Burford Capital Limited (BUR) Earnings Call Transcript & Summary

Good afternoon, everyone. I would like to welcome you all to the Burford Capital 2022 Business Update. My name is Brika, and I'll be your event specialist running today's call. [Operator Instructions] I would now like to hand the call over to our host for today, CEO, Christopher Bogart. So Christopher, you may begin.

Thank you very much. I know that there are a number of questions out there about process and so on. And we are absolutely going to get to those questions. However, we did say that the substance of these 2 calls before Q&A would be identical. And I know that there are people, as results who are not joining this call until after the substance is over because they were on the call last night. So what we are going to do, notwithstanding those questions, is we're going to play the recorded version of the business update. And then after that, I'll come back, address some of the questions that I know are out there and then proceed to take all of your Q&A. So with that, let's please go ahead with the body of the call. Thanks. Hello, everybody, and thank you very much for joining us for our business update call on our 2022 activities. As usual, I'm here with Jon Molot, Burford's Chief Investment Officer; and Jordan Licht, Burford's Chief Financial Officer, and both of them are going to talk to you separately. I'm going to lead off and spend a little bit of time, starting on Slide 4, after you get through the disclaimers. And with that slide up, I'm really excited to be talking to you about 2 quite different things today. First of all, on the business itself, we are really feeling that the pandemic is moving into the rearview mirror for litigation and for courts. We had a really nicely strong 2022: $350 million of cash realizations, up 33%; record-breaking new business; $1.2 billion of new group-wide commitments; balance sheet deployments that have more than doubled over the last 2 years. We had a real growth in the modeled value of our balance sheet portfolio. That grew by $800 million last year, a 21% growth rate. We raised more than $1 billion of new capital during the course of 2022, and we ended the year with a strong cash and liquidity position that Jordan will talk more about. But what we're really excited about, notwithstanding the fact that 2022 was a really nice, good catch-up year, a strong year for us, we're really excited about 2023. The courts are back fully in operation. We are seeing that reflected now in some numbers. So for example, we've got more than 30, 3-0, final merit hearings or trials already scheduled during the course of 2023, and that compares to only 10 such hearings occurring in 2021 and only 11 last year. So that's a really strong beginning to the year, and it makes us optimistic that we're going to get back into the groove that existed before the pandemic. And 2023 has also begun very well. We've had several case successes already, a $90 million settlement, a $67 million trial win, a $52 million arbitration award for one of our managed funds. So the world has just come back to life. Courts are back doing their thing. And on top of all of that, while this is not a source of great happiness for us or for you in other quarters, the world economy is obviously not in its most robust state, and that leads to opportunity for us. The simple reality is that when things are going wrong for businesses, when interest rates are rising, when there's corporate stress out there, that's -- that leads to disputes, and those disputes lead to opportunity for us. And so we're pretty optimistic about where things stand on the back of what was already a strong 2022. Second of all, we're excited about what's going on with our fair value accounting. That's both a long key and the somewhat eccentric sentiment, as I'm sure that many investors read our release and instead reacted to words like SEC and delay. But we have been living the exotic nature of fair value for the last 14 years in this asset class, and we've been doing that without having a North Star. And that's led to us spending more time talking about accounting and less time talking about the merits of our business than we would have liked. Now we do see a North Star, and that's thanks to some significant engagement by the senior staff of the SEC. And we have high hopes of a clear fair value approach that should become the industry standard and will let us never again have to talk about accounting standards on our earning calls. We've been engaged constructively with the SEC for around 6 months now, and we feel good about where we are, which will result in some methodological change, but will still anchor our asset values to case events. At bottom, what's really going on here is fundamentally an inversion. Instead of starting at cost or present value and adding value as we progress through case events, which is what we do today, we're talking about starting with a future value and discounting it back. But again, with meaningful changes in value only driven by case events. But the beginning and the endpoints of that spectrum remain the same under either approach. Of course, it would have been too much to ask to have this happen last spring in good time for a relaxed year-end. Instead, we have it happening in real time, and that means we will be providing our audited statements later than usual, although we hope to have them out in 45 to 60 days. As you know, we manage the business on a cash basis, not an accounting one, and we can't spend fair value. So all the numbers we're providing to you today are cash numbers. This delay doesn't have any impact on us as we run the business, and we think you should regard it as a long-term positive for the business just as we do. I can't really emphasize that enough, that I am delighted with the idea of moving to clarity on this question and really putting it behind us as one of the growing pains associated with this business and this industry. And as I said, we continue to run the business on a cash basis, and none of this accounting dynamic has any effect at all on us as a cash basis. After we go through this presentation, we're happy to answer your questions about all of this within, obviously, the limitations of what we can say while we're in an ongoing process. Turning to Slide 5. We thought it was useful to set out crisply the 4 things you get when you buy Burford stock, what we're basically calling the 4 pillars of value. And to begin with, we have what is now an enormous core portfolio of litigation assets. We model those assets, as we've described before and as Jon and Jordan will discuss in more detail, that portfolio, excluding our YPF assets, right now shows an expected value of $4.6 billion at year-end. And we've been consistently producing high returns across the capital that we have deployed into that portfolio with now at a cash track record that's well in excess of $2 billion. So pillar number one is you're getting an existing book of desirable investments. Pillar number two is you're getting an origination platform. We're the industry's market leader. We have significant scale, and we've demonstrated over and over again our ability to put a lot of new business through that origination platform, more than $1 billion in each of the last 2 years. And we do that with a global presence. We do that again with our clear industry leadership, with our relationships, with our brand and with our share of voice in the industry. The third thing you get is the industry-leading asset manager with -- we've raised almost $4 billion in investment funds over time. And those funds not only augment our balance sheet capital, but they enable us to provide other opportunities to investors that let them -- that let us really cover the waterfront, cover the gamut of what our clients need and provide investors with a wide range of risk and return opportunities. And finally, we have what really you could almost argue is a free option on the YPF-related assets. We've already made a significant amount of cash profit from the YPF cases, and we're waiting for an outcome of them, which, of course, if it is positive and in our favor, could be of substantial value. So really Burford gets you those 4 things all together in 1 package. There's nowhere else you can get those things, either in the scale or quality that we provide. And we're really excited to be able to show you what we can do with them going forward. And with that, I'll turn it over to Jordan.

Thank you, Chris, and great to join the team and be with you here today. I'm turning to Slide 6, and this slide shows our cumulative returns since inception. Most of you have seen this slide before, but it's great to reiterate the story. Burford has consistently earned high returns that are uncorrelated to the economy or market fluctuations. We have a 14-year track record of very strong returns with $2.2 billion in cash realizations, an 88% cumulative ROIC and a 29% IRR. In my first few months, I saw the power of the business represent itself in short order. The global antitrust portfolio matter that we've discussed previously had a significant partial realization with an impressive 42% IRR. The ROIC was 48%, which is what we would anticipate when litigation resolves fast. It's exciting to see the power of the business producing significant cash-on-cash returns. Moving to Slide 7, another slide that you've seen before. This demonstrates the favorable returns of the asset class. We outlined our track record in a different way here, and there are a couple of key takeaways to point out. We win much more often than we lose. There's positive asymmetry on the size of our returns that skews toward the cases we win. And finally, it shows the repeatable nature of earning high returns. We have now had 30 matters conclude with ROICs greater than 200%, including 4 in 2022. I know not every case wins, but when we experience a loss, it's not necessarily a total loss of capital. I want to point out the bullet on the side of the page that illustrates this nicely. On the 16% of losses, we still recouped 42% of the deployed cost. Let's flip to Slide 8. We've updated the output of our proprietary probabilistic model for year-end 2022. Quick note, this page is based on the Burford-only capital provision direct portfolio, excluding the YPF-related assets. Let's start on the column furthest to the right. You can see the implied realizations from the model, and the implied performance fee income both increased in 2022. Implied realizations at year-end were $4.6 billion, up from $3.8 billion previously. And the implied performance fee income, which includes income from BOF-C, is $500 million, up from $400 million. The implied ROIC has remained relatively steady at around 140%. As we've said before, this return figure is greater than our historical level, mainly driven by our putting on larger cases, including monetizations and claims families, which we believe tend to have higher returns. It's important to make sure that we understand the impact of these numbers changing over time. And as we continue to refine and improve our model, we could see these numbers move around. Also, while it's great to see the anticipated gains of the portfolio rising, there are times when it will decrease. For example, as assets in the portfolio convert to realizations, which would be a positive for the company, it would be removed from the model portfolio. Moving forward to the next slide, we have a fantastic origination platform, a great brand and a great track record, history of innovation, regular interactions with almost the entire top 100 U.S. law firms and a global presence that meets our clients' needs all over the world, a team that is steeped in commercial litigation that combines financial and structuring acumen with a database of 14 years of results. All this manifests itself in putting capital work. In 2022, we added record levels of new commitments and deployments, and most of -- more of those potentially higher-returning assets are going to our balance sheet, as we've increased the portion of our originated core legal finance assets that are allocated to the balance sheet. We also believe that we deployed capital into high-value assets in 2022 as we've added $900 million in modeled realized gains this year from new business. This figure represents both deployments from commitments made in 2022, including deployments already made in the year and commitments from prior year vintages that converted from discretionary to definitive commitments. And as Chris mentioned, we look forward and we're excited not only about the potential for realizations as court backlogs ease, but also the opportunity to continue to originate new, high-quality, high-returning core litigation finance assets. With that, I'll turn it over to Jon to talk about the portfolio.

Thanks, Jordan, and thanks to you all for joining. It's great to speak with you. I think we were able to recruit Jordan who was a fabulous CFO because we have this amazing portfolio with a very attractive, interesting profile. And then I just want to talk a little bit more about the portfolio and where it's poised at this moment. So as Chris said at the beginning, the portfolio is poised to deliver more results than we historically have. If you just look at the bullets on the left that Chris alluded to earlier that like we've got more than 30 trials [ and ] final merit hearings already scheduled for this year as compared to 11 for last year and 10 the year before. It's just so much more activity than we have seen. It's just a big uptick, and the COVID delays really do appear to be behind us and the logjam is breaking. And just in the first 2 months of this year, we had a trial verdict that if affirmed, would deliver $67 million to Burford, we have a settlement that did deliver $90 million in cash to Burford, and we had an arbitration win that would deliver $52 million to one of our private funds. 2022 was more active than '21, right? We did see a 20% increase in resolution, 60 versus 50, but there's much more poised to happen still in '23 than there was in '22. And if you turn to Slide 11, you can see, graphically -- there's a lot of information on this slide, but you can see sort of what we've done so far and what we are poised for in the future. The bottom horizontal line, the black with the light figures, that basically shows our IRR per vintage and shows positive returns across vintages that are quite attractive. And you can see another representation of that positive performance by comparing the black vertical bars above to the red vertical bars above. The black ones are the money that went out the door in deployment, and the red are the realization. That's the money that came back. And we're very pleased that the red bars are larger than the black bars. But what I'm really interested in is the gray-shaded vertical bars because that's the money we've put out the door in matters that haven't yet concluded, and that's what is poised to deliver in 2023 and beyond and what I'm very optimistic about. I joked with the team that we're a bit like air traffic controllers with lots of planes in the air, all of which are poised to come in for a landing. And it's just a wonderful thing to see so much activity in the portfolio. If you turn to Slide 12, I'll say just to spend a moment on YPF. There's really not that much to say. It's the motion for summary judgment had been fully briefed since June of last year, and we're just waiting. And that's not uncommon in litigation, that a judge will take some time to write a definitive merits opinion, and we'll see what comes of it. And there's not really much more we can say, other than that it's there and fully briefed and ready. So with that, I will turn it back to Jordan on Slide 14 to talk about this great origination machine. Where we get the capital from, we have different pools of capital for different risk-reward profile deals. Jordan?

Thanks, Jon. So we talked about putting money to work on the balance sheet, but we also, as Jon just mentioned, have a great asset management business. And on Page 13, I want to take a minute to talk about the value we see in that platform. We think about the asset management business is benefiting us in 2 ways. Number one, we view it as giving us the ability to engage in a broader range of legal finance activity. And number two, it provides leverage to the balance sheet, enabling the balance sheet to be more diversified and for us to be able to execute on larger transactions. In 2022, we closed on the $360 million Burford Advantage Fund, our first fund that invests in lower-risk legal finance assets; and on BAIF 2, our latest post-settlement fund, as the investment period for BAIF 1 ended during 2022. We believe we're the largest asset manager in the legal finance space by a considerable margin. We saw meaningful growth in our asset management income to $36 million for 2022, primarily driven by the growth in income from BOF-C, as that portfolio of core litigation finance asset seasoned. And speaking of BOF-C, during 2022, we extended the investment period of that fund to the end of 2023, and we shifted the allocation of each new matter that meets the relevant investment criteria between the balance sheet and BOF-C. 75% of those assets now go to the balance sheet, up from the previous 50%. While the timing of earning our asset management income can be variable due to the structure of our arrangements, we're very excited about the potential earnings from this platform. Keep in mind on the slide that I had shown earlier that the $500 million in implied performance fees from our probabilistic model don't also include the income from Advantage Fund or post-settlement funds. Let's move on to Slide 14. Our liquidity position consisting of cash and cash equivalents and marketable securities at year-end was $210 million. Cash receipts of $328 million in 2022 was up 17% from 2021, reflecting the pickup in realizations, and we expect to see meaningful cash inflows to occur as case resolutions continue to accelerate. As always, we balance maintaining our liquidity cushion due to the variability of our cash inflows and with seeking to minimize the drag of low-returning cash on our overall return-on-tangible equity. I'd also highlight that we have $115 million at year-end of receivables, the majority of which we expect to convert to cash in 2023. We begin 2023 well positioned to continue to deploy capital against new opportunities. And as Chris mentioned, we've had some significant early wins in the first quarter that, if paid in full, would meaningfully contribute to our current liquidity position. With that, I'll turn it back to Chris for some concluding remarks.

Thanks very much, Jordan and Jon. And so just turning to Slide 15 and wrapping this up before we take your questions. So again, we sort of begin where -- we end where we began. We were very pleased with what happened in 2022. The world came back to life. We saw meaningful upticks in virtually every metric across the business, ranging from realizations in the door to the new business out the door, and we ended the year with a very strong cash and liquidity position, which is only continuing to be augmented during 2023 as matters continue to come to fruition. And then we've got a lot of optimism about what's happening in 2023. Just the sheer fact that after being closed and delayed during the pandemic, courts took a while to shake that off, but they have shaken it off now. Every court that we're aware of is operating at full capacity and is doing its best to work its way through its backlogs, and we're seeing the benefit of that, both tangibly in the examples that we've already given you about things -- good things that have happened during the early part of the year and just in terms of what the court calendar looks like as the rest of the year goes forward. So we're pretty pleased about where the business is after having to endure a little bit of sleepy time during the pandemic. And as I said at the onset, while inconvenient and slightly aggravating on a process basis, I'm pretty excited about the ability not to talk to you any longer going forward about fair value accounting and to have a pretty clear standard for us and for the industry going forward. So with that, we'll stop talking at you, and we'd be delighted to take your questions. So as promised, I'm going to come back on now. And before we open the floor to Q&A, I'm going to talk a little bit more about the SEC process and what's going on here in response to a number of questions that we've received, and I'm going to sort of roll all of those questions into one comprehensive answer. So by way of background, Burford, when it moved to the U.S. and listed on the New York Stock Exchange in 2020, we did that still reporting under IFRS. And so our listing process with the SEC and the first year of financial statements filed as a -- as also a U.S. issuer were issued under IFRS. And while the SEC obviously reviewed those statements as part of the listing process, the SEC's role with respect to the IFRS and U.S. GAAP is different. When it comes to U.S. GAAP, the SEC is the final word for what U.S. GAAP is for public companies. So then, you get to 2021. So what happened in 2021 is that we changed to U.S. GAAP. And so 2021 was the first year we were reporting under U.S. GAAP. And the other thing that happened in 2021 is that we started publicly providing the outputs of our probabilistic model. We have been doing that modeling for some time beforehand. But at our Investor Day in 2021, we unveiled that work for the first time. And as you know, we have been reporting on the changes and updates to the model values ever since. And there's some relevance to that development as well here. So in the normal course, with 2021 being the first year that we were filing under U.S. GAAP, the SEC staff, would as a matter, of course, review that 2021 filing during the course of 2022 and provide any comments. And this is a routine process that happens with the SEC. Those comments ultimately become public, and you will be able to see them. And they -- the SEC asked a number of questions. You'd give them answers. It's a very customary process. And so that unfolded. And during the course of that process, we started talking more broadly to the SEC about fair value accounting for this asset class under U.S. GAAP. And the reason for the interest was obviously because this is the first time the SEC has had to confront litigation finance assets. There isn't any other listed litigation finance firm out there. But at the same time, I think if you look around the market, it's clear that this is a growing asset class and that it's acquiring some degree of public significance. People know that exists, and it's getting press and capital flows and so on. And we're obviously the market leader. And so I think, quite -- as I said in the prior remarks, we had a very constructive set of engagement with the SEC staff about the best way to account for legal finance assets under U.S. GAAP. And just for context, historically, we've had this valuation approach where we start at cost and then we use case events to mark cases up and down. And that, we believe, has been satisfactory, but it also has led to quite a lot of the value of those assets only being recognized upon resolution. And we've published this data for some years. And we're sort of somewhere in the 25% range. In other words, by the time we get to a successful resolution of a litigation matter, we, generally speaking, have only recognized about 25% of the ultimate profit, even though there may well have been case events along the way that showed that the case was proceeding in the right direction. When you marry that up to the probabilistic modeling, the problem is the modeling gives us the ability to do some things that I would describe as more traditional in the asset valuation sense. So we have, now, an expected future outcome. We have an expected duration. And so the question, I think, becomes, if you have information like that, isn't it appropriate to be -- and especially if you've been finding that information to be fairly reliable, isn't it appropriate to be using some of that information as part of the valuation process? And that's what we meant when we talked about inverting the process. There is no question that we believe, and we believe the SEC accepts, that case events remain the prime driver of value of litigation assets. So when we put a case on, its value doesn't go up at our level of historical returns simply because of the passage of time. People will not pay dramatically more for a litigation asset a year after its inception, simply because time has passed. They will want a buyer of an asset in the market. They'll want to know what the court thinks, what the arbitration tribunal thinks. Is there evidence that things are going well. And so under any methodology, those will remain, in our view, the prime driver of market value of our assets. But there are some methodological things that we can do to come closer to traditional principles of fair value. Obviously, if this was an operating business, and we're valuing an operating business, you take a bunch of cash flows. You discount them back at a risk-adjusted rate and that, presto, gives you your present value. So we're not talking about doing quite that, but we're talking about moving in the direction of having a time value of money concept and calibrating our models to purchase price. As I said before, inverting the process. We are in the process of implementing that approach. And as we said in the release, then that approach will be audited and vetted with the SEC. But we have had enough discussions that we have a level of comfort about where we are in the process and how much longer it's going to take, which is why we were able to give a reasonably precise range of when we think this will all be done. So -- and what we've said is our expectation is in the 45- to 60-day range. And candidly, some people have asked why we just came through with this information now. There was a point where we were hoping to be all done in time for a March release and it simply ultimately proved not to be the case, that we needed some more time for that. But this is not something that we believe has months and months of time to go. And that's, by the way, why we think there is no -- what I would call a vanishingly small risk to default on the data or anything like that. Those risk factors are in the release for standard U.S. disclosure reasons. But the simple reality is we have until June 30 before anything happens on the bonds, and we have longer than that for any other deadline. And we just don't think those are in issue at all. So we are comfortable with where we are in the process. We think it's a constructive process. We think the end result will be positive for the business. And we look forward, as I said before, to not ever having to talk to you again about the ins and outs of fair value accounting. And so with that, there's a question that's sort of related that maybe Jordan should pick up, which is from Jeremy Hewlett, who says logically, if fair value carrying values move from a cost base, adjusted for legal judgment or significant legal events, to a discounted present value of expected outcomes, wouldn't the implication be that carrying values could be expected to rise? Jordan?

Sure. So I think, Chris, you actually touched upon that ever so slightly when you discussed the fact that we still believe that the overwhelming value release associated with a litigation finance asset is associated with the observation of adjudicated events. And so I think one shouldn't look at this purely as just a straight line as, Chris, as you mentioned, of an accretion of an IRR, and instead, while we will bring in some elements of cost of capital and so forth, that we do expect the values to still move significantly with observable events as opposed to just moving over time as you had mentioned, Chris.

Thanks, Jordan. And so with that, I know that people may have more specific questions, which we're happy to do our best to answer. And hopefully, people will also have some questions about the business because, my goodness, we're pretty happy with where we are. And by the way, I should point out that we actually omitted in the oral presentation to mention our most recent success, which we do have in the release, which is an appellate resolution. In other words, not even a trial win. We've now won on appeal as well. And so it's very rare for those to be further disturbed. An appellate resolution that would deliver $400 million approximately in proceeds group-wide, including to some of our managed funds, and about $100 million to the balance sheet. So it has been a pretty terrific beginning 2.5 months to the year. So with that, why don't we take your questions?

[Operator Instructions] We have the first question on the phone line from [ Alex Roswalf ] of BAE System Pension Fund.

This is [ Alex ] from BAE. Two questions for me, please. Firstly, can you just clarify the change to the fair value accounting? I can completely understand the rationale, and I think I understand the reason behind it. But on day 1, assuming this change gets through, presumably, the value in the accounts would be the same under both treatments because your -- it's cash deployed T plus 0. And so what we're saying is actually at the first point the judge makes a decision or something similar. At that point, we would deviate from where we are today. In the new world, we would then start realizing more P&L at that point. Is that the right understanding?

So you're certainly right about day 0. These are arm's length negotiated commercial transactions with counterparties. And so the amount that we are paying out, either in cash when we do a monetization or over time, the amount that we're agreeing to pay out when we do a case funding, that is the value at the time of doing the transaction. And that would be -- that's absolutely right under either approach. And you're also right that the potential for modification is, let's say, we put out $100, and we expect to get $300 in 3 years later. That implies -- if you calibrate that to $100 cost, that implies a certain discount rate. That discount rate is far too high, in our view, to simply be applied to the cash flows because -- and the reason I say it's far too high is because our returns are pretty high, and therefore, you would be accreting quite a lot of value just by the passage of time. And as I said earlier, we don't think that a buyer of assets -- of these assets would pay that level of accretion simply because of passage of time. But there may be a world where we have a little bit of accretion at some much, much, much lower rate while saving the bulk of valuation change for case events. That's sort of the direction of travel, if you will. And Jordan, feel free to expand on that, if you'd like.

No, I think you hit the high points there.

That makes sense. And one more if...

Sure. One question -- sorry, go ahead. Yes, go ahead, please.

So I was just going to say as a completely different question. In the higher interest rates well that we're now living with, just thinking about your capital structure, are you happy with leverage of where you are? Would you be willing to take it higher or lower? And any comment on the rating? And whether we're happy where we are today?

Yes. The business is not levered at any material level today. We're sitting on sort of a 0.25 turn of leverage right now. And we've always said we don't see this business as being a highly levered strategy just because of the inherent risk of the underlying assets and the unpredictability of cash flows. But at the same time, we've been opportunistic users of the credit markets. And I think we're certainly prepared to continue to be, to the extent that we see opportunities that go beyond our ability to self-fund them. That being said, the business does throw off quite a lot of cash. And as the courts reopen, we expect the velocity of that cash to increase. And so we feel very happy with our liquidity position. When you have results like the ones that I just chimed off, in the space of 75 days, that can contribute on its own quite a lot of liquidity to the business. So I think we're -- the short answer is we're opportunistic and open to it as part of the capital structure. But we don't necessarily see it as an imperative. Another...