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Edited Transcript of IMF.AX earnings conference call or presentation 22-Aug-19 10:59am GMT

Full Year 2019 IMF Bentham Ltd Earnings Call

Sydney Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of IMF Bentham Ltd earnings conference call or presentation Thursday, August 22, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Saker

IMF Bentham Limited - MD, CEO & Director

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Conference Call Participants

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* Mark Richard Southwell-Keely

Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research

* Michael Peet

Goldman Sachs Group Inc., Research Division - Executive Director

* Nicholas Caley

Baillieu Holst Ltd, Research Division - Equity Research Analyst

* Peter Delevett

Intel Capital - Global Marketing & Public Relations Director

* Peter Meichelboeck

Select Equities Pty Ltd., Research Division - Head of Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to full year results 2019 conference call. (Operator Instructions) I must advise you that this conference is being recorded.

I would now like to hand the conference over to your speaker, Mr. Andrew Saker, Managing Director and CEO.

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [2]

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Thanks, Jess. Good morning, ladies and gentlemen, and thank you for participating in our call. Joining me today is Stuart Mitchell, our group CFO; and Jeremy Sambrook, our Group GC and Company Secretary. The purpose of today's call is to present our financial results at year ended 30th June, 2019, and discuss the next steps in our continuing evolution of the business.

Turning to Slide 2. In our usual style of transparency, openness and candor, we commence this presentation with a defection of what worked and what didn't during the last financial year. Before we get to that, and in response to recent interest in accounting policies in the dispute funding sector, I would like to remind our shareholders that we do not use the concept of unrealized gains to reduce earnings volatility. Instead, we only recognize earnings at the conclusion of an investment. Booking unrealized gains may ease the pain of lumpy earnings, but runs the risk of potentially distorting portfolio health and overall performance. We've taken the less easy path, but one that should give our shareholders confidence in our reporting, but unfortunately will produce lumpy results till such time as we complete our transition.

Let's start with what didn't work. As you'll be aware, our interest results show a consolidated loss after tax and NCI of approximately $25.4 million. This is the largest loss in our history and results from a number of factors. Firstly, the strategy to grow the business meant we had to invest ahead of the curve. We've never been shy about our plans in this respect. In our FY '18 annual report, we set out a number of our philosophies on business, a couple of which are worth repeating here. A, we take a long-term view over a short-term view every time. This means preparing a long-term view of maximizing cash flows over short-term decisions that should (inaudible) seek profitability. We recognize the pain and share that with our stakeholders that remain convinced that our approach will deliver the long-term benefits we will seek. And b, we are prioritizing growth for long-term profitability. We are growing our capacity to be future fit in a rapidly growing industry. We need to develop scale and global presence to enhance our sourcing capacities and to mitigate risk.

Whilst our decisions during this transition phase have short-term adverse P&L implications, we were confident that the investment would be for the beneficial -- for the benefit of our future profitability and strength. To some extent, that is borne out in the completions we've seen in the past 2 months, and I'll come back to that shortly.

Secondly, we had very few completions in FY '19, and of those completions, a number of them had modest returns. These outcomes reflect the continued transition of our business from a capital constrained investor in a small number of matters with a small commitment as we were in FY '16 to a fund manager, investing in a diversified portfolio in FY '19. This transition was never going to occur overnight, given the gestation period of the underlying investments. We continue to ramp up our business in FY '16, and this is the fourth full year of this transition. Whilst we would have preferred to have seen more completions occurred at the right side of June 30, they did not. And instead started to fall into the FY '20 year with a consequential impact on the results for FY '19.

In addition, as we've seen throughout the dispute resolution finance industry, there has been a general slowdown in the conclusions of matters, whether it be by way of court determination for settlement. This is particularly being apparent where the dependent is insured.

Thirdly, we had 3 losses during the year, all of which were in our fund structures, as these funds are consolidated, their impact on our financial results in their entirety, even though we only have a minority interest in those funds. These losses are an unavoidable part of our business. If we bat a thousand, we are too risk adverse and will leave too many opportunities on the table. As such, our shareholders need to accept the inevitability of the occasional loss. As much of our shareholders understand by investing in fund structures, we are mitigating the cash impact of these losses compared to the time when we were a direct balance sheet investor.

Finally, we have recognized a number of impairments on our investments. This is not investment that have been written-off, but investments that we consider it is prudent to raise an impairment charge due to developments in the case or where it is appropriate and (inaudible) the requirement for IFRS standards. An example of these impairments may be helpful. In one investment that we have impaired, we invested some capital into a pretrial discovery motion. We are undertaking this interrogatory step to prove up our case before investing further. We have one signed up client, which is all that is required to commence the interrogatory process, but if we lost alone would be insufficient to recover the entire investment to date. If we obtain the pretrial discovery audits and prove up our case, we will launch a book build to establish the class, at which time, we should have sufficient clarity on the recovery of our investment, and we'll reverse the impairment. However, as these stages fall either side of the balance date, the appropriate approach is to raise an impairment charge, which is what we have done.

Now let's turn to what has worked. Whilst profitability lagged the investment, we are thrilled by the developments we have made in the growth of our business, which establishes the platform for a very bright future. Our business had 2 key assets, being money and people. We successfully grew both our key assets over the last financial year. On funds management front, during the course of the year, we upsized Funds 2 and 3 and then billed them both. Further, we concluded the commitment period for Fund 1 and commenced investing into its successor fund. This brings an end to the first generation of our funds based on European waterfalls, where we were capital subordinated and deferred in cash collections. The billing of these funds were materially ahead of schedule and reflects a strong demand for our litigation financing in the markets in which we operate.

During this year, we successfully launched funds 4 and 5, obtaining commitments from external investors, which, combining with our own balance sheet committed raised USD 1 billion for new investments, both within the U.S. and outside of the U.S. Both of these funds have an embedded option for the investors to agree to upside these funds to an aggregate of USD 2 billion. By any measure, this is an enormous pool of capital that can be recycled during the commitment period and that is locked in for us to invest. These fund structures are part of the second-generation of fund models meeting an American waterfall, which facilitates a (inaudible) return of capital and performance fees to be paid on each individual investment.

For FY '19, we set a target of having AUD 1.5 billion in funds under management. We met and exceeded that target, and now have close to $2 billion in funds under management. Because of our access to capital, we were able to materially grow our portfolio in terms of both the number of investments and the intangible asset value and the corresponding TPV. The growth in the number of our investments reflects the continued diversification of risk through a portfolio approach. Our investments are diversified geographically and by case type and size. We materially increased our head count by 33% during the course of the year, which is a driver for the sourcing and underwriting of investments. This increase in our team also mitigates risk, both at an investment level and an operational level. At an investment level, we have a broader team of expert sourcing and underwriting opportunities, which increases diversification and mitigates risk. At an operational level, as the leading team of experts in prejudgment merits-based investment opportunities, we are under constant threat of poaching of our team members by competitors. By deepening the pool of talent, we reduced the impact of the occasional loss of a team member to a competitor, whilst concurrently expanding the referral pool for new opportunities.

Finally, as alluded to earlier, we have seen several completions in the past 2 months that have settled rather conditionally or in principle. The conditional settlement is usually awaiting court approval, which can take up to 3 months to obtain. We do not usually recognize the revenue from these completions until court approval has been obtained and the appeal period from the approval order has expired. The in-principal settlements where an agreement have been reached to settle a matter, but the documentation is awaiting execution or approval by a third party. Some of our indirect investments in the U.S. have an in-principal settlement which awaits court approval, which will result in a recovery by our client, which then flows through to us. Again, we do not recognize this income until receipt is certain.

Turning to Slide 3, and expanding on the last point. As you'll note -- as noted from our recent announcements, we've had a number of investments complete during the period from 1st of July through today. These investments relate to balance sheet and fund investments. And as such, we expect will appear our consolidated results for FY '20, assuming the recognition criteria previously mentioned are satisfied. These completions are expected to generate approximately $110 million in revenue, which is over 3x the total revenue we generated for the entire last financial year. These completions relate to $467 million in APV, which represents a revenue to APV ratio of 23%. This is materially higher than our long-term average. However, our long-term average does include losses in adverse costs and as such will be lower than the subset of successful completions as we've seen in the recent couple of months.

As I've previously mentioned, we've been [meaning] to have some of these conclude prior to 30 June, so that we could have recognized the income in last year's results. However, we do not directly control when these investments conclude, which we're able to recognize the revenue. And of course, we don't recognize unrealized gains.

As you will note from our portfolio disclosures, we expect a number of other matters to complete during this financial year, which if successful is likely to make FY '20 our most remunerative year to date. This ramp-up in the number of completions is a reflection of both the lag from the previous year, but also as a consequence of our diversification strategy, which increased the number of investments since FY '16. The measure of our growth over the past 4 years is reflected in the next slide in our deck.

Turning to Slide 5. Since the Board approved the 5-year business plan in FY '16, we've invested heavily into our diversification and infrastructure to facilitate growth and to mitigate risk. As you'll note from this slide, we have expanded our geographic footprint and now operate in the largest litigation markets in the world, including the U.S., U.K. and Asia. We have divested our joint venture interest in the U.K. and reestablished our brand under our own sole control. We've increased the number of investments. This is an important for portfolio risk management. We've done so without compromising our standards. Our conversion rate has remained consistent with it throughout this period, whilst we've enhanced our risk management through an expanded investment committee. As a collateral to the growth in the number of investments, we've also seen growth in the APV, whilst the number of investments has doubled during that period, APV has grown by 475%, which reflects the growth in the size of the underlying investments. As previously mentioned, we invested ahead of the curve to facilitate growth. We've invested in our infrastructure, our processes and systems and our team. Our headcount has almost tripled in the past 4 years. We've also successfully transitioned from being a balance sheet investor to a fund manager with the launch of 5 funds in 3 years with an aggregate commitment of close to $2 billion, with the capacity to be expanded to over $3.5 billion.

We're often asked by investors and figurative investors about future growth. Whilst there are apparent increased levels of competition, not all competition is the same. The large number of funds that were launched in FY '18 do not appear in direct competition to us, they do not have either the sourcing or underwriting capacity to do so. There are very few competitors that have the bench strength to compete with us and fewer still that a public companies all transparent. Further, the penetration rates in the addressable markets for dispute resolution finance in the jurisdictions in which we operate remain low, notwithstanding the rapidly growing levels of awareness and appetite for dispute resolution finance. We are more excited about the future than what we have achieved to date as we believe that with the amount capital we have available to deploy, and the team we have to source and underwrite opportunities, we are well placed to continue our growth trajectory.

Turning to Slide 7. As discussed at the beginning of this presentation, our loss this year is being driven by a few key factors. A, a low number of completions leading to low income, a lower profit from fewer completions such that the expense to income ratio is atypical compared to previous results. 3 losses, which have had a P&L impacts but no balance sheet impact and a few impairments, which, again, have a P&L impact but no cash impact. We do not hide from the fact that this is a less-than-desirable results. However, this outcome was largely in line with the expectations as reflected by our quarterly updates throughout the year. Similarly, the positives for the year, as we mentioned at the beginning of this presentation, include the growth in our balance sheet and infrastructure, in particular, we had substantial growth in our net asset backing per share cash, intangible balance APV and number of active investments.

Turning to Slide 8. As most shareholders will know, IFRS reporting for our asset class gives rise to some complexity in our accounting and reporting. We've chosen a path for reporting our investments as intangibles, which leads to reporting assets on a cost basis. Some external commentators have criticized the capitalization of some of our expenses, which are limited to interest in a portion of direct labor and occupancy expenses into our intangibles. This criticism largely arises from being informed about the IFRS accounting standards, which requires certain expenses to be capitalized as the intangibles are qualifying assets for the purposes of the standard. As such, we had no choice but to capitalize those expenses. However, rather than obfuscate and artificially inflate the carrying value of intangibles, we fully and clearly disclosed the carrying value of those investments and provide details of the amount capitalized for each expense for each period and in aggregate, so if investors can dissect the information as they require. We have always stopped the proposition that the best defense for the industry is transparency and disclosure.

To mitigate some of the confusion, we also reconcile our cash performance to the IFRS accounts. The cash reporting is largely consistent with our IFRS results reflecting a low number of meaningful completions during the period. However, it is also important to note that during the period, we've also managed our cash outflows to match our cash inflows.

The next couple of slides deal with our balance sheet. As you would expect from our recent capital market activities, we've grown significantly in terms of cash on balance sheet and net assets, both of which are up 40% year-on-year. The increase in NCI reflects the increase in capital contributed by our fund structures in the accrued preferred return associated with those advances. The NCI will unwind as the external capital and preferred return is distributed back to those investors.

On the next slide, our investments have increased by 33% over last year and APV has increased by 41% over last year. In terms of balance sheet investments, we have continued to deploy capital into these assets, notwithstanding the balance sheet investments are in runoff. The largest expenditures were associated with the 2 Ws as they proceeded through trial. The expenditure on balance sheet investments will moderate in FY '20 as the number of these investments have now finalized either by way of settlement or completed debt trials.

Turning to Slide 11. Given the limited number of completions, the metrics in this slide has not changed materially for the past 18 months other than a slight drop in the success rate, which is dipped below 90% for the first time and the ROIC. We continue to be one of the leading industry participants in terms of our success rate, returns to clients and ROIC. Our client -- returns to clients, which we believe underpins the rationale for the existing (inaudible) industry, remains at 60% plus, resulting in almost $1.5 billion being returned to clients. Given the low number of completions, the 3 losses in FY '19 and the lower margin on those completions, we've seen a gradual trend towards a higher cost to revenue ratio, which has moved from a historical split of 35% to 42%, which has, in turn, reduced our historical ROIC from 140% to 134%. On the success figure, with the recent completions factored in, the success rate is once again lifted to about 90%, which is our continuing target for investments.

Turning to Slide 12. Some participants in our industry have a reasonably flexible approach to defining some of the key metrics, such as ROIC. As such, it does make it difficult, if not impossible, to compare the performance of one manager to another. However, for the sake of clarity, we measure ROIC based on completed matters only and include losses and adverse costs. We do not include partial completions even with the pro rata allocation of the underlying investments as mitigation is never a straight line, and usually the difficult and more expensive issues arise at the back end of litigation, not where the low-hanging fruit resides. Our non-U. S. ROIC was around 153% in FY '16 and is now back at around 154%. We did see a lift in ROIC in FY '16 and '17, primarily from a large one-off completions that tends to skews statistics. However, more meaningfully, in recent years, we've seen a trend downwards on ROIC largely in the U.S. Whilst we expect this to reverse with recent successful completions, this trend has resulted from a number of influences, including losses in recent years and small number completions, which gives rise to a disproportionate impact on ROIC. The one large loss in the U.S. has had the much significant impact in the last financial year. We expect ROIC in the U.S. to increase with successful conclusion in some of the matters, as will be shown later in the presentation.

In Australia, we have seen court intervention in the securities class action arena, which has resulted in lower returns on completed matters as the courts seek to impose a reduced level of commission to funders. This is also coupled with the impact of some competitors, self-anointed disruptors who've chased down returns to a level that sometimes do not reflect the risks involved. We expect the former to be a longer-term change and latter to be a medium-term trend, which should reverse once those competitors become more familiar with the risks of such litigation. In the U.S., ROICs have historically been lower than non-U. S. investments due to the shorter duration of investments in our graduated remuneration structure.

Turning to Slide 13. Whilst we run a global business, which is consolidated to produce a diversified approach to investment and risk, we do bifurcate our business into U.S. and non-U. S. jurisdictions, largely to reflect that the "loser pay" system does not operate in the U.S. It does in other common law jurisdictions in which we operate. In addition to the "loser pay" system, there are other key differences between the U.S. and the non-U. S. dispute resolution systems, including the use of jury trials for commercial disputes in the U.S. and the U.S. system expedites some of the interlocutory processes, which can truncate the litigation lifestyle -- life cycle and reduced duration. The differences in each system has led to an impact on financial outcomes, such as the shorter duration in the U.S., leading to lower ROICs compared to the non-U. S. results. We note that our sample size is relatively small, and as such, may not be representative of what may occur in the future. In particular, the impact of our 2 investment losses in the U.S., has had a significant impact on IRRs and ROICs for our U.S. matters.

Turning to Slide 14, and now funding funnel. With the growth in our team, we've seen an increase in our funding applications of 12% year-on-year and a CAGR of 22% for the period from FY '15 to '19. Notwithstanding the increase in funds available to commit, our long-term conversion rate has remained around 5%, and in FY '19 was actually less than 4%. It is easy for some risk funders to fall victim to the need to continually grow the book, which is sometimes reflected in a higher conversion rate. It also nonsense to rationalize an increased conversion rate by reference to a better qualified applicant. In any event, notwithstanding the increased levels of competition around the world, we have continued to increase our source of opportunities. Our goal has been to increase the number of commitments and amount committed each year to achieve the risk mitigation benefits of the diversified portfolio's investments. In the 3 years prior to FY '15, IMF committed approximately $30 million per annum into an average of 6 new investments per year.

Since January 2015, we commenced [branching] up the number of investments per year and our annual commitments of capital, all initially from balance sheet capital. With the introduction of additional financial and human capital, we continued our growth of funding commitments. In FY '19, we committed conditionally and unconditionally, $223 million of capital, which is over 4x the amount of capital we committed in FY '15. In the next financial year, we are budgeting to commit capital of $276 million, which, again, is a material step-up over our long-term average.

Turning to Slide 16 and our investment portfolio. This next section deals with our investment portfolio at 30 June, 2019. At 30 June, 2015, the APV of our portfolio stood at around $2 billion and comprised 41 investments made entirely from our own balance sheet resources. Over the next 4 years, we increased our portfolio to 83 active investments with an additional 11 investments conditionally approved. The active investments represent an APV of approximately $8 billion and conditionally approved investments represent an additional $1.5 billion in APV. Our investments are now split between balance sheet and various fund structures.

Investments on our balance sheet and in our first-generation funds being funds 1 to 3 are now effectively in harvest mode. Future investments were almost entirely be made into Fund 4 and 5, our second-generation funds.

Turning to slide 17 and the 2 Ws. As we've reported for some time now, there remains 2 large legacy investments being Wivenhoe and Westgem. We had expected that both of these investments would be resolved either by way of settlement or court determination prior to the year-end. However, that expectation was not met, and these matters remain outstanding to this date. We are waiting on court determinations in both matters and have no clear time frame for when those decisions will be rendered. We acknowledge that both matters were complex and subject of lengthy trials and a delay of this length of time rendering a decision is not unusual.

Turning to Slide 18. As previously mentioned, our investments are now spread over our balance sheet in funds 1 to 4. As noted, funds 1 to 3 are largely filled and are in harvest mode. We expect a material number of completions this year on top of the $467 million of APV of conditional and unconditional completions announced from the 1st of July to date, but as always, it will be the usual risks of delay. As noted earlier, we've made a reasonable start with the completions, and we're pleased to see that translate through to income, which will hopefully be recognized in FY '20. The estimated completions of $3 billion this financial year will be a challenge to replace. It's impossible to predict the APV of investments that will be made. With the increased budget of investments for FY '20, we hope to continue to grow our total APV. To put it into context, with a budget of $172 million in FY '19, we added $2.5 billion in APV. So we do think it is possible to achieve and it is within range.

Turning to Slide 19. From a geographical perspective, our investments are now roughly split evenly between the U.S. and non-U. S. jurisdictions. We don't necessarily have a target for the split of U.S. and non-U. S. matters. However, given the fund size for each of funds 4 and 5 are the same, we expected our geographic diversification will remain reasonably consistent. As we've noted in the past, we are an opportunistic investor, and as such, are to a large extent, a deal taker. If an investment meets our criteria and survives our due diligence and investment committees, we will make the investment. Of course, this is subject to a number of structural limits under the funds, particularly around concentration caps. We're also conscious of maximizing our returns, and as such, will limit the announced law firm portfolio and appeal funding in which we invest, as they're generally lower risk, but also lower return-type investments. Our primary focus remains on prejudgment or award merits-based investments for which our IM cohort is specialized and arguably industry-leading.

We remain keen to invest in group claims but have now diversified away from being so focused on shareholder class actions in Australia. We now invest in a range of group actions in Australia, Canada and after the balance date, in Europe. These investments are a combination of shareholder class actions, environmental claims and cartel claims, including our single largest funded claim in Canada. The design to shift away from our focus on shareholder class actions in Australia may be temporary and will depend on how the courts and competitors continue to behave. It is also consistent with our strategy to expand our corporate finance offerings in Australia and globally. As we noted earlier, the courts have to started interfere with contractual rights between funders and group members with the apparent aim of improving the returns to group members at the expense of funders. This is being required after a few funders took advantage of the circumstances and took disproportionate returns from the proceeds of claims, resulting in poor returns to group members. However, the court has now gone to the extreme and do not, in our view, properly consider the risks of the litigation borne by the funder in determining an appropriate return to that funder.

Further, some competitors have entered the market as self-proclaimed disruptors and achieve what the court sought to do depressing returns to funders. In our view, these disruptors have also not taken into account the risks of litigation. We suspect that in the fullness of time, these funders will learn that the depressed returns they seek do not properly or adequately compensate for the risks and a likely of disappear after a few losses or simply collapse. As such, we will take a long-term view on these investments and will proceed where the economics makes sense, but will not chase these depressed returns and will otherwise continue with our diversification approach and limit our exposure to shareholder class actions in Australia until such time as a sensible and appropriate risk-adjusted return is available.

In addition, we have seen a material increase in corporate activity, which now represents approximately 20% of our investments comprising amongst other things of appeal funding litigation and arbitration funding. The strong contributors to this outcome are in the U.S. and Asia, where corporate seems to be more willing to embrace dispute resolution finance a source of risk and financial management. We ramped up our efforts in Australia and are seeing some encouraging signs with an increased appetite for corporate funding, such as the recently disclosed discussions with (inaudible) here in Western Australia.

Turning to Slide 22, which deals with our completions by funds. Completions to date have been limited and as such are affected by outlier-type results, both on the positive and negative sides. It is difficult to place too much reliance on these results to date. However, as this is now our core business going forward, we plan to report on a historical fund performance. Given the nature of the asset class, we elect not to provide earnings guidance and indeed have additional SEC regulations and restrictions in the area of our U.S. firms.

Turning to Slide 21. The next 2 slides -- sorry, 23, our next few slides deal with our fund activities. We commenced Fund 1 in February 2017, with an initial investment capacity of USD 133.3 million. After we sold a number of balance sheet assets into the fund, we upsized that t fund to USD 166.6 million, of which our investor contributed $125 million and IMF contributed $42 million. We have now fully drawn down all contributions and closed commitment period to allow us to commence investing into Fund 4, the successor fund to Fund 1. At 30 June, we had capacity to invest an additional $6 million into the fund, which will be utilized on investment opportunities in our pipeline. We've made a number of realizations of our investments and commenced to return priority capital and preferred return to our investor. Fund 1 is basically in harvest mode.

Turning to Slide 24. We commenced Fund 2, 3 in October of 2017, with an initial aggregated commitment level of $150 million, with a view to deploying that capital over a 3-year period. In January 2019, less than 2 years after the commencement of that fund, it became apparent we required additional capacity in the fund to provide us with sufficient time to launch its successor fund. We subsequently upsized the fund to $180 million of which IMF committed -- is required to commit $36 million. The balance of which came from 2 external investors. At 30 June, the fund is now 93% committed with additional investments in the pipeline such that investors have agreed to bring the commitment period to an end, which allows us to commence investing into Fund 5, the successor fund to Fund 2, 3. Fund 2, 3 will also now effectively enter the harvest mode. IMF is contributing $16 million to this fund to date and is required to commit an additional $20 million, which it will do so over the next few years on an as-needs basis as funded are deployed for commitments over the life of the fund.

Turning to Slide 25. Fund 4 closed in 2015 with first investments in April 2015. Fund 4 has an initial capacity of $500 million comprising $400 million from external investors and $100 million from IMF. Contributions are made on call and the fund is a closed-ended funds, meaning investors cannot regain their capital early. Fund 4 is our second-generation fund, which is structured on an American waterfall basis, which provides the capital to be returned on a pari passu basis amongst our investors, including ourselves. IMF earns a management fee on deployed capital, which is paid quarterly, and performance fees on an investment by investing the basis, 20%, which is on an investment-by-investment basis of 20% for an IRR of less than 20% and 30% for the portion of the profit, which exceeds the 20% IRR.

The second-generation funds will be more focused on IRR, whereas first-generation funds are focused on ROIC.

Finally, turning to Slide 27. Whilst we cannot control the world around its unforeseen circumstances to occur, we remain vigilant against those threats and risks that confront us. The recent issues with one of our competitors, it allows -- has allowed us the opportunity to highlight the differences amongst participants in the industry, whilst we've had to deal with some criticism for our conservative approach. The consequences of the alternative should be apparent to all.

One of the focus areas for our future remains developing our offerings in the corporate funding market. We've made significant progress in these initiatives over the past 12 months and now have almost 20% of our investments in this market. We've also established focus groups with various teams to allow specializations to develop in specific areas, such as arbitration, insolvency and insurance and which allows our teams to cross pollinate, notwithstanding the geographic diversity. We are taking a global and coordinated approach to our business, which injects a new level of professionalism into the business. We're looking to continue to expand our geographic footprint, both within our existing jurisdictions, such as Asia and Canada, but also into new jurisdictions, such as Continental Europe. Our footprint makes us one of the largest funders in the world and enables an increased ability to fund at multinational disputes. One of the capital market initiatives for this year will be to address the OTC debt, which is due by 30 June, 2020. We plan to either repay this debt from current resources and revenue from completed matters or to refinance the debt on terms similar to the restructured funds with extended [T notes] and consistent providence.

Ladies and gentlemen, that now concludes our presentation, and I'll hand back to Jess to facilitate and to coordinate our Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Nick Caley from Baillieu.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [2]

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Just a couple of questions. Firstly -- sorry, I just want to get it straight in my mind. You said your normal impairments from lost cases, which go to net revenue, but then you've added that $9.5 million as part of expenses related to the review of carrying values. Is that right?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [3]

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Yes. That's correct. And we raised an additional $9.5 million in impairment, some of which, as I mentioned in the presentation, are capable are being reversed, such as the examples that we provided.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [4]

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Right. That'll be an ongoing process, obviously, and that could be a swing line. Does that have any magnitude going forward?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [5]

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Well, normally, if we've completed the matter we bring it to account and recognize it as a loss. This one, they fall either side at the balance date. So if they could view on what the appropriate treatment is, in the example we provided that it's more than likely to be reversed during the course of this year. So it is -- in fact, it is a possible factor, yes.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [6]

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Okay. Just on your contribution of Fund 5, so I'm just -- you might have said that the USD 100 million you have to put into Fund 5, have you already put that in?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [7]

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No. That to be contributed over the next 4 years on an as-needs basis.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [8]

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And just with the 2 Ws, you said there's no time line. Would you be surprised of it leaked into the second half of FY '20?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [9]

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No. I wouldn't be surprised if it leaks into the second half of FY '20. We don't have any clarity on it. As I mentioned, it's not unusual, complex cases, to take this one for a decision. Yet, we remain hopeful that meaningful discussions could be recommenced on potential settlements on those matters as well.

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Operator [10]

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(Operator Instructions) And your next question comes the line of Mark Southwell-Keely from Select Equities.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [11]

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I have several questions. The first one, I'm just -- if I can refer to Slide 3 and Slide 22, am I correct in interpreting that on Slide 3, there's a Fund 1 result there [in green] in principle settlement of $32 million. Has that been previously disclosed? Or is today's release the first time that that's been disclosed?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [12]

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Slide 3 and Slide which is your second reference to?

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [13]

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22.

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [14]

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So the -- in Fund 1 or Fund 4, which fund is it that you're referring to?

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [15]

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In Fund 1?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [16]

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Fund 1. No, I think we've previously disclosed that one and the 1 and Fund 4, both have been disclosed.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [17]

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Because I think when you put out your market update the other day in response to the Burford debacle, I think at the time, or may -- at the release of your last quarterly in fact. At the release of your last quarterly, you had a similar table that had completions post June 30, which amounted at that time to 68 -- sorry, $69.2 million, and that's now going up to $110 million. And I'm just trying to track the difference from that release of the quarterly to now. And in Fund 1 at that point in time, there was nothing in Fund 1. And now, in that table, you've got $31.7 million.

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [18]

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Yes. That's correct. So there has been a subsequent completion in relation to Fund 1.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [19]

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Sorry, so it is in disclosure?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [20]

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Well, it's not a new disclosure today. It was disclosed by way of an announcement during the course of the last few weeks.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [21]

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Just moving on, if I just cross-reference that table on Slide 3 to the table on Slide 22, you also -- on Slide 22, you're looking at completions by fund. And I'm just kind of cross referencing, and this might have been part of that disclosure that you've made already, I guess, that the ROIC, should we interpret the ROIC on that $31.7 million, a 0.14?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [22]

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All right. That's (inaudible) of all of those 16 patients, so it's an uplift of negative 0.11 to a positive 0.14, (inaudible) that type of impact, but it's a weighted average fee, not a direct [impairment].

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [23]

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So if I just got to Slide 8, and also, if I refer you to Page 96 of the annual report, so Slide 8 and Page 96. I'm just trying to reconcile what you're saying here in Slide 8. So you're saying that you've managed your cash outflows to suppliers and employees. So in the prior year, it was $44 million, and it's gone down to $35.6 million. And I'm trying to then reconcile that to the P&L. And in Note 5, your OpEx is effectively gone from 29 in the prior year to 40. And then I'm also just cognizant of the fact that your employee numbers have grown quite substantially. There seems to be a bit of a contradiction in the cash flow versus prior OpEx and a substantially growing [above it]. But can you just elaborate on that for me, please?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [24]

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Sure. It's through the consolidation of external resources from the fund. So the funds are actually making payments of cash to this provided [about it] which gets consolidated into the P&L. So the Note 5 is a consolidated figure. What we see on Slide 8 is actually our cash flows.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [25]

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Okay. So your employee numbers, which you just said in the conference call have expanded, but I think you said 30%. So notwithstanding that your employee numbers are growing substantially and your geographic footprint, you're saying that your cash OpEx has gone from 44 to 35?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [26]

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Yes. Because their contribution in the funds is lower. They're making a direct dollar-for-dollar expense.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [27]

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It's a touch confusing, but I'll move on. In terms of the impairment of intangible assets, which is -- which you've previously discussed on the prior Q&A, the $9.5 million, I'm just trying to recall if you've made an impairment in this manner in the accounts before. An occasion does not spring to mind. I'm just wondering if there's been either a change in company policy or a change in accounting policy that's driven this.

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [28]

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There will be disclosure in the half year on it Mark. It wasn't obviously that large, but they want that disclosure. There's no change in (inaudible) or accounting standard.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [29]

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So you're saying you've done -- if I go through the accounts -- back through the accounts over the last few years, I'll find similar metrics?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [30]

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Just in the last half. I don't think we based one in the last couple of years.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [31]

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I'm just wondering if there's been a change in policy.

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [32]

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No. It's simply a timing issue and those expenses are occurred, our adjustment of the recovery of those assets, and it's the same process that we measure every year and have done so the last several years.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [33]

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So the same process, but you haven't had a prior entry before?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [34]

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Correct. Except in the half year.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [35]

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Just moving on. Slide 19. If I'm -- just listening to you on the call, Andrew, I think what you're telling us is that you're not participating in shareholder claims at the moment?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [36]

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No. Not quite correct. What we're saying is we're not going to be as focused on shareholder class action in Australia.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [37]

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Because the economics don't add up.

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [38]

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In a lot of them but not -- that's not to say that we are abandoning shareholder class action in Australia. In fact, they will continue to replicate investment opportunities. However, we're going to be selected about and not going to chase those returns that are uneconomic.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [39]

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So what percentage -- you've got 40% of your APV by investment type, which is allocated to group. What proportion of that would be shareholder claims?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [40]

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Yes. Shareholder claims in Australia would represent -- I don't know off the top of my head, but it will be a reasonably large proportion, probably half.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. - Director, Senior Advisor, Dealer and Head of Research [41]

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I'm just wondering if therefore, how achievable some of your growth targets might be, if you've got such a big proportion of your case book where you're not currently competing aggressively because of the market dynamics?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [42]

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Well, we feel very confident that the growth has, particularly because we've got hopefully different book to what we had a couple of years ago, plus a different footprint. We're pursuing investment opportunities in several different markets, including Australia. But Australia now represents a smaller proportion of the book than it did 5 years ago. Our focus in Australia will remain on group actions, which include environmental claims. And we've put a number of those running as you're aware, we can [take loss]. A shareholder class action in Australia are by itself becoming a significant contributor to the growth. Bigger growth areas seem to be shareholder class actions in other jurisdictions, including potential in Canada, but definitely in Europe. (inaudible) in Canada, where we're running only our single largest claim as well as group actions in jurisdictions, cartel claims in particular. But the growth is made up of contributions from arbitration, commercial litigation, fuel funding, portfolio funding, as you can see from that split of other assets.

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Operator [43]

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(Operator Instructions) And your next question comes from the line of [Daniela Kareem] from Goldman Sachs.

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Unidentified Analyst, [44]

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Well done in setting yourself up for what seems to be a great FY '20. I just had a quick question relating to Slide 3, just that agreed in-principal settlements for Fund 4 of $30.5 million. I just wanted to understand what the related investment was by IMF, just to get a sense of the returns that we could expect?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [45]

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Fund 4 it was in a business, in a portfolio of cases, if my memory serves me correctly, and it was entered into about few months ago and completed. (inaudible) the ROIC on it is low, but the IRRs on it, I think if my memory serves correctly, it's about 120%. So as you know, Fund 4 is a IRR fund -- IRR-driven fund. So our performance at that will be at the 30% type level once it clicks. And by it's on a smaller amount because the ROIC is lower.

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Unidentified Analyst, [46]

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Okay. Got it. So that would have been, if you look at Slide 25, the capital call to fund for is $23 million currently. Is that what the related investment would have been?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [47]

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And there is 2 investments in Fund 4 and I can't recall the one that completed. I think the one that completed is a bit larger one about $20 million at that.

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Operator [48]

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And your next question comes from the line of Peter Meichelboeck from Select Equities.

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Peter Meichelboeck, Select Equities Pty Ltd., Research Division - Head of Research [49]

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Could I just ask, just in relation to, if I'm looking at, well, I think, Slide 22, the completions by fund. You mentioned that Fund 1 is impacted by the loss of the 2 investments. Can you give us a sense of what the returns were for fund -- or would have been for Fund 1, excluding those 2 losses?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [50]

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I think, in the half year, and I think the ROIC was about 7.8 excluding that loss. That is our large box is about $10 million of the (inaudible). So it had a very (inaudible).

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Peter Meichelboeck, Select Equities Pty Ltd., Research Division - Head of Research [51]

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Right. Okay. And if I -- sort of coupled with that, if I look at the Slide 12 and 13, in terms of the ROIC for the U.S. The comments being made now on for some time that the returns that have come through in the U.S. are not reflective so far of sort of longer-term expectations, et cetera. But for 5 years, obviously, the ROICs have been lower and trending lower. What should we be -- or what do you think should be the long-term expectations for that for the U.S. given what's happened so far because by now we've had what 32 cases in?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [52]

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Well, look, it's -- we say, we don't give forward-looking statements. So it's making a distinction on ROIC to be appropriate. Our expectation is that to those 2 losses, which typically from a what was a 0.8% -- 0.8 ROIC down to a 0.5 ROIC are likely to reflect. So we would still expect that ROIC to be lower than what we achieved in 1 investment, and that's largely because they're shorter duration. We had that credit rating in fund structure where ROIC increase over time. So I know I haven't answered your question, Peter. I don't think I can because (inaudible).

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Peter Meichelboeck, Select Equities Pty Ltd., Research Division - Head of Research [53]

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Okay. Just in terms of Wivenhoe and Westgem, what's the appeal period for those to once you get to, assuming, let's say, a judgment? What would be the potential appeal period that you would have to wait for each of those?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [54]

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That depends on the appeal court, Peter. The time can vary anywhere from several months to a couple of years, just depending on the nature of the appeal, what it is that you're looking to try to resolve. So it's impossible to predict.

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Operator [55]

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As there are no further question at this time, please continue Andrew. Thank you.

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [56]

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Thanks Jess. I think there's no further questions, we'll wrap it up. Thank you, everybody.

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Operator [57]

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Sorry pardon the interruption. We've got 2 more. And our next question comes from the line of Aidan Brooksby from ICE Investors. All right, yes. Let's move on to the next question, that comes from the line of Peter Delevett from Intel.

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Peter Delevett, Intel Capital - Global Marketing & Public Relations Director [58]

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One question on the muddy water report on Burford. I mean, clearly, there was an impact from a capital market point of view. Any ripple effect into the industry? What's been the reaction from law firms and corporates that you've spoken with?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [59]

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Well, generally, these things improve positive towards us. And we have distinguished funds (inaudible) way we report. (inaudible)

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Operator [60]

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And your last question comes from the line of Sophie Carran from Goldman Sachs.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [61]

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So Andrew, it's Michael Peet, here. Sorry, I missed most of the call. Apologies if this question has been answered. But just looking at Slide 3, just looking at the $112-or-so million of yet to be recognized income, would you expect most of that or all of that in FY '20? And maybe just a rough timing, if you can?

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [62]

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Sure. I think our expectation is that all of it will be recognized in FY '20, and we would expect it will be recognized before 31 December.

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Operator [63]

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As are no further questions at this time, please continue.

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Andrew Saker, IMF Bentham Limited - MD, CEO & Director [64]

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Well, thanks, Jess. If there are no further questions, I think we'll wrap up the call. Thanks, everyone, for their participation and interest, and look forward to what looks to be like an exciting FY '20. Thank you.

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Operator [65]

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And that does conclude our conference for today. Thank you for participating. You may all now disconnect.