (ATE) insurance or claims may be handled by lawyers on a ‘No Win No Fee’ basis. ATE involves large premiums as such cases are pursued. The IPs are reluctant to get involved in premium payments and prefer ‘Third Party Financing’.
One big winner in this market place has been Burford Capital (LON:BUR), which provides specialised finance to the legal market. It operates worldwide, with main offices in New York, Chicago and London. The company offers financing to lawyers and clients engaged in litigation and arbitration, asset recovery and other legal finance and advisory activities. In the last 10 years its shares have risen almost 18 times.
On 14th December last year Manolete Partners (LON:MANO) floated on AIM at 175p per share. Through brokers Peel Hunt it raised £16.3m for working capital and existing shareholders lightened their positions in selling £13.1m worth of shares.
In the UK market it is widely recognised as the leading insolvency financing company and it is firmly placed in the top 1,000 fastest growing companies in Europe.
Since its start in 2009, the company has been offered 1,301 cases with a total claim value of £3.9bn. However, it is well worth noting that Manolete has a very rigorous checking procedure before it takes on any claims – less than 20% pass muster. Of the 249 cases to date, worth £64m, it has concluded 173, worth £28m, leaving 76 ‘live’ today.
The procedure involves detailed work by its 52-year-old founder and boss Steven Cooklin and his team: net worth analysis; judgement of legal merits; passing through the investment committee; then investments made; and thereafter cases are managed closely through to a conclusion.
Manolete makes its money by using commercial and legal expertise, supported by its own financial backing, to settle claims quicker than others in the sector, thereby realising more for the creditor estate. Impressively, its investment returns are on average well over 200%.
Whether it is buying (90% of its business) or funding claims, its income model is simple – it pays a small initial amount upfront, paying for all legal costs to progress the claim. When a recovery is made it gets its costs back plus a contractual percentage of the net proceeds – circa 50%. It has in just five cases bought 100% of the recovery.
63% of its cases have been completed within 12 months, with legal costs at 17% of damages recovered, driving average case returns at well over 200%. Of the 173 completed cases just nine have gone to trial, with only one lost at a cost of £34,000.
Understandably, its business is increasing – with new case enquiries running at around £35m of values per month – with an average number now at 20 per month.
On the face of it this company looks very fully valued, it came to the market at £76m and is now some £100m, with its shares at 230p. However, I consider that the 43.57m shares in issue are fairly tightly held: Moulton Goodies has 26.56%; Cooklin has 18%; Michael Faulkner has 13.35%; Soros Fund Management with 10.98%; Miton Group with 9.98%; Hargreave Hale with 9.22%; and Amati Global Investors with 3.50% – that makes 91.59% firm – leaving just 3.66m shares in other hands.
Now, it is very visible why the shares are going higher. The market is all about supply and demand – and the demand, particularly from non-professionals, is increasing.
The year to end-March 2019 results should be announced mid-summer, and they should be very good. The interims to end September showed a 57% after-tax profit increase of £2.5m, a margin of 38%.
This company is really on the up and so too are its shares – despite its high rating 300p is very possible this year.