Manolete has announced the successful settlement of one of its long-running truck cartel claims, securing £3.2 million in cash. This fully recoups its investment and includes a strong profit share, with payment due by 1 August 2025.
The economics are impressive: Manolete invested just £483k in this particular claim, implying a money multiple of 6.6x and a 560% cash return. With the broader trial for other truck cartel claims delayed until September 2026, the board saw this early resolution as a smart trade-off, favouring immediate cash that could be reinvested in new claims.
Manolete, often mischaracterized as a litigation finance firm, is more accurately described as a specialist asset manager. It acquires legal claims, manages them through to resolution and reinvests the proceeds at exceptional rates of return. In that light, early settlements like this are beneficial, as they free up capital for reinvestment and will enhance compounded returns.
But there's a downside. Because the settlement came in below the claim’s previously marked valuation, it triggers a non-cash fair value write-down of £836k, in line with IFRS-9 rules. This is a hangover from the Mark Taverner era, when litigation assets were marked to estimated market value rather than cost. Investors have long argued this approach is misguided, especially given the illiquid nature of these assets (there is no resale market and so their resale value is arguably zero) and the unpredictable nature of litigation claims where timing of settlement materially impacts the size of the settlement.
Based on this settlement, the company expects to take a further £1.1 million non-cash write-down on its remaining truck cartel claims in its interim results for the six months ending 30 September 2025. Combined with the current £836k, that brings the total write-down to £1.9 million. As of 31 March 2025, Manolete valued all its truck cartel claims at £15.4 million. With £3.2 million now monetized and £1.9 million written down, the net asset value of the remaining claims is expected to be about £10.3 million.
It should be noted that this is just an accounting issue. The settlement, as explained above, is good news and a great outcome. Investors that understand this business will appreciate this nuance. Unfortunately, most of the market do not, and will take the 'write-downs' as bad news invariably negatively impacting the share price.
This is the second time that Manolete's misguided approach to meeting IFRS-9 has backfired - the last time caused a profit warning in September 2022 which rocked investor confidence. With Taverner no longer CFO, this should be the moment for change.
This truck cartel investment was a rare divergence from Manolete’s core strategy. While pleased with the outcome and still optimistic on remaining claims, the company reaffirmed that it's unlikely to pursue similar Competition Law claims again in future. This is also good news as its core business yields impressive rates of return over far shorter time frames - a perfect recipe for high rates of compounded growth.
In short, the investment thesis remains firmly intact, and today’s news is a clear positive. If the share price reacts negatively, it may well present an excellent buying opportunity. The only disappointment is the company’s decision to use the £3.2 million proceeds to pay down debt under its Revolving Credit Facility with HSBC. Given the significant discount at which Manolete’s shares currently trade relative to intrinsic value, this represents a major missed opportunity to repurchase up to 10% of its own stock - a move that could have delivered substantial long-term value to shareholders and simultaneously sent a positive message to the market undoing the damage caused by the asset-write down and Manolete's misguided approach to meeting IFRS-9. C'est la vie!
Thank you for your very detailed analysis which is a great introduction the Manolete investment thesis. After “digestion” of this highly atypical / complex case, I’d have some questions / observations if I may. I try to play the devil advocate in order to rule out any potential structural weakness / risk which could make Manolete a value trap.
1. I understand the growth drivers will mainly reside in the higher value of the cases and I understand these case take longer to happen after the initial rise on litigation. Still, I am wondering if this “higher value case” are more difficult to sign.
In the paragraph on the champerty concept, you point “Champerty was ultimately recognized as providing a “social good,” allowing third parties to finance legal claims and so ensuring that access to justice wasn’t restricted by financial constraints”
This quote should imply that larger corporations may be less cash constrained .. then they do not need Manolete service ?!
I may be totally out of the book here as in a bankruptcy, the company is by definition always cash constraint whatever their size .. but from I have understood, Manolete is more focused on the “technical cases” where there is fraud .. and I wonder if these cases are still bankruptcy cases or not ?!
My fear would be that Manole may be restricted on lower value cases (which translate into lower profitability) because higher value companies just don’t need Manolete.
2. Considering Manolete buys claims, the higher the case, the more Manolete has to invest to buy in ? ie is there any capital constraint which may prevent Manolete to grow into higher case ? (I understand they don’t want to pay out dividend .. in order to grow equity .. which may validate my observation ?
3. As Manolete has to buy in the case and they have a finite equity, they end up subscribing RCF to generate new liquidity to fund new case. Considering the higher interest cost environment, this is a drag on profitability.
Does Manolete benefit from any “cost of money compensation" when they successfully close case ? This would balance their higher interest debt burden.
4. The constant increase in referrals is very positive (20%-25 CAGR). It show the prestige of the company and reduce the marketing needs. Still, this doesn’t transfer into a growing number of case at the close of march 31, 2025 : 282 cases vs 276 in 2024. How to explain this flattish number of cases despite higher referrals ? (I don’t have the “overall value of the ongoing case” which may be indeed growing)
5. I understand that Manolete is quite safe of the legal side as they have proved almost 100% success rate on cases. STILL, this doesn’t always mean with “good profit” as I have noticed an increase amount of “bad debt provisions in the last years :
• 2019 : 49k GBP
• 2020 : 535k GBP
• 2021 : 1366k GBP
• 2022 : 321 kGBP
• 2023 : 1534k GBP
• 2024 : 1362k GBP
• 2025 : 1343k GBP
These provisions represent quite a heavy charge compared to the 20-30M GBP revenues.. I wonder how to explain this sudden bad provision increase .. as there was almost none pre 2018 ?
If there any way Manolete can contain this risk ?
6. With the CFO departure, is there a possibility that the company will change their IFRS 9 accounting ?
7. Apart from the accountancy policy which seems a low hanging fruit, what others initiatives can implement the future CFO to boost ROE ? I don’t know if any sharebuyback makes sense even at a current value of 1x P/B .. as the capital is needed to fund the future business.
8. When did the company buy the truck cartel claim and how much did they invest to buy this claim ?
9. I think your chart on the ROI metric is an interesting idea to show the ROI over time. However, I think you should have used a trailing metric on the “% uplift on capital invested” (green bars) to show the IRR instead of the overall value generation since inception (ie 48% over 9 years since 2017 doesn’t seem “that profitable”). I suggest to use a 24 trailing month IRR metric which track the “normal” cycle of the cases (from the initial funding to the final down payment).
I’ll try to address each in turn with a brief comment:
1. Litigating a case involves lawyers exchanging communications and preparing for a Court hearing in the event that settlement cannot be agreed between the parties. The work load is broadly the same for a claim valued at £25,000 as it is for a claim valued at £1m. So there is operating leverage in the business. Margins are bigger on the larger claims. The average claim size pre-Covid was ~£200k, but because of special measures introduced by the government to protect businesses from insolvency, it fell to ~£80k. That impacted margins. However, it is now moving back up, currently ~£120k and anticipated to move above £200k in due course. The second part of your question appears to be a misunderstanding on your part. Consider the Cartel cases – valued at north of £15m – these were businesses that were driven to bankruptcy because the big truck manufacturers illegally fixed prices, squeezing the margins of their customers and introducing financial strain that proved fatal. Manolete will sue the big truck companies on behalf of these insolvent claimants. If it wasn’t for Manolete, these claimants may not have had the financial fire power or determination to sue huge multinational truck manufacturers (kind of a David and Goliath situation).
2. As stated above, formerly the average size of a claim was £200k. The company has a net asset value of ~£45m and a revolving credit facility of ~£20m, so investing in larger cases shouldn’t be constrained by lack of financial resource.
3. Manolete earn about 17% annualized on investment. If they are borrowing at single digit rates, it looks like good business to me.
4. Case numbers are a red-herring. Ignore them. I have no idea why the company quotes them as a metric. I would rather have one case worth $1m than 10 cases each worth $100k. It’s the average value per case that matters most.
5. Winning a case is one thing, securing settlement from the other party is something else. Sometimes the other party will pay without any trouble, other times the judgement needs to be enforced. There is always a risk that they don’t recover all damages that they are awarded so provision needs to be made, but just because there is a provision, doesn’t mean that it is utilized.
6. I hope that the new CFO will be more commercially minded, rather than being just a dull accountant.
7. Settlement of the Cartel cases and reinvestment of that money will be a key catalyst. Buying back shares is something they should be doing but have refused to do. Focusing on larger sized cases to bring up their average case size is important.
8. The Cartel claims have been going on for almost a decade. It isn’t typical Manolete business. Most of their cases settle within 2 years from start to finish. Although these cases will land the company a huge windfall, they have acted as a drag on performance – which is why the company quotes its returns excluding the Cartel cases. Returns on investment are annualized and so the more time it takes, the lower the annualized return will be. These claims need to be settled ASAP and the money reinvested at higher rates of return. Liability is already established, so it is a question of ‘when’, not ‘if’.
Hello James, thanks a lot for your high value feedback!
I agree Manolete is poised to have a better future with settlement of the truck cartel claim, astute initiatives from the future CFO, general tailwind for their litigation services due to falling economy .. but I think the core of the thesis relies on the higher value case which should soon emerge after the long administrative process for larger corporation.
10. I wonder if there is any extra “hidden leverage” on these higher value cases ?
I understand Manolete will be able to invest more funds in the claim while having the same costs for enquiry meaning higher IRR when settled. But can Manolete invoice any other fee to their litigator customer if the case is settled ?
If settlement is positive, Manolete will win on their 200k claim stake and the customer will win on his 300k stake.
Can Manolete invoice any “extra success fees” to their IP customer which has recoup 300k GBP (say maybe 10% -20% of that amount?) or is Manolete revenue strictly limited at the pro-rata of the claim they bought (here 200k) ?
Manolete works on a discounting basis. If a claim is worth £500k (your numbers) and the person owning the claim has insufficient financial resource or will power to litigate, then that claim may never be brought. So Manolete acquire the claim. They may say to the owner that if the claim is not brought within the statutory time limit, then all potential value will be lost - he will receive nothing. So Manolete may offer £200k for a high quality claim and perhaps they'll also offer a percentage of anything achieved over that sum as consideration to buy the claim. Let's say 50% for the sake of argument. Now Manolete own the claim and all rights that flow from it. They are in the drivers seat and can make all decisions relating to the litigation. So let's say that they succeed and are awarded £500k, plus legal costs. So the prior owner of the claim, who had already received £200k upfront, gets another £150k. The residual £150k is for Manolete. But don't forget that their capital investment upfront was only £200k, so get £350k back for having investing £200k, so they recover their initial investment, plus a 75% return.
This is why I say it is asset management, not litigation finance. They are buying an asset and benefit from the uplift in its value. It is really no different to a private equity firm taking a stake in a start-up and then benefiting from a subsequent IPO. The different being that in in the PE space, they hope for 1 in 20 start-ups to succeed, and the gain is huge which compensates for the 19 that didn't make it. With Manolete, their success rate isn't 5% but over 95%.
Hi James, amazing writeup! Thank you for the effort and painting a realistic picture of the business. I wish you'd step in as interim CFO and implement the proposed accounting improvements. Now that Taverner is gone do you see any likelihood your idea getting adopted by management? Also having met with the CEO I'm sure you've pitched him this better accounting method, was Cooklin open to it?
I think that everything turns on who they appoint as the new CFO
It shouldn't be another text-book accountant from a big accountancy firm
It needs to be someone who thinks outside the box, understands the nuances of corporate finance, invests in the business personally and does what's best for the company
It would be a disaster to appoint another Taverner who is ticks none of these boxes
Cooklin is a nice guy, but he too is very conventional in his approach. Will he change things? I don't know. I have lobbied on the merits of repurchases, but he doesn't seem to buy the argument and simply offers excuses about restrictions on capital imposed by their bank, HSBC, which is a shame. If the bank is holding the business back, the answer is simple. Change bank. But banks don't oppose companies paying dividends, so why would they stand in the way of timely stock repurchases? It doesn't make sense to me.
The settlement of the Cartel cases is key. Management need to start thinking like asset managers - the optimal settlement will be determined by a combination of timing and quantum. At the moment, the value of these cases is sitting as dead money not working for the business. They need to release it and redeploy it at a higher ROI.
Key skill sets are certainly missing at management level. Maybe the new CFO will bring those. If not, they need to add to the team to fill that void.
The company is hugely undervalued - the question is simply when will the re-rating occur. Once again, it all turns on settling the Cartel cases and redeploying capital in more vanilla cases.
May be worth reaching out to Jon Moulton, who’s the majority owner, he could knock some sense into management to take these obvious wins. Happy to help petition on this anyway.
26 June 2025 - Audited results for the year ended 31 March 2025
Steven Cooklin, Chief Executive Officer, commented:
"We are delighted to report our highest ever revenues of £30.5m for FY25 and a strong increase in profitability, well ahead of market forecasts. Cash generation has also been particularly impressive with a 45% increase in gross cash receipts for the year. In FY25 we also recorded lifetime highs in the number of new case referrals from Manolete's nationwide proprietary referral network. FY26 has got off to a strong start with new case signings already 27% higher than the whole of Q1 FY25 and further concrete evidence of larger average case sizes feeding into our portfolio of more recent case signings. The continued strong tailwinds of challenging market conditions faced by many UK corporates provide the Board with optimism for further good progress in the new financial year."
Hello! I'm deeply impressed by your Substack articles. I am curious about your thoughts on the recently announced ARRCC number. Compared to the 109K for April to September, the number for October to March seems to have dropped slightly. Doesn’t this seem to contradict management’s claim that the numbers will return to the pre-COVID level of 200K? I would like to hear your opinion. My english skill is not good, I hope you understand.
Thank you for your question. ARRCC numbers are improving which is encouraging. While there was a small sequential decline from H1 to H2, it’s up year-on-year. This is mostly down to the timing of case settlements, which is naturally hard to control. Still, the overall trend is moving in the right direction. I anticipate that the size of cases will continue to increase and that ARRCC numbers will tend back towards the 200k level.
· Record new case investments of 282 (FY24: 276) - excluding extraordinary Bounce Back Loan cases
· Record new case referrals of 896 (FY24: 731)
· Record volume of case completions at 272 cases (FY24: 251)
· Gross cash recoveries of £25.6m (FY24: £17.7m)
· Net cash income from completed cases £13.3m (FY24: £10.8m)
· Estimated total revenue of £30.8m (FY24: £26.3m)
· EBIT of £3.2m (FY24: £2.5m)
· Net Debt £11.1m (FY24: £12.3m)
· New bank facilities agreed with HSBC
Steven Cooklin, Chief Executive Officer, commented: "The past year has seen Manolete achieve record KPIs across all key metrics of the business and outperform market forecasts. Given the strong tailwinds presented by the challenging UK and global business environments, we expect to build upon those achievements in the forthcoming year."
A key metric is the ARRCC (average realised revenue per completed case) which stood at £108k (FY24: £96k). The ARRCC is important because the cost of litigating a claim involves similar amounts of time and effort, regardless of the sums involved. So a portfolio of larger sized cases will enjoy greater operating leverage, boosting marginal returns. Accordingly, the combination of higher case volumes and larger case sizes will lead to a material transformation in the profitability of the business. The continued positive trend towards larger average case sizes is in line with the Board's previously stated expectation that average case completion sizes would likely increase as the number of medium and large company insolvencies returned to their normal levels in the UK insolvency market following the withdrawal of the UK Government's significant financial support to businesses over the Covid period of March 2020 - April 2022, as well as the temporary suspension of key insolvency laws during that same period. Pre-covid the ARRCC stood at ~£200k and it is anticipated that it will return to that level - the trend seems to confirm that expectation.
The Company enjoyed a record FY25 in terms of all its key operating metrics and finished the year with 438 live cases in progress (FY24: 418) with an estimated Net Book Value of £41.8m (FY24: £40.2m) which gives the Board confidence in the prospects for the current financial year. In anticipation of another busy year ahead, the Company will welcome two new senior level hires into the existing 15-strong in-house legal team during the first four months of the new trading year.
28th March 2025: New Revolving Credit Facility with HSBC Bank
Manolete Partners announce it has signed a new Revolving Credit Facility ("RCF") with its existing provider, HSBC UK Bank Plc ( "HSBC").
The new RCF provides Manolete with the same level of facility as the previous arrangement, at £17.5m. However, the margin charged to Manolete by HSBC on the new RCF is at a reduced rate of 4.0% (previously 4.7%) over the Sterling Overnight Index Average (SONIA) and has a reduced non-utilisation fee, from 1.88% to 1.40%.
The new RCF is a 3.25-year facility with an initial maturity of 27 June 2028. Manolete has the option to further extend the facility on its current terms by an additional year.
The covenants remain unchanged except for the Asset Cover covenant which has been relaxed for the next six months.
Steven Cooklin, CEO commented: "We are delighted to have secured a new long-term commitment to the business from HSBC, which is testament to the strong partnership we have established since 2018. The improved terms of the facility demonstrate confidence in the Manolete business."
I'm just starting to look into Manolete. The business numbers are bit complex and it's difficult to get the earnings power beneath the accounting shenanigans. Also, I don't think the management team does a good job at explaining the superiority of its business model (vintage table is too complex, and doesn't include opex costs as far as I know).
How did you build the chart with the cumulative investments (including opex) and cash receipts? Are investments in new cases the initial fees that Manolete pays + the initial legal costs? My goal is to see the compounding rate of growth in the business model.
I hope we can have some constructive discussions on MANO.
The compounding rate of growth in the business was severely interrupted by Covid governmental measures and closures of the Courts during lock-down. Companies were being prevented from going insolvent, which slowed the rate of new cases, and older cases were taking longer to bring to resolution. I demonstrated this in the charts in my analysis.
We are now through that period and insolvency cases are at record levels. That will start showing through in the numbers during 2025 and 2026.
Manolete Partners are due to report sometime around mid-April. It will be interesting to see what they have to say.
In terms of my charts, it was lots of manual work trawling through financial reports and running my own calculations. IFRS accounting was never designed for investment firms, so it is entirely unhelpful for Manolete Partners.
An unusual company - many don't understand it needs to be valued as an investment company. It currently has very low analyst coverage, which means it is under the radar. I rarely see a company that has so much business that it needs to turn 70% of opportunity away and of the business it accepts, it can generate such a high return on invested capital with a very high degree of certainty, very little risk that is offset via portfolio diversification and with the ability to reinvest earnings at the same favourable high rates of return.
As Charlie Munger used to say, when you see a fat man in the street, you don't need to weight him to know he is fat. When you see a great investment opportunity, it is similarly so obvious.
I have really enjoyed reading your analysis, as I have found it difficult to understand the complexities of the accounting practices over the years. Thankyou.
Can I ask if Mano paid you to write this piece?
Also, do you think they may raise capital to fund new cases by issuing more shares, rather than borrowing from HSBC or someone else?
As a fund manager I am constantly analyzing companies. I share that analysis, in an easily digestible format, on Substack.
Why not? I've already done the work.
My motivation was to create an investment community of like minded people, so that we could share ideas.
Some of my best investments have come from people reaching out to me and introducing me to companies that I previously didn't know.
The population of investible companies runs to well over 7,000 and its impossible to analyze them all. So the community is a great way to find the hidden gems.
As part of my research I usually interview people at the company in question. In the case on Manolete Partners, I have spoken to the CEO many times by email, telephone and face-to-face over a coffee.
But the analysis is all independent - it is not influenced by anyone else. You will notice that I lay out the good, bad and the ugly. I don't look to paint a rose coloured picture - I tell it like it is.
That answers the first part of your question Robert.
In relation to the second, it would make no sense for the company to raise equity capital now at such a discounted share price. When the shares are trading for 30 pence on every pound of value, the last thing you want to do is give away more pounds of value in return for 30 pence of cash. May I recommend that you read: https://rockandturner.substack.com/p/henry-singleton-learn-from-the-best?utm_source=publication-search which explains this in more detail. Singleton was arguably the best capital allocator ever and it was he who inspired Buffett.
Thankyou for your clear response. More so than ever we have to question what we read on the internet, and question who is behind the story, especially if the content is ‘free’.
I question everything. As for Mano I just could not understand how every year the rhetoric coming from management seemed positive, yet Mr Market would go the other way - I had to question ‘what am I missing’, so your research gives me back some faith, that fundamentally this company is undervalued.
If you are looking at long-term debt against cash on the balance sheet you are correct, although it is worth pointing out that the £12.5m has been reduced to circa £11.4m since September.
However, if you take cash and equivalents to include net current receivables and short term investments, the balance tips the other way.
The key issue is that for short term investments most companies would include government bonds and the like in which they park surplus cash to generate some return. These are highly liquid and equivalent to cash. For Manolete, their short term investments are almost certainly cases that will settle imminently, but not as liquid as a government bond so arguably not equivalent to cash.
As such, I have removed the wording "net cash" from the article to avoid confusion.
Either way, it doesn't impact the investment thesis.
"This is because the company’s auditor asked that investments in claims be recorded as cash flow from operations instead of CAPEX, as it argued that rights in litigation are considered non-depreciating assets while CAPEX is usually depreciable ... So operating cash flows look awful - presenting a false picture of the business."
Makes me wonder. You have the investments as CAPEX on the income statement. You take the bottom-line of the income statement (profit/loss before tax) and bring it over to the cash flow statement. There you add back depreciation. Where is the difference to recording investments directly in the cash flow statement as an outflow? When you have the case investments in the income statement as CAPEX, you just get a lower profit/loss before tax to carry over to the cash flow statement. You add back depreciation. The net result to operational cash flow is the same as reporting in the cash flow statement case investments directly which you substract from a higher profit/loss before tax number.
So that's my reasoning, and apparently, there's something I'm not understanding.
The bottom line of the income statement is useless because it is derived from a combination of realized and unrealized revenue due to IFRS-9 requirements. So the net income on the income statement is not cash net income at all.
You want to take that over as the starting point of your cash flow statement?
Garbage in, garbage out.
Accounting rules are becoming useless for investors and misleading. They aren't designed with investors in mind. Buffett understood this all the way back in 1986. His shareholder letter that year explained how he adjusts reported numbers to make them useful.
Take a look at the 1986 shareholder letter (you can find it with Google)
Yes, the income statement is not cash income. For that are the adjustments in the cash flow statement, including adding back depreciation. Still, as you point out, with Manolete Partners you arrive at operating cash flow losses - more cash goes out than comes in. And what I don't understand is why you say the cash flow statement is misleading and that (if I understand you correctly) the operating cash flow losses shouldn't be operating cash flow losses.
Berkshire has no operating cash flow losses, by the way. Buffett's discussion about unrealised gains/losses refers to the income statement.
Buffett expressed frustration with accounting standards in his 2023 shareholder letter. It is worth reading the way he explains this anomaly to his sister Bertie in that letter.
If you start the cash flow statement with numbers based on unrealized revenues (that may or may not materialize in future) then you have to add back more than just depreciation.
In the case of Manolete, its claims don't depreciate anyway. The investments either yield a positive return or else are written down/off. So there is no depreciation to factor in.
This is what I mean when I say that accounting standards aren't designed for this kind of business. A hard PPE asset depreciates and needs to be replaced. The depreciation charge becomes a proxy for the replacement cost.
That doesn't apply when investing in legal claims.
These are investments. So why don't they appear as CAPEX in the cashflow from investing activities, rather than operating activities?
In my mind, this is a balance sheet business. The NAV of the business compounds over time as money is invested profitably in claims and then reinvested. But even the balance sheet is problematic. Due to the profit warning in Sep 2022, the company is super prudent now in valuing its claims - so the assets are undervalued. At the same time, the liabilities relating to ongoing litigation costs are already paid but capitalized on the balance sheet until the claim settles. So those liabilities have largely been settled, meaning that the liabilities on the balance sheet are over stated. All that means that the NAV of the business is actually higher than it appears.
The accounts are just a mess - largely because of the auditor, who was replaced recently I believe - and that means that there is so much white noise in the numbers for investors to decipher that many simply give up.
I am speaking with the management of Manolete about producing a shareholder letter, similar to that at Berkshire, which speaks to the shareholders and explains the anomalies contained in the statutory reporting numbers. If investors are able to better understand the business, they are more likely to invest. Manolete are thinking about it.
Ok, I thought you considered depreciated CAPEX instead of operating cash outflow - speaking about the legal case investments - to be the solution. I misread this part of your article!
Still, I struggle with understanding your argument. You can have the case investments as CAPEX in your favourite version of an income statement (which is not the one we have now, as you point out), but this ultimately reduces the profit/loss income you carry over to the cashflow statement. So you either have the cash outflow of case investments recorded indirectly in the lower profit/loss income before tax you carry over to the cash flow statement, or directly as, as it's done now, in the cash flow statement. With, as far as I can see, the same result to the bottom line of operating cash flow: a loss.
Not saying your argument wouldn't be right; I just don't get it.
We are saying the same thing. If, whichever way you do it, you end up with a cash flow loss, despite the business being both profitable and cash generative, how useful is the cash flow statement in assessing the quality of this business?
It's a little like trying to read the accounts of a bank. They always look awful and over leveraged... but that misses the point... their business is a leveraged business.
Read that book that I mentioned earlier in this thread. It explains how useless accounting has become.
It was designed for asset heavy industrial businesses and hasn't evolved with the times. It doesn't work well for asset light software businesses nor does it work well for financial businesses such as Manolete.
If you disagree, then that's fine. Continue using those numbers. But I think you are trying to push a square peg into a round hole.
Thank you for your comments, but you miss a few key issues in your reasoning:
1. You are confusing Manolete as a mere litigation financer. It is fundamentally different. It is a niche investment firm. It doesn't fund someone else's litigation, it acquires the claim outright and owns it. This gives it full control over case management.
2. It currently borrows at just over 9% (and hopes to get that rate down when the revolving credit facility is renegotiated in June of this year). Against that, it makes 17%+ annually on its investments.
3. Most of its claims aren't funded with debt, but are merely reinvested capital being churned at that 17%+ annual growth rate - so it is compounding its own capital and not dependent on debt, thereby mitigating the impact of changing rates.
Important Update on Manolete Partners (MANO)
Manolete has announced the successful settlement of one of its long-running truck cartel claims, securing £3.2 million in cash. This fully recoups its investment and includes a strong profit share, with payment due by 1 August 2025.
The economics are impressive: Manolete invested just £483k in this particular claim, implying a money multiple of 6.6x and a 560% cash return. With the broader trial for other truck cartel claims delayed until September 2026, the board saw this early resolution as a smart trade-off, favouring immediate cash that could be reinvested in new claims.
Manolete, often mischaracterized as a litigation finance firm, is more accurately described as a specialist asset manager. It acquires legal claims, manages them through to resolution and reinvests the proceeds at exceptional rates of return. In that light, early settlements like this are beneficial, as they free up capital for reinvestment and will enhance compounded returns.
But there's a downside. Because the settlement came in below the claim’s previously marked valuation, it triggers a non-cash fair value write-down of £836k, in line with IFRS-9 rules. This is a hangover from the Mark Taverner era, when litigation assets were marked to estimated market value rather than cost. Investors have long argued this approach is misguided, especially given the illiquid nature of these assets (there is no resale market and so their resale value is arguably zero) and the unpredictable nature of litigation claims where timing of settlement materially impacts the size of the settlement.
Based on this settlement, the company expects to take a further £1.1 million non-cash write-down on its remaining truck cartel claims in its interim results for the six months ending 30 September 2025. Combined with the current £836k, that brings the total write-down to £1.9 million. As of 31 March 2025, Manolete valued all its truck cartel claims at £15.4 million. With £3.2 million now monetized and £1.9 million written down, the net asset value of the remaining claims is expected to be about £10.3 million.
It should be noted that this is just an accounting issue. The settlement, as explained above, is good news and a great outcome. Investors that understand this business will appreciate this nuance. Unfortunately, most of the market do not, and will take the 'write-downs' as bad news invariably negatively impacting the share price.
This is the second time that Manolete's misguided approach to meeting IFRS-9 has backfired - the last time caused a profit warning in September 2022 which rocked investor confidence. With Taverner no longer CFO, this should be the moment for change.
This truck cartel investment was a rare divergence from Manolete’s core strategy. While pleased with the outcome and still optimistic on remaining claims, the company reaffirmed that it's unlikely to pursue similar Competition Law claims again in future. This is also good news as its core business yields impressive rates of return over far shorter time frames - a perfect recipe for high rates of compounded growth.
In short, the investment thesis remains firmly intact, and today’s news is a clear positive. If the share price reacts negatively, it may well present an excellent buying opportunity. The only disappointment is the company’s decision to use the £3.2 million proceeds to pay down debt under its Revolving Credit Facility with HSBC. Given the significant discount at which Manolete’s shares currently trade relative to intrinsic value, this represents a major missed opportunity to repurchase up to 10% of its own stock - a move that could have delivered substantial long-term value to shareholders and simultaneously sent a positive message to the market undoing the damage caused by the asset-write down and Manolete's misguided approach to meeting IFRS-9. C'est la vie!
Hello James,
Thank you for your very detailed analysis which is a great introduction the Manolete investment thesis. After “digestion” of this highly atypical / complex case, I’d have some questions / observations if I may. I try to play the devil advocate in order to rule out any potential structural weakness / risk which could make Manolete a value trap.
1. I understand the growth drivers will mainly reside in the higher value of the cases and I understand these case take longer to happen after the initial rise on litigation. Still, I am wondering if this “higher value case” are more difficult to sign.
In the paragraph on the champerty concept, you point “Champerty was ultimately recognized as providing a “social good,” allowing third parties to finance legal claims and so ensuring that access to justice wasn’t restricted by financial constraints”
This quote should imply that larger corporations may be less cash constrained .. then they do not need Manolete service ?!
I may be totally out of the book here as in a bankruptcy, the company is by definition always cash constraint whatever their size .. but from I have understood, Manolete is more focused on the “technical cases” where there is fraud .. and I wonder if these cases are still bankruptcy cases or not ?!
My fear would be that Manole may be restricted on lower value cases (which translate into lower profitability) because higher value companies just don’t need Manolete.
2. Considering Manolete buys claims, the higher the case, the more Manolete has to invest to buy in ? ie is there any capital constraint which may prevent Manolete to grow into higher case ? (I understand they don’t want to pay out dividend .. in order to grow equity .. which may validate my observation ?
3. As Manolete has to buy in the case and they have a finite equity, they end up subscribing RCF to generate new liquidity to fund new case. Considering the higher interest cost environment, this is a drag on profitability.
Does Manolete benefit from any “cost of money compensation" when they successfully close case ? This would balance their higher interest debt burden.
4. The constant increase in referrals is very positive (20%-25 CAGR). It show the prestige of the company and reduce the marketing needs. Still, this doesn’t transfer into a growing number of case at the close of march 31, 2025 : 282 cases vs 276 in 2024. How to explain this flattish number of cases despite higher referrals ? (I don’t have the “overall value of the ongoing case” which may be indeed growing)
5. I understand that Manolete is quite safe of the legal side as they have proved almost 100% success rate on cases. STILL, this doesn’t always mean with “good profit” as I have noticed an increase amount of “bad debt provisions in the last years :
• 2019 : 49k GBP
• 2020 : 535k GBP
• 2021 : 1366k GBP
• 2022 : 321 kGBP
• 2023 : 1534k GBP
• 2024 : 1362k GBP
• 2025 : 1343k GBP
These provisions represent quite a heavy charge compared to the 20-30M GBP revenues.. I wonder how to explain this sudden bad provision increase .. as there was almost none pre 2018 ?
If there any way Manolete can contain this risk ?
6. With the CFO departure, is there a possibility that the company will change their IFRS 9 accounting ?
7. Apart from the accountancy policy which seems a low hanging fruit, what others initiatives can implement the future CFO to boost ROE ? I don’t know if any sharebuyback makes sense even at a current value of 1x P/B .. as the capital is needed to fund the future business.
8. When did the company buy the truck cartel claim and how much did they invest to buy this claim ?
9. I think your chart on the ROI metric is an interesting idea to show the ROI over time. However, I think you should have used a trailing metric on the “% uplift on capital invested” (green bars) to show the IRR instead of the overall value generation since inception (ie 48% over 9 years since 2017 doesn’t seem “that profitable”). I suggest to use a 24 trailing month IRR metric which track the “normal” cycle of the cases (from the initial funding to the final down payment).
Thank you for any helpfull feedback :)
Olivier, thank you for your questions.
I’ll try to address each in turn with a brief comment:
1. Litigating a case involves lawyers exchanging communications and preparing for a Court hearing in the event that settlement cannot be agreed between the parties. The work load is broadly the same for a claim valued at £25,000 as it is for a claim valued at £1m. So there is operating leverage in the business. Margins are bigger on the larger claims. The average claim size pre-Covid was ~£200k, but because of special measures introduced by the government to protect businesses from insolvency, it fell to ~£80k. That impacted margins. However, it is now moving back up, currently ~£120k and anticipated to move above £200k in due course. The second part of your question appears to be a misunderstanding on your part. Consider the Cartel cases – valued at north of £15m – these were businesses that were driven to bankruptcy because the big truck manufacturers illegally fixed prices, squeezing the margins of their customers and introducing financial strain that proved fatal. Manolete will sue the big truck companies on behalf of these insolvent claimants. If it wasn’t for Manolete, these claimants may not have had the financial fire power or determination to sue huge multinational truck manufacturers (kind of a David and Goliath situation).
2. As stated above, formerly the average size of a claim was £200k. The company has a net asset value of ~£45m and a revolving credit facility of ~£20m, so investing in larger cases shouldn’t be constrained by lack of financial resource.
3. Manolete earn about 17% annualized on investment. If they are borrowing at single digit rates, it looks like good business to me.
4. Case numbers are a red-herring. Ignore them. I have no idea why the company quotes them as a metric. I would rather have one case worth $1m than 10 cases each worth $100k. It’s the average value per case that matters most.
5. Winning a case is one thing, securing settlement from the other party is something else. Sometimes the other party will pay without any trouble, other times the judgement needs to be enforced. There is always a risk that they don’t recover all damages that they are awarded so provision needs to be made, but just because there is a provision, doesn’t mean that it is utilized.
6. I hope that the new CFO will be more commercially minded, rather than being just a dull accountant.
7. Settlement of the Cartel cases and reinvestment of that money will be a key catalyst. Buying back shares is something they should be doing but have refused to do. Focusing on larger sized cases to bring up their average case size is important.
8. The Cartel claims have been going on for almost a decade. It isn’t typical Manolete business. Most of their cases settle within 2 years from start to finish. Although these cases will land the company a huge windfall, they have acted as a drag on performance – which is why the company quotes its returns excluding the Cartel cases. Returns on investment are annualized and so the more time it takes, the lower the annualized return will be. These claims need to be settled ASAP and the money reinvested at higher rates of return. Liability is already established, so it is a question of ‘when’, not ‘if’.
9. Interesting suggestion. Thank you.
I hope this helps.
Hello James, thanks a lot for your high value feedback!
I agree Manolete is poised to have a better future with settlement of the truck cartel claim, astute initiatives from the future CFO, general tailwind for their litigation services due to falling economy .. but I think the core of the thesis relies on the higher value case which should soon emerge after the long administrative process for larger corporation.
10. I wonder if there is any extra “hidden leverage” on these higher value cases ?
I understand Manolete will be able to invest more funds in the claim while having the same costs for enquiry meaning higher IRR when settled. But can Manolete invoice any other fee to their litigator customer if the case is settled ?
Here is an example to explain my question :
Claim 500k GBP
Manolete buys 200k GBP, insolvency practitioner keeps 300k GBP
If settlement is positive, Manolete will win on their 200k claim stake and the customer will win on his 300k stake.
Can Manolete invoice any “extra success fees” to their IP customer which has recoup 300k GBP (say maybe 10% -20% of that amount?) or is Manolete revenue strictly limited at the pro-rata of the claim they bought (here 200k) ?
Thank you !
I think you may be misunderstanding the process.
Manolete works on a discounting basis. If a claim is worth £500k (your numbers) and the person owning the claim has insufficient financial resource or will power to litigate, then that claim may never be brought. So Manolete acquire the claim. They may say to the owner that if the claim is not brought within the statutory time limit, then all potential value will be lost - he will receive nothing. So Manolete may offer £200k for a high quality claim and perhaps they'll also offer a percentage of anything achieved over that sum as consideration to buy the claim. Let's say 50% for the sake of argument. Now Manolete own the claim and all rights that flow from it. They are in the drivers seat and can make all decisions relating to the litigation. So let's say that they succeed and are awarded £500k, plus legal costs. So the prior owner of the claim, who had already received £200k upfront, gets another £150k. The residual £150k is for Manolete. But don't forget that their capital investment upfront was only £200k, so get £350k back for having investing £200k, so they recover their initial investment, plus a 75% return.
This is why I say it is asset management, not litigation finance. They are buying an asset and benefit from the uplift in its value. It is really no different to a private equity firm taking a stake in a start-up and then benefiting from a subsequent IPO. The different being that in in the PE space, they hope for 1 in 20 start-ups to succeed, and the gain is huge which compensates for the 19 that didn't make it. With Manolete, their success rate isn't 5% but over 95%.
Hi James, amazing writeup! Thank you for the effort and painting a realistic picture of the business. I wish you'd step in as interim CFO and implement the proposed accounting improvements. Now that Taverner is gone do you see any likelihood your idea getting adopted by management? Also having met with the CEO I'm sure you've pitched him this better accounting method, was Cooklin open to it?
Thank you for your kind words
I think that everything turns on who they appoint as the new CFO
It shouldn't be another text-book accountant from a big accountancy firm
It needs to be someone who thinks outside the box, understands the nuances of corporate finance, invests in the business personally and does what's best for the company
It would be a disaster to appoint another Taverner who is ticks none of these boxes
Cooklin is a nice guy, but he too is very conventional in his approach. Will he change things? I don't know. I have lobbied on the merits of repurchases, but he doesn't seem to buy the argument and simply offers excuses about restrictions on capital imposed by their bank, HSBC, which is a shame. If the bank is holding the business back, the answer is simple. Change bank. But banks don't oppose companies paying dividends, so why would they stand in the way of timely stock repurchases? It doesn't make sense to me.
The settlement of the Cartel cases is key. Management need to start thinking like asset managers - the optimal settlement will be determined by a combination of timing and quantum. At the moment, the value of these cases is sitting as dead money not working for the business. They need to release it and redeploy it at a higher ROI.
Key skill sets are certainly missing at management level. Maybe the new CFO will bring those. If not, they need to add to the team to fill that void.
The company is hugely undervalued - the question is simply when will the re-rating occur. Once again, it all turns on settling the Cartel cases and redeploying capital in more vanilla cases.
I hope this helps
May be worth reaching out to Jon Moulton, who’s the majority owner, he could knock some sense into management to take these obvious wins. Happy to help petition on this anyway.
If you know a way to reach Moulton, please share it with me by DM. I have tried to reach him multiple times but without success.
MANOLETE PARTNERS STEAMS AHEAD
26 June 2025 - Audited results for the year ended 31 March 2025
Steven Cooklin, Chief Executive Officer, commented:
"We are delighted to report our highest ever revenues of £30.5m for FY25 and a strong increase in profitability, well ahead of market forecasts. Cash generation has also been particularly impressive with a 45% increase in gross cash receipts for the year. In FY25 we also recorded lifetime highs in the number of new case referrals from Manolete's nationwide proprietary referral network. FY26 has got off to a strong start with new case signings already 27% higher than the whole of Q1 FY25 and further concrete evidence of larger average case sizes feeding into our portfolio of more recent case signings. The continued strong tailwinds of challenging market conditions faced by many UK corporates provide the Board with optimism for further good progress in the new financial year."
For full announcement, see: https://d2ysp6t8sg26jc.cloudfront.net/2025-06-26/4499O/d6145ff701bb945cbeb3467e9894b703d15f8152.html
Hello! I'm deeply impressed by your Substack articles. I am curious about your thoughts on the recently announced ARRCC number. Compared to the 109K for April to September, the number for October to March seems to have dropped slightly. Doesn’t this seem to contradict management’s claim that the numbers will return to the pre-COVID level of 200K? I would like to hear your opinion. My english skill is not good, I hope you understand.
Thank you for your question. ARRCC numbers are improving which is encouraging. While there was a small sequential decline from H1 to H2, it’s up year-on-year. This is mostly down to the timing of case settlements, which is naturally hard to control. Still, the overall trend is moving in the right direction. I anticipate that the size of cases will continue to increase and that ARRCC numbers will tend back towards the 200k level.
Trading update, 29th April 2025
Highlights for FY25:
· Record new case investments of 282 (FY24: 276) - excluding extraordinary Bounce Back Loan cases
· Record new case referrals of 896 (FY24: 731)
· Record volume of case completions at 272 cases (FY24: 251)
· Gross cash recoveries of £25.6m (FY24: £17.7m)
· Net cash income from completed cases £13.3m (FY24: £10.8m)
· Estimated total revenue of £30.8m (FY24: £26.3m)
· EBIT of £3.2m (FY24: £2.5m)
· Net Debt £11.1m (FY24: £12.3m)
· New bank facilities agreed with HSBC
Steven Cooklin, Chief Executive Officer, commented: "The past year has seen Manolete achieve record KPIs across all key metrics of the business and outperform market forecasts. Given the strong tailwinds presented by the challenging UK and global business environments, we expect to build upon those achievements in the forthcoming year."
A key metric is the ARRCC (average realised revenue per completed case) which stood at £108k (FY24: £96k). The ARRCC is important because the cost of litigating a claim involves similar amounts of time and effort, regardless of the sums involved. So a portfolio of larger sized cases will enjoy greater operating leverage, boosting marginal returns. Accordingly, the combination of higher case volumes and larger case sizes will lead to a material transformation in the profitability of the business. The continued positive trend towards larger average case sizes is in line with the Board's previously stated expectation that average case completion sizes would likely increase as the number of medium and large company insolvencies returned to their normal levels in the UK insolvency market following the withdrawal of the UK Government's significant financial support to businesses over the Covid period of March 2020 - April 2022, as well as the temporary suspension of key insolvency laws during that same period. Pre-covid the ARRCC stood at ~£200k and it is anticipated that it will return to that level - the trend seems to confirm that expectation.
The Company enjoyed a record FY25 in terms of all its key operating metrics and finished the year with 438 live cases in progress (FY24: 418) with an estimated Net Book Value of £41.8m (FY24: £40.2m) which gives the Board confidence in the prospects for the current financial year. In anticipation of another busy year ahead, the Company will welcome two new senior level hires into the existing 15-strong in-house legal team during the first four months of the new trading year.
Today Manolete Partners has announced that it is replacing its CFO.
https://d2ysp6t8sg26jc.cloudfront.net/2025-04-07/9585D/e69a39b50380c15f54c3b42b5d3994b06dd2ff79.pdf
This is welcome news and long overdue. He wasn't the right man for the job.
28th March 2025: New Revolving Credit Facility with HSBC Bank
Manolete Partners announce it has signed a new Revolving Credit Facility ("RCF") with its existing provider, HSBC UK Bank Plc ( "HSBC").
The new RCF provides Manolete with the same level of facility as the previous arrangement, at £17.5m. However, the margin charged to Manolete by HSBC on the new RCF is at a reduced rate of 4.0% (previously 4.7%) over the Sterling Overnight Index Average (SONIA) and has a reduced non-utilisation fee, from 1.88% to 1.40%.
The new RCF is a 3.25-year facility with an initial maturity of 27 June 2028. Manolete has the option to further extend the facility on its current terms by an additional year.
The covenants remain unchanged except for the Asset Cover covenant which has been relaxed for the next six months.
Steven Cooklin, CEO commented: "We are delighted to have secured a new long-term commitment to the business from HSBC, which is testament to the strong partnership we have established since 2018. The improved terms of the facility demonstrate confidence in the Manolete business."
Hey James! Thanks for the insightful post!
I'm just starting to look into Manolete. The business numbers are bit complex and it's difficult to get the earnings power beneath the accounting shenanigans. Also, I don't think the management team does a good job at explaining the superiority of its business model (vintage table is too complex, and doesn't include opex costs as far as I know).
How did you build the chart with the cumulative investments (including opex) and cash receipts? Are investments in new cases the initial fees that Manolete pays + the initial legal costs? My goal is to see the compounding rate of growth in the business model.
I hope we can have some constructive discussions on MANO.
Best,
Miguel
Miguel
The compounding rate of growth in the business was severely interrupted by Covid governmental measures and closures of the Courts during lock-down. Companies were being prevented from going insolvent, which slowed the rate of new cases, and older cases were taking longer to bring to resolution. I demonstrated this in the charts in my analysis.
We are now through that period and insolvency cases are at record levels. That will start showing through in the numbers during 2025 and 2026.
Manolete Partners are due to report sometime around mid-April. It will be interesting to see what they have to say.
In terms of my charts, it was lots of manual work trawling through financial reports and running my own calculations. IFRS accounting was never designed for investment firms, so it is entirely unhelpful for Manolete Partners.
I hope that helps.
Regards
James
https://albertoag.substack.com/p/the-big-short-uk-corporate-bankruptcies?r=3hhq06
I wrote about Manolete back in March of 2024.
Good report James
An unusual company - many don't understand it needs to be valued as an investment company. It currently has very low analyst coverage, which means it is under the radar. I rarely see a company that has so much business that it needs to turn 70% of opportunity away and of the business it accepts, it can generate such a high return on invested capital with a very high degree of certainty, very little risk that is offset via portfolio diversification and with the ability to reinvest earnings at the same favourable high rates of return.
As Charlie Munger used to say, when you see a fat man in the street, you don't need to weight him to know he is fat. When you see a great investment opportunity, it is similarly so obvious.
I have really enjoyed reading your analysis, as I have found it difficult to understand the complexities of the accounting practices over the years. Thankyou.
Can I ask if Mano paid you to write this piece?
Also, do you think they may raise capital to fund new cases by issuing more shares, rather than borrowing from HSBC or someone else?
I am not paid to write my analysis.
As a fund manager I am constantly analyzing companies. I share that analysis, in an easily digestible format, on Substack.
Why not? I've already done the work.
My motivation was to create an investment community of like minded people, so that we could share ideas.
Some of my best investments have come from people reaching out to me and introducing me to companies that I previously didn't know.
The population of investible companies runs to well over 7,000 and its impossible to analyze them all. So the community is a great way to find the hidden gems.
As part of my research I usually interview people at the company in question. In the case on Manolete Partners, I have spoken to the CEO many times by email, telephone and face-to-face over a coffee.
But the analysis is all independent - it is not influenced by anyone else. You will notice that I lay out the good, bad and the ugly. I don't look to paint a rose coloured picture - I tell it like it is.
That answers the first part of your question Robert.
In relation to the second, it would make no sense for the company to raise equity capital now at such a discounted share price. When the shares are trading for 30 pence on every pound of value, the last thing you want to do is give away more pounds of value in return for 30 pence of cash. May I recommend that you read: https://rockandturner.substack.com/p/henry-singleton-learn-from-the-best?utm_source=publication-search which explains this in more detail. Singleton was arguably the best capital allocator ever and it was he who inspired Buffett.
Thankyou for your clear response. More so than ever we have to question what we read on the internet, and question who is behind the story, especially if the content is ‘free’.
I question everything. As for Mano I just could not understand how every year the rhetoric coming from management seemed positive, yet Mr Market would go the other way - I had to question ‘what am I missing’, so your research gives me back some faith, that fundamentally this company is undervalued.
Manolete Partners was named Financial Times Europe Long-Term Growth Champion 2025
Someone just brought this to my attention: https://markets.ft.com/data/announce/detail?dockey=1323-16743348-7TMKSM9MRQ6MNSII7IDFVGS3Q0
Hi James,
Comprehensive write-up but you state that Manolete has a net cash position, it doesn't.
At the Interims it had £636k of cash and £12.5m of debt giving a net debt position of £11.9m.
Patrick
Thank you for your message.
If you are looking at long-term debt against cash on the balance sheet you are correct, although it is worth pointing out that the £12.5m has been reduced to circa £11.4m since September.
However, if you take cash and equivalents to include net current receivables and short term investments, the balance tips the other way.
The key issue is that for short term investments most companies would include government bonds and the like in which they park surplus cash to generate some return. These are highly liquid and equivalent to cash. For Manolete, their short term investments are almost certainly cases that will settle imminently, but not as liquid as a government bond so arguably not equivalent to cash.
As such, I have removed the wording "net cash" from the article to avoid confusion.
Either way, it doesn't impact the investment thesis.
I am grateful that you pointed this out.
Best regards, James
"This is because the company’s auditor asked that investments in claims be recorded as cash flow from operations instead of CAPEX, as it argued that rights in litigation are considered non-depreciating assets while CAPEX is usually depreciable ... So operating cash flows look awful - presenting a false picture of the business."
Makes me wonder. You have the investments as CAPEX on the income statement. You take the bottom-line of the income statement (profit/loss before tax) and bring it over to the cash flow statement. There you add back depreciation. Where is the difference to recording investments directly in the cash flow statement as an outflow? When you have the case investments in the income statement as CAPEX, you just get a lower profit/loss before tax to carry over to the cash flow statement. You add back depreciation. The net result to operational cash flow is the same as reporting in the cash flow statement case investments directly which you substract from a higher profit/loss before tax number.
So that's my reasoning, and apparently, there's something I'm not understanding.
The bottom line of the income statement is useless because it is derived from a combination of realized and unrealized revenue due to IFRS-9 requirements. So the net income on the income statement is not cash net income at all.
You want to take that over as the starting point of your cash flow statement?
Garbage in, garbage out.
Accounting rules are becoming useless for investors and misleading. They aren't designed with investors in mind. Buffett understood this all the way back in 1986. His shareholder letter that year explained how he adjusts reported numbers to make them useful.
Take a look at the 1986 shareholder letter (you can find it with Google)
I also recommend this book: https://www.amazon.com/Accounting-Forward-Investors-Managers-Finance/dp/1119191092
Yes, the income statement is not cash income. For that are the adjustments in the cash flow statement, including adding back depreciation. Still, as you point out, with Manolete Partners you arrive at operating cash flow losses - more cash goes out than comes in. And what I don't understand is why you say the cash flow statement is misleading and that (if I understand you correctly) the operating cash flow losses shouldn't be operating cash flow losses.
Berkshire has no operating cash flow losses, by the way. Buffett's discussion about unrealised gains/losses refers to the income statement.
Buffett expressed frustration with accounting standards in his 2023 shareholder letter. It is worth reading the way he explains this anomaly to his sister Bertie in that letter.
If you start the cash flow statement with numbers based on unrealized revenues (that may or may not materialize in future) then you have to add back more than just depreciation.
In the case of Manolete, its claims don't depreciate anyway. The investments either yield a positive return or else are written down/off. So there is no depreciation to factor in.
This is what I mean when I say that accounting standards aren't designed for this kind of business. A hard PPE asset depreciates and needs to be replaced. The depreciation charge becomes a proxy for the replacement cost.
That doesn't apply when investing in legal claims.
These are investments. So why don't they appear as CAPEX in the cashflow from investing activities, rather than operating activities?
In my mind, this is a balance sheet business. The NAV of the business compounds over time as money is invested profitably in claims and then reinvested. But even the balance sheet is problematic. Due to the profit warning in Sep 2022, the company is super prudent now in valuing its claims - so the assets are undervalued. At the same time, the liabilities relating to ongoing litigation costs are already paid but capitalized on the balance sheet until the claim settles. So those liabilities have largely been settled, meaning that the liabilities on the balance sheet are over stated. All that means that the NAV of the business is actually higher than it appears.
The accounts are just a mess - largely because of the auditor, who was replaced recently I believe - and that means that there is so much white noise in the numbers for investors to decipher that many simply give up.
I am speaking with the management of Manolete about producing a shareholder letter, similar to that at Berkshire, which speaks to the shareholders and explains the anomalies contained in the statutory reporting numbers. If investors are able to better understand the business, they are more likely to invest. Manolete are thinking about it.
Ok, I thought you considered depreciated CAPEX instead of operating cash outflow - speaking about the legal case investments - to be the solution. I misread this part of your article!
Still, I struggle with understanding your argument. You can have the case investments as CAPEX in your favourite version of an income statement (which is not the one we have now, as you point out), but this ultimately reduces the profit/loss income you carry over to the cashflow statement. So you either have the cash outflow of case investments recorded indirectly in the lower profit/loss income before tax you carry over to the cash flow statement, or directly as, as it's done now, in the cash flow statement. With, as far as I can see, the same result to the bottom line of operating cash flow: a loss.
Not saying your argument wouldn't be right; I just don't get it.
We are saying the same thing. If, whichever way you do it, you end up with a cash flow loss, despite the business being both profitable and cash generative, how useful is the cash flow statement in assessing the quality of this business?
It's a little like trying to read the accounts of a bank. They always look awful and over leveraged... but that misses the point... their business is a leveraged business.
Read that book that I mentioned earlier in this thread. It explains how useless accounting has become.
It was designed for asset heavy industrial businesses and hasn't evolved with the times. It doesn't work well for asset light software businesses nor does it work well for financial businesses such as Manolete.
If you disagree, then that's fine. Continue using those numbers. But I think you are trying to push a square peg into a round hole.
Ok, thanks for sharing your thoughts. I'll put the book on my reading list!
I also published a short podcast covering Manolete Partners https://rockandturner.substack.com/p/manolete-partners-golden-opportunity also available on YouTube, Apple podcasts, Spotify, and other leading podcast services.
Litigation financing is one of the toughest businesses out there, many lenders have been burnt (although not as specialist as Manolete).
You missed the number one headwind: the end of low interest rates; the business' returns are now impaired.
These income statement accounting entries and balance sheet assets need at least 2y to be realised as cash profits.
If one has a healthy hurdle rate, and thereby demands healthy CROCI, one should not overpay for such a business.
Thank you for your comments, but you miss a few key issues in your reasoning:
1. You are confusing Manolete as a mere litigation financer. It is fundamentally different. It is a niche investment firm. It doesn't fund someone else's litigation, it acquires the claim outright and owns it. This gives it full control over case management.
2. It currently borrows at just over 9% (and hopes to get that rate down when the revolving credit facility is renegotiated in June of this year). Against that, it makes 17%+ annually on its investments.
3. Most of its claims aren't funded with debt, but are merely reinvested capital being churned at that 17%+ annual growth rate - so it is compounding its own capital and not dependent on debt, thereby mitigating the impact of changing rates.
I hope this helps.