Key points:
- Manolete Partners down 17% on court case loss
- There's also been a revaluation of the entire litigation book
- Perhaps simply prudent management of expectations?
Manolete Partners (LON: MANO) is down 17% in London this morning – is this some resurgence of the Burford Capital problem at a litigation financier? That has to be our first question with anyone in this field – when are they recognising revenue and how are they recognising it? For that is indeed what tripped up Burford Capital and given the long time spans of litigation and court cases is the essential decider over what revenues actually are.
The base problem here is that there's some probability of a case being decided in favour of the client that the firm is financing. There's also – likely enough – some years before actual revenue arrives. That's the whole point of there being a financier in the loop after all. So, revenue this year is some combination of probability and time span to its receipt. Get the probability wrong and then so are revenues as reported. Of course, it's possible to simply say that revenue is whatever is actually received – but that then undervalues that future revenue stream quite drastically. There is no correct answer here – it's a matter of judgement and trying to get it right.
What's happened here at Manolete is that the probability seems to have shifted. A court case that was expected to go one way has gone another. That then has implications for future revenue – and for the recoverability of already paid costs. This is expected to knock several millions off profits.
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As Manolete themselves say: “the Board has decided to write down the full value of the case in its forthcoming results for the six months ended 30 September 2022 (“FY23 Interim Results”). The impact will be a reduction of £2.3m to pre-tax profits, of which the cash costs paid out on this case to date are £636,756.” That is, they had applied a high level of probability to recovery in this case when in fact it turned out to be – before appeal at least – so low probability as to turn out to be zero.
This then has knock on effects upon the rest of that litigation book: ” a more prudent view of the valuation of the Company's c.280 ongoing litigation case investments. … expects to announce a pre-tax loss of c.£5m in the FY23 Interim Results, the large majority of which will be due to the adjustment of unrealised revenues and unrealised profits.”
This begins to look like that Burford Capital problem – which at Burford was an aggressively optimistic (to be polite) overstatement of probability. One very large difference being that Manolete is dealing with the issue directly and promptly. But clearly prospects for that litigation book are now worse than they were – thus the fall in the valuation of it.
It is possible to take a contrary view of Manolete. They're financiers, specifically, of insolvency litigation. Which, given the economic clouds ahead, we might well expect to rise substantially. So we could predict a booming business – but that does then still depend upon Manolete financing the right cases. You know, those with a probability of recovery?