Investment Criteria

Investor-State Dispute (ICSID, ICC, etc) claimants trading at <30% of compensation expected value, often resource / energy businesses, with clear evidence of alleged breach, backing by successful legal counsel & litigation funders, aligned incentives, and a likely distributions to shareholders.

Investment Criteria

Definition: Arbitration is when two parties, after a failed private resolution, allow an 'Arbitrator' (3 constitute the 'Tribunal) to decide. You can think of them like the judge.

Investor-State Dispute Candidates:

  • Publicly listed claimants

  • ICSID, ICC, PCA, Etc.

  • Resource / Energy companies most common

Heavily Discounted:

  • Market Cap / Probable Award = max.30%

  • Have seen as low as 10%

  • Affords vast margin of safety

  • Conservative assumptions

Reason for Discount:

  • Not: award expected value below market cap, or awards (regardless of amount) that don't flow through to common equity holders.

  • Common valid reasons.…

  • Shareholder turnover (old base panic sell down despite business value not changing thanks to nature of compensation calculation, and it takes time to new investors to find the stock)

  • Assumed need for expertise (many stay away because they're not trained in law, but as this is very procedural, studying past cases with similar governing rules works just fine.)

  • Market Ignorance: being an incredibly niche area, few are actually aware of these opportunities. We aim to formally introduce arbitration investing as an asset class.

Useful Levers:

  • Commodity price (for investments whose value is levered to commodity prices, the appropriate compensation can increase without any work from the legal counsel).

  • Low implied probability (e.g. if the market decides the odds of our estimate goes from 10% to 20%, that is a 100% ROI without any case progression)

Return Driver:

  • Not a strict requirement, but we generally find that businesses whose sole focus is the arbitration, so have no operating business, are more likely to distribute a larger % of the award to shareholders.

  • We have no problem with reinvestment, and our criteria means all our picks have enough margin of safety for poor capital allocation anyway (unlikely considering the valuable projects being fought over in the case.)

Catalyst:

  • Each submission, when publicly released, acts as a chance for the market to reassess their views on the chances of X and Y, and to price the stock accordingly. If we have chosen the right cases, this should only go positively.

Aligned Incentives:

  • We prefer management who have some skin in the game, and benefit from the same stock appreciation as common stockholder

Backing:

  • Not a requirement, but useful

  • Litigation Funding from a firm with a great track record is similar to seeing an investor you respect is in the stock you're doing work on. It doesn't change your thesis, but it may give you more confidence. We often look out for Burford, LCM, and Bench-Walk.

  • A Legal Counsel with a great track record is essential - the arguments are only so merited as their presentation.