Burford Capital Limited (BUR) Earnings Call Transcript & Summary

Since it's been some years now that I've been doing these, and it's a terrific way to see so many investors at one time. As usual, I'll have to gallop through this a little bit. I'm going to turn the pages on a few slides, talk to you a little bit about the business and our performance and then leave quite a long time for questions. But I would say that in addition to this event this evening, we have a couple of upcoming events that will permit some more shareholder interaction as well. In June, we're going to have a public shareholder Q&A event open to anyone. So look for details for that on our website. And in October, we're going to have a capital markets event a classic multi hour presentation of the business by a number of the members of the management team and the Board. So we hope to have your participation in both of those. But for the purpose of tonight, let me take you, starting on Slide 4, through a few highlights of the business, both what has happened in the last year and what's going on in general with this business, for those of you unfamiliar with Burford and the business environment in which we operate, so that we can then get to your questions. What you see here on a single page is really a snapshot of what has happened in the business, not only in the last year, but over the last few years. 2020 was a terrific year for us from the perspective of portfolio performance. It was actually the best year in our history in terms of both generating cash and realizations from the core litigation finance business, and I'll go back in a minute and tell you just what that business is. But just to start off with some basic numbers and some trends here, what you can see in the top right graph here is that the business has been growing very substantially over the last 5 years. In fact, the 5-year CAGR, the compound annual growth rate, for the business's portfolio is more than 50%. And so we've gone back from when I first started coming to Shares events with a portfolio that was just a few hundred million dollars that has risen today to a portfolio that sits at $4.5 billion. That is not only important just from the sense of size and scale of the business, which offers a number of opportunities for us. But it's also important because our business has medium-term assets in it, and they take some time to turn into cash. And so as we grow the portfolio, if you look at the returns that we've been able to generate in the bottom right-hand corner of this slide, you'll see that those returns have been pretty consistent historically over time. And so what that infers is that if those returns continue, the large portfolio in the future will continue to throw off quite a significant amount of cash. And you see in the bottom left quadrant here, not only did we generate for the balance sheet alone more than $0.5 billion of cash last year, we are also the industry largest fund manager. And so in addition to that balance sheet cash, when you add the fund generation cash, we were actually over $1 billion of cash, and that sets us up for the future generation of performance fees from the fund side of the business. On top of these 2020 statistics, just a few notable corporate progress notes, the first is that in addition to the public debt that we've issued historically in London, we ventured for the first time this year into the U.S. institutional debt market. And we were very pleased to close an enormously successful inaugural issue. We raised $400 million of long-term debt capital. That extends the ladder of our debt maturities out to 2028 now. It was exceedingly well received by investors. The offering was significantly oversubscribed. We were able both to increase its size and also to drive down the coupon, the effective interest rate on that debt. And so that was really a show of strength in the market. We also are completing about 6 months now of being listed on the New York Stock Exchange, in addition to our London listing. That's been well received by American investors, and we are experiencing some organic growth in the institutional book in the United States. And that's something that we will keep on continuing. But I think that's really a signal of how the business has continued to grow and mature to not only have the London listing that we've always had, but to be able to go through the U.S. regulatory process and to list on the deepest and largest capital market in the world. And while we've been doing that, we have been continuing to enhance the corporate governance around the business, including this year, appointing 3 new highly qualified outside nonexecutive directors, and their biographies are all available on our website. Turning to Slide 5. And I'm going to just very quickly, for those of you not familiar with Burford. And I know that most of the Shares participants do know us. I'm going to give you a very quick tour of what we do. Fundamentally, Burford is a specialty finance firm that focuses only on the legal sector. And what we effectively do is put capital behind the underlying value of legal assets. If you have a claim against somebody else -- and we do only large dollar complex corporate claims. But if you have a claim against somebody else, fundamentally, you're trying to get money from that person. You've got a contingent receivable. And we finance those contingent receivables. There's risk. There's duration risk and there is substantive risk, and that's why we have a team of 140 people, including 70 experienced lawyers, who look to build our portfolio around those risks, but that's the fundamental nature of the business that we put capital behind the ultimate outcome of those legal claims. Why is that a business? Why are companies taking our capital instead of simply writing checks to their own law firms? There's really 2 reasons for that. One of them is the P&L side of the company's business. I used to be, for example, the Global General Counsel of Time Warner, the media group. I never could get enough budget out of the CFO. It wasn't that Time Warner didn't have the money. It's that Time Warner wanted to spend the money on its movies and television shows instead of on my litigation cases. And the reason for that was perfectly sensible on the part of the CFO. If I spent money on litigation, that money would flow through the corporate P&L, it would hit the operating expense line, it would reduce earnings and because Time Warner trades on a multiple of earnings, it would have an untoward impact on overall valuation. Especially since investors don't value litigation outcomes very much. And so it would be seen as a drag on value. And so Burford comes in and stands in the shoes of the client and simply writes those checks to the law firms on behalf of our corporate clients, enabling them to effectively cleanse their P&Ls from these legal expenses. And in exchange for doing that, we take a share of what ultimately is recovered in the litigation. The other side of what we do is on the balance sheet, the corporate balance sheet. So in addition to just providing that P&L relief, we also provide balance sheet flexibility. We turn pending legal claims into monetizable financeable assets. We put capital behind the expected future value of those claims and that lets companies use these effectively invisible claims as sources of working capital. Turning to Slide 6. What this slide is really doing is just telling you that there's a lot of money at work in law. You probably know this just from looking around the city and seeing how many lawyers there are and how many legal offices there are in office buildings. But when you stop and put numbers on them, they're pretty eye popping. The global legal industry generates more than $800 billion a year in legal fees annually. That's the amount of money that lawyers charge their clients. When you add in the value of the claims themselves, the settlements, the judgments, you get to the kind of enormous numbers that you see on the right-hand side of the slide. I'm not suggesting for a moment that all of this is an addressable market for Burford, it's clearly not. But what I am suggesting is that when you look at the relative size of Burford, I'm excited that we've made it to $4.5 billion of portfolio size, when you compare that number to these very large numbers, you can see that there's a significant amount of potential future runway ahead of us. And we're excited to continue to go down that road and to continue to lead the market. Slide 7 is a particularly good way of showing how this business works. Fundamentally, we look at an awful lot of potential investments every year between $1,000 and $1,500 and we winnow them down to saying yes to between 4% and 8% of them. We commit capital to them, as you see on the circle on the left. Over time, we deploy those commitments against, in other words, we put money out the door. And then we basically wait. We're a buy-and-hold investor, waiting for the outcome of those cases that we've provided capital against. And litigation and disputes ultimately just have 3 possible outcomes. You can see them there. Either, they'll go to trial or some other form of adjudication and win or lose or, and this is the most common outcome, they'll settle. Our portfolio right now settles 61% of the time. Litigation in general settles the majority of the time. And what settlements mean is you're taking risk out of the equation because the parties are agreeing to pay each other money. And as you can see, we make desirable returns when cases settle and we do so fairly rapidly in an average duration of 1.6 years. When cases don't settle, then risk enters the equation, and the judge and the jury can certainly go in an opposite direction to us and we can lose some of these cases. But when we don't lose them, when we win, then we'll be entitled to the potential of full-size damages and a longer duration. And we simply make more money on those cases. They take twice as long, but we make 5x as much money. We don't control which path cases go down and indeed, it's virtually impossible to predict on an individual case, how their -- which of those paths are going to take. But what we do know statistically is that these kinds of distributions are historically normal. And what you see then is the distributions combined to generate the returns that you see in that red box there. And this is now over an awfully big, awfully long track record. Burford, just on the balance sheet alone, without including our investment funds, has generated $1.6 billion of cash recoveries since we've been doing this for the last 11 years, with the kinds of returns that you're seeing there. So this is not any longer an early stage fledgling, small dollar track record. This is an enormous $1.6 billion track record from which we've been able to generate those kinds of cash returns. And just to underline that, the numbers on this page are cash. There's no accounting here. This is just cash in and cash out. Turning to the next couple of slides, I'm actually going to move -- in the interest of time, I'm going to move right to Slide 10. And what I'm going to show you on Slide 10, this is a new slide for us, and I just want to spend a minute on it before we then talk about COVID and go to Q&A. What this slide is showing is basically, we've taken our -- the business that we've done over the last 11 or 12 years, and we've divided it into 3 age-based categories, early, middle and recent. And we've shown you here what those vintages have thrown off in terms of realizations for us and what's still left. And so the gray represents the early vintage, the first few years of our life. We were small business then, and not surprisingly, these numbers are not very large. But what you can see in the top graph is that those early cases have continued to decline as a portion of what's in the portfolio. So you get to today, and there's very little of those early vintages left. There's still a little bit but there's not very much at all. And you can see in the bottom that they've contributed to our realizations over time, but not as much as the other buckets, as you would imagine, given the fact that they started off fairly small. Then we started growing. And in the middle vintage, 2013 to 2016, we started putting more capital to work. And as a result, that red band that you see there in the middle shows you that the middle vintage did a really nice job sort of in the middle of our history of producing nice chunky returns. That's what the bottom graph is showing you. So that period in 2016, 2017 all the way through to 2019, we were getting a lot of our income from those middle vintage investments, which is exactly what you would expect since the weighted average life of our investments is between 2 and 3 years. But of course, if you look at the top graph, and what you see is that, that middle vintage has been declining slowly over time as well. The exciting part of this graph, and this goes all the way back to what I said when we started this discussion about the growth in the overall portfolio is the black is the recent vintages. And as you can see, that's much larger today than the other vintages have ever been, but it hasn't produced all that much yet in realizations. And that's why we have, if history repeats itself, a high degree of enthusiasm about the underlying quality of this portfolio over time. This business comes with unpredictability and volatility in the timing of our returns. We can't help that. That's the nature of the litigation process. So you will have quarters or half year periods here that are very busy for us. We had a record-breaking first half of 2020, for example. And you'll also have periods that are quite slow. We had a very slow period at the end of 2019. And that's simply because courts and judges don't decide things on any predictable schedule. But that's frankly one of the reasons that we get the returns that we do. If this business were predictable in both time and outcome, nobody would be paying 30% returns on the capital. And finally, just turning to Slide 11 because no presentation is complete without talking briefly about COVID. COVID is both an opportunity and a duration impact on our business. The duration impact is simply that some courts have slowed down. Jury trials, for example, in the United States are not proceeding at the moment with any particular vigor. Some criminal cases are, but very few civil cases. This is a timing issue for our business. It's not a substantive issue. We haven't had a single client or a single case discontinue because of COVID related delays. But we have had some duration related impacts in our cases, they simply will take a little bit longer and be a little bit more unpredictable in the time that they take to get to the end. That's not necessarily a bad thing for us. We charge often for time on our capital. And so we may end up having even more profit from some of these cases because of those delays, but they certainly exist in a portion of our investments. You also saw last year, not surprisingly, in the heart of the pandemic in the first half of 2020, a sharp decrease in new business as law firms and everybody else in the world trying to figure out what they were doing in life. But as you can also see, the second half of 2020 came back to be pretty much right on top of the second half of 2019. We're looking forward to the world completely reopening, it hasn't done that yet in law, but we're certainly moving in the right direction. The flip side, of course, is -- and I hate to talk about opportunity in the context of a global pandemic, the reality for lawyers is that events like the global financial crisis a decade ago or the pandemic in 2020 and 2021 do, in fact, produce a lot of legal activity, a lot of disputes, a lot of uncertainty. Burford did quite a lot of financial crisis related litigation. And in the years to come because these claims will be around for years and years. In the years to come, you can certainly imagine that you'll see a meaningful volume of pandemic related litigation moving through the court system and the arbitral system as well. So Slide 12 has a few words of conclusion, but rather than me sum up other than to say we remain deeply excited about the portfolio that we've built and the opportunities that we have as the largest player by a significant margin in this growing industry and this growing asset class, an asset class that has uncorrelated returns that have historically been desirably high for us. And we're excited to continue to take advantage of the market opportunities. The way that we've built the business over time has given us a number of competitive advantages, competitive moats. And we're looking forward to what lies ahead. And with that, Roland, why don't I take any questions that we have.

Okay. Thank you all for your questions. I've got quite a lot here to try and get through. But please do feel free to keep firing them in. And Chris, I'm going to jump around a bit, and it's kind of quite hard to go in the logical order with these things. So trying to get through as many as we can, but apologies we are going to go from subject to subject. So first off, could you please describe a bit exactly how Burford earns income from the managed funds?

So our role as a fund manager is very traditional and sort of private equity style approach. We charge a management fee to investors on the capital that we manage for them, and we charge performance fees from the profits that we generate on the investments. On our sort of flagship style funds, the funds that co-invest with the balance sheet in traditional litigation finance investments. We typically charge a 2% management fee and a 20% performance fee. We have other fund strategies where the fees differ from that as well.

And you've mentioned that Burford experiencing growth in the U.S. institutional interest. Can you provide any more specific detail on that, please?

Yes. So Burford has been on a capital markets journey for the last several years. We started life in 2009 in London, listing our name. We started issuing public debt in London on the ORB market in 2014. And as Burford continued to grow and its capital needs evolved, in 2016, we added our investment management business, which now has assets under management of something on the order of $3 billion. And then we started investigating, first of all, an equity listing in the United States. We concluded that last year, the New York Stock Exchange listing. And that gave us the -- basically the underpinnings to also do a debt offering in the United States. So we went out into the institutional debt market. It's not a retail market. And marketed what was ultimately a $400 million issue to a very significant number of large prominent institutional investors.

So all of that $400 million would have been institutional. You don't have retail participation, in the same way that we do here in the U.K., with ORB?

In these institutional deals, it's not a publicly traded offering. It's done under what's called Rule 144a, and it's restricted to large institutions.

And you mentioned that the coupon came down on this, do you think you achieved a lower coupon rate in the States than you would have done in London? Or does it make any difference?

Well, so the coupon rate that we were able to get, even as a first-time issuer in that market was right in line with our historical debt issuance. And candidly, I don't think that we would have been able to do an offering of that size in the U.K. market. Historically, it's pretty hard to get above a couple of hundred million pounds. The other thing that we've done by doing that U.S. issuance is that we've taken the foreign exchange risk off the table. We have significantly more U.S. dollar-based income than we do sterling income. And so we didn't have to then worry about, for example, trying to hedge or figure out what to do to manage that exchange risk, especially since the pound has obviously strengthened nicely for everybody in the last couple of years.

And next up, is, can you talk about post settlement business in a low yield world? The appetite for uncorrelated high single-digit net returns is enormous from allocators. How scalable is this segment?

So the question refers to the fact that in addition to our sort of core traditional litigation finance business, we operate a number of ancillary businesses in the legal sector. One of them provides post settlement finance. This is effectively receivables -- receivables purchasing or a factoring business, where we take pending payouts from litigation settlements for clients and for law firms, and we monetize them today. And as Roland, as the question suggests, the returns on this, because these are much lower risk and shorter duration, the returns are considerably lower than they are for our traditional business. And we do this only through investment funds, we don't do this on the balance sheet. We right now have several hundred million dollars engaged in that business. And I think there's probably scope for us to continue over time to not only grow that business, but also to have adjunct businesses as well that target returns that lie in between post settlement and the kind of returns that we generate in traditional litigation finance.

Next question. How do you avoid a conflict with a client, for example, as to whether they should accept a settlement?

So we're not in the driver's seat. We are sort of a fancy and complex version of a bank. We provide capital against the asset value of the claim just in the same way that the bank lends money against the asset value of real estate. But it's ultimately the clients' and the lawyers' job to drive the case to a successful conclusion. And also to decide whether and when to settle as opposed to going forward to trial. We have managing an enormous multibillion-dollar portfolio of litigation, we obviously have an awful lot of experience with those issues, and it's not uncommon for us to be asked for our advice. But at the end of the day, we're not in the driver's seat.