Litigation funders have had a bad rap of late. Burford Capital, backed by beleaguered investor Neil Woodford, became a cause célèbre last month when activist investor Muddy Waters published a damning report on it.
Although the attack by Muddy Waters founder Carson Block focused on Burford and its accounting, other litigation funders came under the spotlight. Manolete Partners is among a small clutch of listed companies that rushed to distance themselves from Burford.
Manolete, which is backed by UK venture capitalist Jon Moulton, listed shares at 175p last December, raising £16m. Unlike its rivals, Manolete, launched in 2009, focuses on insolvency litigation.
If a company goes bust, Manolete finances the work of the insolvency practitioner and its lawyers to claw back money for creditors.
It buys the claim, giving Manolete the right to sue. It will then chase the directors, who have often taken assets out of the company, for a share of the winnings, while creditors tend to get back more than 60%. Case sizes typically range from £20,000 to more than £70m.
Peel Hunt said rule changes in 2016 meant that the main form of funding for insolvency litigation had become “less attractive to claimants”, opening up a £1bn-a-year market.
However, the sector is still haunted by the Burford debacle. Manolete, which has a market value of £225.3m, said the shorter duration of its cases meant that it was easier to value them more accurately and account for expected gains. “Our case duration is less than a year,” said Steve Cooklin, chief executive. He said that only two of Manolete’s 330 cases had gone to trial, both of which were settled, and Manolete collected the money.
“Its ownership of cases allows it far greater insight and control, allowing it to cut [stop contesting] losing cases quickly and at minimal cost,” analysts said.
Still, shares took a hit last month after the Burford case, dropping by a third to 370p, as concern about the sector spread. Shares closed on Friday at 510p.
The growth outlook for Manolete is positive. Analysts at Arden expect it to pursue claims of larger value, which would result in larger settlements. Manolete has already invested in 59 new cases this year – equal to the number it backed over the year to the end of March.
Despite the growth prospects, the sector is now under greater scrutiny. Steely nerved investors might view Manolete as attractive, but with litigation funders under the microscope, it is a sector to avoid.
