Burford Capital Limited (BUR) Earnings Call Transcript & Summary

Welcome to the Burford Capital Investor Call. [Operator Instructions] I shall now hand over to Christopher Bogart, the CEO of Burford Capital, to begin.

Thank you very much and good morning, everyone. Thanks for taking a few minutes with us this morning. As you know, we put out a trading update this morning. It isn't something that we've historically done. But given the level of investor interest in some news flow, we decided we would go ahead and do that. And we're delighted to share, from our perspective, a very positive 2019 with you. I think the most exciting part of this is the level of growth that we see and continue to see in this business. We've posted the highest level of new business in our history, and we're finding continued strength in the litigation finance market. We're finding sustained interest in our offering, and we see a significant amount of runway ahead of us. Part of that is just the sheer growth in demand for capital in the legal sector and part of it is a continued evolution in the way the capital is used and the kinds of demand that we see for our capital. For example, this year, we saw an uptick in corporate interest in litigation monetizations, which really does open an entire new front of business for us. And just one example, one of our largest deals of the year was such a monetization with a Fortune 100 company for a substantial litigation position. So this is not just a world of small companies and people who need capital, this is corporate finance applied to legal assets. And so we're very excited about what lies ahead. The other very rewarding piece of this is that we, on concluded matters, continue to be able to demonstrate stability returns. Our returns have remained consistent, in fact, they've actually ticked up somewhat this year to a 93% return on invested capital and a 31% IRR. Again you've heard us say for some years that returns move around from period to period, so we don't hold that out as a trend, but we nevertheless are very pleased that, for years now, we've been able to deliver high returns in this business. And one of the pieces of market research that is particularly compelling to us is that price for capital in this industry is cited by clients as one of the less-important criteria for selecting a capital partner. Some of the other attributes that we bring to the table, our unique scale, our global reach, the quality of our people. Those are things that clients value very much and that drive them to do business with us. Deployments in our business also remained strong. We did, again, $1.1 billion of deployments out the door. That is an extraordinary amount of capital for us to deploy in a single year. We've now done it twice in a row, which really sets the business up for years ahead because those deployments will obviously turn into litigation resolutions in the years ahead, but that can take, as you all know, some time. Cash proceeds also jumped up, 23% overall, just showing the fact that while litigation can take a long time, we routinely turn our investments into cash, and we've got a significant track record of being able to do so. A few weeks ago, we put out some other news, including a management restructuring. And the purpose of that was just to continue to address the continued growth and maturity that our business is showing, and ultimately highlighted what a deep bench of people that we have in this business that has been largely organically built. So we're really thrilled with the team, and Jon will probably say a few more words about that; but we're delighted to showcase the fact that we've got a deep bench of management here, and that this has really become a significant global business. Many of you are interested in what's happening with corporate governance, and we've made a number of announcements in that regard over the past months, you should expect to see another announcement fairly soon from us about appointments, new director appointments to the Board. We've followed an extensive process to engage in finding those appointments, including using Korn Ferry's executive board search function. And as I said, you can look for an announcement from us reasonably soon on that front. As anyone who has followed us for some time knows, we have no control over the timing of our income. And in fact, what makes our business uncorrelated is that very fact: that we don't control and can't control when cash flows occur, that we rely on judges to decide cases, and we have no idea when they will do so in any individual matter. We actually think that, that is an enormous plus for the business and we would trade that any day for a business that had cyclical returns. But what it does have the potential to do is introduce period-to-period volatility because of the growth or lack of growth in litigation progress. And so for us, the second half of 2019 was especially slow, and as a result of that, we'll see lower period income. But just to prove the timing point, January 2020 has been a fantastic month. So we had multiple litigation successes in January that if affirmed and paid, would result in more than $150 million in profit for us in just a single month. So basically, a lot of the things that one would have wished happened in the second half, happened in January instead. And we regard that as not problematic at all. And even if we did regard it as problematic, it's not something over which we have any control. It's simply a fact of the business. And it's, frankly, one of the reasons, not only that we have lack of correlation but we were able to generate strong returns. If this business were predictable as to both outcome and duration, then, frankly, you wouldn't need Burford and you wouldn't see the delivery of the kind of returns that we deliver. So we're really pleased with 2019, and we're excited about what lies ahead for 2020. And with that, let me turn it over to Jon Molot, the Chief Investment Officer, to talk a little bit more about the portfolio.

Thanks, Chris, and thanks to you all for joining on short notice. As I'd said many times in the past, and it bears repeating, I really like our portfolio. In fact, I can't -- I like our portfolio today better than I ever have. Part of that is, as Chris said, to the extent that there were not as many resolutions or was not as much concrete progress in 2019 in litigation events. That just means there's more value left for 2020 and beyond. And that's highlighted by our very low loss record set in 2019, I think we had something like $6 million of losses, which is remarkably small. It's -- that compares to $21 million in 2018, which was still a low loss rate, and it's far below 1% of assets. I can't promise that we'll repeat that low loss level, but that is just a sign that the lower earnings is a result of inactivity rather than bad activity, which means that those resolutions remain to come. And in fact, as Chris pointed out, January has been a very active and happy month for us. Some of the things that if the year had ended January 31 instead of December 31, it would look very different, and we're not really bothered by that. We're in this for the long run and it's a fabulous portfolio. One of the reasons why I'm particularly enthusiastic about our portfolio today is, as I say every year, it continues to evolve. We are constantly looking for new ways to deploy capital to meet our clients' needs. So Chris mentioned, we've developed a business line that provides monetizations for large corporates, and we've been in discussions with a number of Fortune 100 companies and comparable international conglomerates. And we've closed a couple of those deals this year, which would lead to a sizable deployment of capital. And I think that's a business line that's going to continue to grow and generate returns for us. So that's been a very exciting business. I think it'll be, just as in the first half of the year, we talked about a new type of securities portfolio; the second half, we talked about these monetizations. There will be more innovations to come that we're working on in terms of getting capital law firms as well. I won't go on about the team, as I tend to do, because I love our team so much. But the one thing I will say is the team, like Chris, Jim and I, they know what's in the portfolio and they are staying put. They are very happy with Burford and they're very enthusiastic about its future. And I think that's a sign of confidence that this really is a fabulous business. It's a market that has tremendous opportunity, and we are well poised to continue to take advantage of that opportunity. So the short of it is that the portfolio is great. The business is running really well, and we're very excited for how things are going at the beginning of 2020. And with that, I will turn it over to Jim.

Thanks, Jon, and good morning, everybody. As many of you know, I'm approaching my 6-month anniversary as Burford's CFO. I've enjoyed my time here. It's an exciting asset class, a great team and a terrific business with a lot of growth in front of us. I've also enjoyed meeting with many of our investors, and look forward to more of those conversations in the years to come. Chris and Jon have already covered the meat of the trading update, but I'm happy to address questions about any of the numbers either now or offline. I'm also looking forward to providing you with a new approach to our 2019 annual report next month, with substantially more disclosure designed to address some of the key questions that we've heard from all of you. Consistent with the sort of detail and transparency I hope we provided in today's announcement, my goal is to continue to give our investors as much insight and information about our business as we can. Before turning to questions, I wanted to touch briefly on cash and liquidity. I think as we've indicated in the release today, ours is a cash-generative business. We produced $1 billion of cash across the group last year, including $500 million on the balance sheet itself. We closed the year with almost $200 million of cash on the balance sheet, which was sufficient for our foreseeable needs and up from the half year, despite the fact that we did not raise any new balance sheet capital in 2019. Although it's been 2 years since our last debt issue, we continue to view a modest level of leverage as a key part of our management -- our capital management plans. We've had the view, though, that as the business grows, we need broader access to debt markets. And to that end, we've obtained in the fall, debt ratings from both Moody's and S&P, which I think you can look at as another sign of maturity of our business since no one else in our industry is rated. With these ratings, we may look to add some additional debt in 2020 to continue to finance our growth. We're pleased with our continuing performance in collecting receivables, there's often a gap in time, as you know, between litigation results and when we receive cash, which is of course why we make pretty good money in our post-settlement business. We had an unusually large level of these due-from-settlement receivables at June 30, some $173 million worth. We're pleased to report that we collected 97% of those receivables in the second half, demonstrating that we do get paid once litigation resolves even if it takes some time. So a key part of my job is to pay close attention to liquidity. Philosophically, we run a conservative balance sheet and maintain a significant amount of cash as we did in 2019 to give ourselves plenty of flexibility. Given the different liquidity levers that we have to pull on, I'm quite comfortable with our cash position today and its ability to permit the business to meet its needs and continue to grow in 2020 and beyond. And so with that, I'll turn it back to Chris.

Thanks very much, Jim, and operator, we are ready for any questions that anyone would like to ask us.

[Operator Instructions] Our first question comes from Julian Roberts from Jefferies.

I was just wondering if you could give us any more color on any differences in the market or ways that Burford interacts with its clients and with the law firms since the events of August.

The answer is not really. And I think you see that borne out in the amount of new business that we did, because obviously, we had put out numbers shortly before what you kindly called the events of August. And so no, I think those events obviously had a profound impact on our equity shareholders, about which we are very unhappy and we have separately -- in response to a number of shareholders requesting us to do this, we have separately taken some action that is continuing in the English courts. But leaving aside the impact on shareholders, which I don't mean for a moment to minimize, the rest of the business has carried on. Our clients are sophisticated lawyers and law firms around the world. They have seen meritless short attacks before. Many of them have advised clients who have been the target of them because they seem to be increasingly frequent. And it was pretty apparent that the substance of that attack was, as I said, meritless and misleading. And so it really didn't dampen, I don't think, the interest in Burford and the willingness of clients to work with us.

[Operator Instructions] The next question is from Andrew Shepherd-Barron from Peel Hunt

Yes. Okay. Three 3 quick ones from me, if I may. One is could you update us on the U.S. listing? Is that still a go? Secondly, can you tell us whether or not there have been any write-downs in the investment portfolio in 2019? Obviously, we've seen the less-unrealized gains but I'm interested to know what kind of -- whether you've done any fundamental review of the cases and have any comments to make on that. And thirdly from me is, will you be -- in looking at information disclosed this morning, it is still not possible to track cash proceeds for 2018, for example, as to the extent you've given a useful split into the accounts for 2018, will you be doing that at the finals?

So thanks, Andrew. Taking those in order, the -- as to the U.S. listing, we put out a statement a few weeks ago in early January that addressed a number of Burford-related questions including the U.S. listing. And having issued that statement, we have now been placed on sort of a quiet period by the U.S. Securities lawyers. So everything that we had to say about the U.S. listing was in that statement. Just to recap it, what we basically said is that we had done an extensive amount of work with our legal advisers, and the outcome of that work was a determination that we believe that we should go forward and file for a U.S. listing, and that we intended to do so with the target of having that filing made in April. We need full year audited financial statements to be able to make that filing, which is the reason for the timing, our -- we're intending to report full year results on the 24th of March, and then it'll take a little bit of time to put those in shape for an SEC filing document. So that's sort of where we stand. But we also said in that release that investors for U.S. Securities laws reasons, needed to recognize that we wouldn't be able to say anything else while that process unfolded, as is customary in that way. As to your second question, I'll talk briefly about the valuation process and then Jon can certainly chime in with some color if he'd like. When we do fair value, and one of the reasons that we don't routinely put out trading updates like this and instead go through a process that leads to the preparation of the full year results is because the valuation process in which we are engaged is very extensive. And so we do exactly what you've just described, we engage in a fundamental review of all of our investments. And we do that every 6 months, we don't just do it occasionally. And so really what we're doing for every single investment individually that we have is we're looking at whether there has been an objective event in the underlying litigation or arbitration that would cause us to alter our valuation position in either direction, pro or con. And as you saw from the extensive valuation, fair value material that we put out last fall, which is still available on our website, you will see that we are quite cautious in our approach to that. And in fact, we tend to reverse many more downward write-downs than we do upward writeups. And so we're doing that kind of fundamental review every time. I think in every single period, there are valuations that move in both directions, and that's just the nature of litigation. And sometimes, valuations will move more than once in the same case. Jon, do you want to add anything to that, if there's anything? We've covered a lot but...

Yes, I would just add that as Chris says, we have a very large portfolio, so there are activities in all of the cases and the question is whether in any given case in the prior 6 months, there's been sufficiently concrete development that increases or decreases the value of the investment based on that objective change. And there will always be, in every period, a number of investments that will meet those criteria. And under the formula that we have, there will be a change. This was a quiet period not only with respect to resolutions where the cash came in at Burford as we said, it was not that quiet when it came to collecting receivables that we had as of June 30, so all that money came in. But with respect to new resolutions generating cash, it was a quieter period. And with respect to litigation events that were concrete enough to warrant a fair value adjustment, it was a quiet period. It's not -- it sort of reinforces that we don't make fair value adjustments based on the sentiment about the cases -- our sentiment about the cases, and the portfolio is quite strong. But that is not a reason to adjust fair value in either direction. And so it was a quiet period with respect to fair value adjustments as well as realizations. So there were not significant losses in cases or significant setbacks in cases that are not yet fully realized. There -- some smaller cases had some setbacks and some smaller cases had some positive developments and there were fair value adjustments based on those. But not in numbers that are large enough to have moved the needle in the same way as the prior period.

And Jim, do you want to take Andrew's third question?

Yes. I think the simple answer to your third question is, yes, our intention is to provide more breakouts and transparency into the different pieces of the balance sheet and income statement puzzle. I think the way I'd think about this is we have historically put out an awful lot of information. The complexity of the business has also grown, and so part of our goal is to keep up with that. But as well as to be able to tie the pieces together in a way that's clear for investor. And so I think the sort of thing that you're asking about will be one of the places where I think we can provide some additional transparency, and you're seeing a little bit of that in terms of the numbers that we laid out here in the RNS this morning.

The next question is from [ John Purcell ] from UBS.

I wanted to ask you, are assets or are investments on your balance sheet, are any of them monetized by selling them to third-party funds that you control or other related parties? And if so, what is the proportion of that? And will you be disclosing that going forward?

Sure. So we, from time to time, will engage in secondary sales into the market. And what we're trying to do -- we've been doing this for some years now. And what we're trying to do over time is actually develop a secondary market for litigation risk. And so the most obvious example of a secondary transaction that we've done, and we've done it repeatedly now, is Petersen. But we also do it from time to time, when we're able, in other smaller and less-visible transactions. So for example, we did in fact also do, in the second half, a monetization -- a small monetization of one of our other investments. And the purpose behind that is to condition the market over time that will become accustomed to buying and will sort of add to our financial capacity. We already source capital for multiple places. We invest directly on our balance sheet from public equity and public debt. We have a very attractive arrangement with a major sovereign wealth fund, that effectively is almost structural leverage for the balance sheet. And we run a sizable family of investment funds. And having access to the secondary market capital, maybe even with a long-term view toward some sort of securitization approach, is attractive to us. So that's why we do it. In terms of the buyers of those instruments, they tend to be institutional investors that have -- desire to have some direct exposure to individual underlying litigation assets. And we don't comment on what happened individually with investments or with our funds, but I will say, broadly, that it certainly is not impossible that if we had an attractive investment in the market, that some of our LPs, some of our fund investors, might be of the view that it would be attractive to have an interest in some of those investments as well. If that were to happen, that would be an investment decision made solely by the limited partners, in other words, Burford as the investment manager would not be able to be in a position of directing an asset from our balance sheet into our investment funds. That's a self-dealing transaction that would require, under U.S. Securities law, would require the consent of the limited partners. And so if such a transaction were to occur, that's the basis on which it would be happening, the investment decision wouldn't be being made by us. And if that transaction was required to be disclosed, either the public investors or the private shareholders, under whatever the applicable legal regimes are, then obviously, we would make the appropriate disclosures.

Sorry, can I just follow-up on that?

Sure.

So yes -- so that makes sense. But you could still disclose what proportion of your balance sheet is potentially being monetized that way. I mean sure, you might not -- if your LPs are deciding and you don't have control over the transaction, if it has to be kept confidential and everything, that makes sense. But disclosing the proportion might be helpful because understanding where the liquidity in that secondary market is coming from obviously matters in terms of the monetization potential of your assets in the long term.

Well, what I assume is underlying your question, is speculation that as part of our monetization of the Petersen -- the most recent Petersen tranche, that some of that Petersen tranche was put into the hands of our LPs instead of into the hands of pure third-party investors. And again, so why don't I do this? While I'm not -- while I'm -- again, I'm not -- not only am I not able but I'm not really at liberty to talk about individual transactions that go into our investment funds, we're subject to a whole variety of confidentiality restrictions. Let me do it this way for you. There have been public reports around that issue and those public reports make it clear, and I'm now citing it -- citing some Debtwire reporting, make it clear from sources other than Burford, that even if that did in fact occur, that there was more than enough demand from nonaffiliated entities to more than fill the entire deal that we were trying to do. So in other words, well, if that happened, it didn't take away from market demand. We weren't using market demand to fill the position. We were instead cutting back market demand in order to accommodate the desire of some of our limited partners.

Our next question is from David Greene from -- who is a private investor.

I wanted to ask a couple of questions, please. First of all, one of the main issues which I think concerns a lot of people is this question of the proportion of profits which are attributable to Petersen and the related case. Now you've mentioned many times that you are not allowed to disclose the fair value of the -- of Petersen or any other case before the case concludes. But what I would like to know is, is it possible to find sort of a roundabout way of getting the information to investors without actually disclosing that. For example, you could say the amount of profit for 1 year, which came from Petersen and then one wouldn't be able to work out what the fair values were in EVA because we don't know the previous year what it was. And that would be I think a pretty useful piece of information for investors. That's one question. And -- well, so if you don't mind answering that question first, please.

Well, I think when it comes to Petersen, let's start with the most important piece of this, I think, which is the cash, the unconditional cash that we've already generated from that, and that is something that has been publicly reported. So we have already generated more than $200 million, $236 million, if memory serves, in cash from unconditional sales of Petersen interests to third parties. And that's on an investment where our total basis is something $20 million plus or minus. So I think in terms of getting realized profit out of Petersen, Petersen has -- whatever else happens in Petersen, Petersen has already been a big complete home run for Burford. And as Jon said, we remain optimistic about its future prospects as part of our portfolio. In terms of where Petersen is marked, you're right, it's not something that we're in a position to talk about. And I think that, frankly, the reason for that is a very sound legal reason we elaborate on in some detail in our written materials. And I think that we're not much inspired to try to create a backdoor to that, which puts the legal issue at risk. The protection of the client legal privilege is really extremely important in this business. If we were to be seen or to be perceived as fiddling around with that, that would I think have a significant impact on client confidence.

Okay. So if I could ask one other thing please? Another question. I know you've said many times that, of course, we understand you can't forecast the profits and you can't forecast timing of the profits because that's certainly out of your control as to when the courts make decisions. But I think it's -- Burford is -- well, to many, pretty hard to analyze what's likely to happen, the cost of funds and the cost of the different types of assets that you hold. Now would it be possible to like provide like a range of forecast? Like -- not a forecast, like illustrations, like -- because historically, generally, a case has taken X number of years on average to settle and I just thought it's been this IRR. If it were to be the same IRR, with this level of profits over this -- over the next few years, and if it will be this, it will be that, and so on and so forth without make any predictions just to help people get some sort of idea what might be possible.

So what we do is provide a very extensive amount of information about the way that Burford's portfolio has historically performed. Much, much, much more information than we're required to by any sort of disclosure standard. And it's been interesting going through the U.S. listing process because our disclosure already is entirely adequate for that process, too. The -- so basically, what one needs to do is consider the question of the difference between settlements and adjudications in our business. And we provide a bunch of information about the financial characteristics of each. And it's actually one of the most difficult parts of the undertaking because it is extremely difficult, if not impossible, to forecast which individual investment is going to settle and which is going to go on to adjudication. And that is -- that has fairly profound economic implications because we tend to make considerably more money on cases that go on to successful adjudication, even that of losses, in fact. So take the word successful out of that, we make more money from adjudications. But they take longer and so that has duration and IRR implications, whereas settlements are less remunerative in nominal dollar terms but they have higher IRRs. So fundamentally, what you're ultimately doing is looking at historical returns and taking a view about whether the historical split between settlements and realization -- settlements and adjudications, which we publish, is going to continue or whether that's going to vary. And with that assumption as an investor or as an analyst, you can pretty much take a view about where you think the business is going. But that is the one piece of data that, other than looking at history, we don't have a particularly good way of predicting. So I hope that's at least a little bit helpful.

Our next question is from Laurence Endersen from Capstrive.

Just curious, you've offered deals in what is structurally high-returning asset and is noncorrelated. I'm just interested in what kind of inward inquiries you're getting about putting more -- having to work on a third-party basis. And also just maybe related, whether that's in any way constrained by sourcing capacity or how long it takes to build out your global sourcing capacity.

Sure. Thanks for the question. So by third-party, I assume you mean third-party investment fund capital. And...

Yes. Nonbalance sheets.

Yes. So -- and what you've seen us do -- Burford was a balance sheet-only investor until 2017. And starting at the beginning of 2017, by acquisition of an existing fund manager and then significant organic growth on the back of that acquisition, we have built the industry's leading funds management platform, so that we have several billion dollars of assets under management today in a variety of different investment fund structures. And we have, and you can see it in our materials, we have formulaic allocations between the kinds of investments that we make and the cost of capital that we use for them. And that clearly -- we clearly signaled our intention to continue to draw capital from all of these sources. Jim Kilman a few minutes ago talked about likely accessing the public debt markets again in 2020. We have, pretty much every year since 2017, gone to market and raised incremental third-party fund capital. And I see us continuing down the road of making use of all of those capital sources going forward. You're right that a high-returning noncorrelated asset is attractive to that investor base. And that investor base, of course, is not as concerned about predictability on a period-by-period basis, so this is an asset that fits well into the allocation mix for those kinds of investors. And we do have relationships with a significant number of institutional investors in that space.