This article by Lawrie Holmes ‘Manolete chiefs seek value creation in bear market’ appeared in Financial Director on 4 June.

The article can be viewed on the Financial Director website here.

Manuel Laureano Rodríguez Sánchez, better known as Manolete, is recognised as the greatest Spanish bullfighter. It’s the name that Steve Cooklin gave to the firm he founded in 2009 to finance specialist insolvency litigations.

Cooklin, a 20-year City veteran, says he decided on the name when remembering that in the years of the dotcom boom Wall Street reports always came from outside the New York Stock Exchange, next to the statue of a raging bull. “I thought, who controls the bull when markets crash, it’s the matador. So I decided on the most famous matador of all for the firm’s name,” he says.

If Manolete Partners was unfamiliar to many across the industry, a decision to list the firm on junior market AIM in December 2018 raised its profile.

Since then the firm has performed well. In its 2019 full year results, pre-tax profit before exceptional IPO costs rose 85 per cent to £6.8m on revenue up 30 percent to £13.8m.

The group’s share price has more doubled since the IPO, continuing on an upward trend this year despite the impact of coronavirus, giving a market value of around £240m at the start of June.

The rationale to launch the firm was clear cut for Cooklin: “There are thousands of companies that go bust every year in the UK, where there are thousands of potential claims, that never see the light of day because there is no money left in those companies.”

Cooklin says a common occurrence in many failing SMEs is for directors to take the capital out and put it into a new venture, in the expectation of finding new success. “But by doing that they’re breaking lots of insolvency laws because the key of the Insolvency Act is to treat all creditors equally. That’s creditors’ money they’re playing with, not theirs,” he says.

“A lot of directors either don’t understand the difference or care that there is a difference, because I think for decades in the UK, they got away with it. There wasn’t anyone to tap them on the shoulder and say that needs to come back into the pot, to pay suppliers,” says Cooklin

In 90% of the cases it pursues, Manolete is buying the claims of bust companies, says Cooklin. “We can open settlement negotiations, accept an offer from the other side, we can even abort the case if we don’t like the look of the way it’s going,” he adds.

Cooklin says the firm’s model was put under the spotlight in 2015 with the Small Business and Enterprise Employment Act “which enabled us to own everything that happens in an insolvency, including the liquidator’s own actions, not just the bust company’s claims,” he says.

“Then in April 2016 the Jackson Reforms were applied to insolvency litigation, which made the old way of doing it, of no win, no fee ambulance chasing way, become highly uneconomic, for the liquidators to use, and our model moved centre stage,” he adds.

As the firm’s number of cases have grown, to around 435 over 11 years, of which 60 percent have been completed, the firm continues to grow in terms of capital and in-house lawyers hired. Their role is to review cases, and report to an investment committee, whether they think they’re viable for us or not,” he says.

Listing the firm offered the chance to raise more capital, although a £20m revolving credit facility arranged with HSBC, is expected to be sufficient for the firm’s needs in the near term. “Cases turn into cash within 11 months on average, which provides a lot of working capital,” says Cooklin.

The coronavirus effect

Cooklin expects the volume of new business to rise in the coming months, given the impact of the pandemic. He anticipates a big tick up in cases, when the massive government grants and loans supporting companies through the lockdown period come to an end. “In a bad year for insolvency, around 14,000 businesses go bust, in a good year its about 20,000. Today there are predictions a million may go bust in the next few months,” he says.

Cooklin says the firm is addressing the pandemic impact through different lenses in the short, medium and long term. “In the short term we’re concerned about the need for the referrers of work, the insolvency practitioners and lawyers. Are they going to be distracted by operational issues working from home. At the moment, little has changed, which is a huge credit to these law firms and insolvency practitioners,” he says.

Although there will be a lag effect, in the time it takes for liquidators to be appointed and investigate cases, Cooklin expects to ratchet up resources. “We have almost trebled the size of the in-house legal team since the IPO, currently running 180 cases.

“We’ve got capacity for doubling that, but we will be monitoring the numbers. Having set up an infrastructure of senior partner level lawyers across the country, the idea would be to hire more junior lawyers under those people, in order to build up,” he says.

Mark Tavener, who joined the firm as CFO in late 2019 after a career in corporate finance, most of it at Big Four firm Deloitte, is not only running the core finance function, but also assessing the overall risk position of the group.

For much of his career, Tavener has worked in due diligence- he came to Manolete after writing a report on the viability of Manolete when it was seeking the first £10m trache of the HSBC facility- so he is well placed to understand the firm’s risk appetite.

“I think we’re improving the level of internal KPI analysis we are undertaking over the the cases. With the number of cases ramping up we are creating a significant portfolio, so we can begin to monitor average cost per case, average return, and as the number of cases builds up, there’s a pattern beginning to emerge. So there’s a level of analysis that we can bring to the company that’s been useful,” says Tavener.

He also says finance is getting better at pricing a live picture of the group’s portfolio churn and cash recycling. “We have large spreadsheets that monitor every case, so we’re very close to progress on live cases,” he says.

As Manolete prepares for what could be a very busy period for the firm, Cooklin says that efforts to forge partnerships with the ICAEW, R3 and the Insolvency Practitioners Association (IPA), in the form of three year exclusive litigation funder deals, should hold it in good stead.

When it comes to the next phase, Cooklin says that beyond the negative picture of firms going bust, the return of capital to creditors could have a positive impact on the UK economy. “If you didn’t have that working very efficiently, there’d be a domino effect, because supplier businesses unpaid out of the insolvency process would have cashflow problems and could go bust themselves.

“I think this is a big issue in the current environment we’re in. I think we and the insolvency practitioners play an important role in capitalism, making sure people are treated fairly and ensuring good businesses survive, while the weak go under,” he says.