Frank Voisin writes about value investing topics at http://www.frankvoisin.com
I have written about Asta Funding, Inc. (NASDAQ: ASFI) on this site several times. Though I recently sold my position (as part of my shift to cash), I still follow it closely. Since I have written about it in the past, I thought it was important to share this surprising press release from earlier today (emphasis added):
Asta Funding, Inc. Announces New Joint Venture in Personal Injury Financing
- Initiates New Joint Venture in Personal Injury Financing With Up To $21.8 Million Annual Investment Over the Next Five Years
ENGLEWOOD CLIFFS, NJ – JANUARY 4, 2012 – ASTA FUNDING, INC., (NASDAQ: ASFI), (the “Company”), a financial services, receivable asset management and liquidation company that specializes in the purchase, management and liquidation of consumer receivables is pleased to announce the formation of Pegasus Funding, LLC (“Pegasus”), a joint venture with Manhattan-based Pegasus Legal Funding, LLC (“PLF”), an established personal injury financing provider.
On December 28, 2011, the Company, through a newly-formed subsidiary, ASFI Pegasus Holdings, LLC (“APH”), executed the Pegasus Operating Agreement with PLF, in which a subsidiary of the Company, Fund Pegasus, LLC, (“Fund Pegasus”), will loan up to $21.8 million per year to PLF for a term of five (5) years all of which is secured by the assets of Pegasus. These loans will provide financing for the personal injury litigation claims and operating expenses of Pegasus.
Pegasus will be actively managed by experienced personal injury litigation funders, Max Alperovich and Alexander Khanas, who will rely upon strict underwriting criteria to provide legal funding to personal injury plaintiffs prior to the settlement of their claims or their resolution in court. The Pegasus business model entails the outlay of non-recourse advances to a plaintiff with an agreed-upon fee structure to be repaid from the plaintiff’s recovery. Typically such advances to a plaintiff approximate 10-20% of the anticipated recovery. These funds are generally used by the plaintiff for a variety of urgent necessities, ranging from surgical procedures to everyday living expenses.
Pegasus’s profits and losses will be distributed at 80% to APH and 20% to PLF. These distributions will be made only after the repayment of Fund Pegasus’ principal amount loaned, plus an amount equal to overhead advances calculated at 9% of principal for each case settled. While the over-all returns to the joint venture are currently estimated to be in excess of 20% per annum, APH reserves the right to terminate Pegasus if returns to APH, for any rolling twelve (12) month period, after the first year of operations do not exceed 15%.
As of today, the Company has advanced approximately $4 million in personal injury financing, along with the advancement of $360,000 for overhead expenses. These loans have been assumed directly by Pegasus and the proceeds thereof assigned by the Company to Fund Pegasus.
Gary Stern, Chairman, President and CEO of the Company commented, “We are very excited about our financial commitment to this joint venture, and in particular, about the future prospects of the personal injury financing space. During these past 3 years, the dearth of attractive consumer credit card receivable portfolios has given management the firm initiative to proactively seek profitable alternative asset classes for investment. For the past 2 plus years, we have deliberately and carefully scrutinized the personal injury financing business, and many of the respected firms which populate its ranks. After considerable due diligence, we elected to enter this market by way of a joint venture with PLF and its experienced and talented management team. Our relatively sizable cash resources, will allow us to continue to look into other asset classes, as a complement to our traditional business model of acquiring distressed receivable portfolios. This new investment in personal injury financing, along with our new credit facility with Bank Leumi gives us the flexibility to utilize internal resources and external financing for future growth. We believe the business of personal injury financing offers growth potential for us and we will continue to explore other asset classes to achieve this goal.”
Prior to this move, investors purchased shares of ASFI believing that it was in the business of purchasing consumer receivables that others had failed to collect upon at pennies on the dollar. Those are assets that are easily analyzed, with the odds of collection handicapped based on a number of statistical methods based on historical data.
With this announcement, the company will be loaning money that will be based on assets that do not yet exist outside of the minds of the lawyers, who are tasked with assessing the expected values of the recoveries from litigation (settlements and awards). This requires both assessing the likelihood of victory as well as the quantum of damages or the settlement value. If the lawyers are mistaken, the amount of recovery can be far less than expected, even zero if the case is lost. Also, the amounts loaned to the plaintiffs are non-recourse, meaning ASFI is taking on the full risk of these loans. The company states there will be “strict underwriting criteria” but I am not convinced legal victoaries are as easily handicapped as the receivables business.
Furthermore, unlike the receivables purchases which occurred at 1 – 3 cents on the dollar, these plaintiff loans will be made at 10 – 20% of the expected recovery. Given that the expected recovery also includes a large portion that goes to the plaintiff, the amount that ASFI (via Pegasus) will be putting out relative to the amount that will be coming back appears to be far lower than in ASFI’s traditional business.
From my perspective, this is a far riskier business model than ASFI’s receivables purchases. I do not like the added risk being taken on, and would have far preferred to see the company continue to purchase receivables portfolios and, failing market opportunities to do so, repurchase its own shares.
What do you think of this move? Good? Bad?
Author Disclosure: None
Frank Voisin writes about value investing topics at http://www.frankvoisin.com
