Considering companies which invest in insolvency litigation cases are meant to be anti-cyclical, winning when the economy goes into a downturn, by rights Manolete Partners (MANO:AIM) should have cleaned up during the pandemic as the number of struggling businesses soared.

However, much to the firm’s chagrin, the opposite scenario unfolded – tens of thousands of struggling firms were saved from going into administration thanks to government support and ‘bounce-back’ loans from the high-street banks.

Since early 2022, the insolvency market has largely returned to normal with the number of cases ‘now at levels not seen since the 2008 financial crisis’ and larger-company insolvencies also back to pre-pandemic levels, according to chief executive Steven Cooklin.

Due to the time it takes to present potential litigation claims to third-party funder like Manolete, it wasn’t until earlier this year that the firm started to see a significant increase in activity.

In its results for the six months to the end of March, the company recorded a 122% increase in new case investments, meaning it ended the financial year at 263, a new record, while new case enquiries jumped 60% to end the year at a record 798 cases.

This momentum has continued in the six months to September, with 417 live cases in progress, 58% more than at the same time last year, while a 21% increase in completions and a 116% increase in new investments has translated into revenues more than doubling to £11.2 million.

The average time taken to settle a case is just under a year, and the
average money multiple on investment net of costs is 2.3 times for the 116 cases completed in the last six months.

Since the start of the year, the firm has been working with Barclays (BARC) on a range of defaulted ‘bounce-back’ loans, and the ‘exceptional’ results it has achieved so far have led to an increase in caseloads as well as a separate pilot scheme with another major bank, which is due to start shortly, all of which could dramatically increase revenues.

In addition, the company has just under two dozen cartel cases in progress, and positive judgements recently on several similar cases which have led to settlements suggest Manolete’s portfolio will be also resolved positively.

While we believe the group’s prospects are extremely bright, and the current valuation doesn’t look demanding, we must add the caveat that this is a small-cap stock, which makes it riskier than normal, and lack of liquidity means the bid-offer spread is unusually wide (typically over 10%), so depending on the closing price the shares can appear to move around a great deal.

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