Burford Capital Limited (BUR) Earnings Call Transcript & Summary

Hello. This is Rob Bailhache and I'm Head of Investor Relations, EMEA & Asia at Burford Capital. I and the whole team of Burford would like to welcome you to today's 2023 CEO Audio Webcast for our retail shareholders around the world. Thank you for your interest, and we hope you find this forum useful. Before we start with my handing over to Chris Bogart from the housekeeping. After Chris give some opening remarks, we will move to Q&A. [Operator Instructions]. We'll try to get through as many questions as possible, but due to the time we have available, Chris won't be able to respond to each of them. A selection of the questions we've already received a group by topic and will attempt to address each topic that's being raised. If there are new subjects from the live Q&A feed, we'll try to get to those as well. And finally, a replay will be available to registrants a short while after today's event using the link he's been provided with. And so with that, I'd like to turn the call over to Chris Bogart, Burford's Chief Executive Officer.

Great. Thanks very much, Rob, and thanks to all of you for taking the time to join us today. I'm delighted to be able to take a bunch of questions about Burford and its business. And before I do that, we just have a few slides, many fewer than from our earnings presentation. So just a few slides to hit some high notes. And so why don't we start with Slide 3 exactly. It's an exciting time for Burford. The last couple of years have been quite aggravating on the one hand as courts closed or slowed down because of COVID. The great thing about this business, one of the many great things about this business is that our cash flows, our recoveries are just generated by the operation of the litigation process. If you think about the litigation process as a giant conveyor belt, it moves forward once you file a case, it may move very speeds, it may twist it may turn, but it moves forward and execrably and it gets to an end. And that ending for us has historically happened on a weighted average basis within sort of 2.5 years of making investments. So that's the traditional state of play in this business. And one of the things that's terrific about that is that it's unrelated, the operation of that conveyor belt is unrelated to economic conditions and market activity. Unfortunately, what it is sensitive to is the court is actually continuing to operate the conveyor belt. And so what we saw in various ways over the last few years was that conveyor about slowing or even stopping altogether. And as a result, we were seeing effectively a buildup of backlog and notwithstanding the fact that demand for our capital remains strong, in fact, at record levels. And so what that did to us is create this backlog and therefore, lower our cash resolutions over the last couple of years. That is changing. Courts are all open. There's no court that we are active in that still has any COVID-related delays or restrictions. And you see courts making valued efforts to work their way through those backlogs. What that is doing for us is showing a meaningful increase in portfolio velocity. And we've given you various data points in the earnings releases, ranging from the number of case milestones that are on the calendar for 2023, which is a multiple of the number that was on for 2022 and also just our first quarter results, which came in at a fairly eye-popping level of $475 million of consolidated revenues. And so that is something that you're seeing really a combination of that backlog picking up as well as just the normal activity in litigation that has commenced more recently. So we're excited about what is happening in the portfolio after a couple of years of doldrums. We're similarly excited about the new business that we have been able to do. We continue to see demand for our capital in the market. And we also continue to tweak our capital structure so that we can maximize for equity shareholders the exposure to our highest returning assets. We've got very solid liquidity, a substantial pool of cash available for investing. And as I said, we're looking forward to seeing what 2023 brings. If we turn the slide, this slide just attempts to remind everybody about the 4 -- we call the 4 pillars of value that shareholders get from a position in Burke. So to begin with, we have a robust core portfolio that is now stands at more than $6.5 billion of litigation assets. That portfolio has continued to grow nicely. And as we just discussed, we see resolutions in that portfolio really accelerating. While at the same time, we've been successful in maintaining consistent returns over that portfolio for a number of years over a very -- a very significant now amount of cash realizations, more than $2 billion in cash that we've returned. We also have the industry's leading origination platform. So in addition to that pool of existing assets, we are capable of generating new assets every year, given our market presence and size and the demand for capital that we see in the market. And in each of the last 2 years, we've done more than $1 billion in new business. While we favor investing from our balance sheet, especially when we are dealing with high-return assets, we also run the industry's largest asset management firm. And that asset management capital, which is around $3.5 billion of AUM, that asset management capital allows us to serve client needs more broadly, including with investment strategies that we might not find attractive with balance sheet capital, but that cement our relationship with clients and expand the reach of what we can do in the industry. And that, of course, generates asset management income for us over time and you really see that number starting to move along with the resumption of portfolio velocity. And finally, so separate apart from our day-to-day business, we've got the IPF case, which is a particularly large and notable case, where on the last day of March, we were successful after some years of ligation in obtaining a federal court, a U.S. federal court decision in our favor on liability. There are a couple of remaining damages issues to sort out, but Argentina has conceded that the ultimate judgment in that case should be in the range of 6 to $16 billion, of which some not in substantial portion would ultimately accrue to Burford's benefit. So those are really the 4 value pillars to Burford. And let me now turn the slide and dig in a little bit more deeply to a couple of things. Many of you have seen this slide before, but I put it up just as a fundamental reminder of the business model. So this is back to the conveyor belt analogy. And if you read this from left to right in the graphic, we start off by committing cash as we deploy most of that committed cash over time. And then we wait. We wait for the litigation process to take its course for that conveyor belt to do its work. And that ultimately leads to the 3 kinds of outcomes that you see here on the slide. The most common outcome is settlement and settlements are a lovely litigation response because they are both riskless in the sense that the litigation risk has been removed from the equation and they generate positive cash flow, as you can see from the returns here, and they do that in a relatively rapid period. When we don't settle and we go to trial, then litigation risk takes hold and sometimes, we'll lose cases when courts or juries don't agree our view of the fact or the law. But we win much more often than we lose, as you can see. And even though winning takes longer than settling, when we do win, we make a lot of money doing it. And that's what the combination of those things is what leads to the aggregate cash-on-cash returns that you see on the right-hand side of that slide. And if we turn to the next slide. If we turn to the next slide. This slide here is an effort to show you effectively what's going on with the portfolio on a visit by vintage basis and really the impact of the COVID delays. So what this is showing you for each annual vintage. In other words, the year in which we commenced the investments. And showing you what has been concluded and realized, but more significantly from my purpose, in these hash, black and white areas, it's showing you what is remaining in those advantages. And given the litigation isn't -- it's not fast, but it's not endlessly slow either, you would expect to see more of those vintages in the middle of the slide at this point to be concluded than you have. And you see quite a lot of activity there because it's not only that we had this COVID backlog show up, it's also that, that happened as the business was starting to really grow rapidly. And so we have the dynamic of vintages becoming much larger and at the same time not showing the realizations that you would expect from the passage of time. And you would expect, frankly, if you hadn't had COVID, you would -- the middle of this slide by now should look more like the proportions that you see on the left-hand side. So that's the catch-up. That's the backlog that we are now seeing begin to be clear. And what that leads to is a reasonable likelihood that over the next couple of years, you're going to see the potential of supernormal outcomes and cash realizations as that backlog gets cleared. So that's the exciting part, effectively, the worth waiting for a part, if you will. The next slide just sets out where we are today with respect to YPF. As I said earlier, we have won on liability in the trial court. There needs to be a further hearing on a couple of damages issues before the court sets a final judgment amount. We believe that, that hearing is likely to occur in the last week of July. After that, the judge will go and write her final decision and issue a final judgment. And then we'll be done with the trial court part of this, we'll have a judgment for some certain against Argentina, and that will then open the next phase of this case, which basically is likely to be sort of simultaneously Argentina appealing that result in the U.S. federal court and us having the ability to begin the enforcement strategy. I know that there are a number of questions about YPF, and so I will hold off talking anymore about it until we get there. And that really takes me to just where we're wrapping up here for the final slide, which is sort of back to where we began. The fundamental message being that we're really excited about what we think we will see in the forthcoming few years as the courts normalize. And as we get the benefit both of seeing that significant growth in the prior year's start to come through in terms of realizations, while also seeing the newer business that we've done follow its normal litigation course as well. And so with that, why don't we turn to some questions.

Thank you, Chris. Our first question comes from Bruce Anderson. Given the strong start we've made in the first quarter, is there every chance that even excluding any further contribution from YPF from a realized income standpoint, 2023 could well be our best year ever?

Well, as Bruce knows, I don't like to forecast the future beyond what I've already done. And I know that is a frustration for some of you who are accustomed to companies giving some more forward guidance. But there's really no way to do that responsibly here without -- simply because of the idiosyncratic nature of the underlying assets. That being said, I stand by what I said earlier, which is that the portfolio is seen velocity. We're seeing a number of milestone events at a level of volume that we have not seen for the last several years. And milestone events in litigation tends to cause movement in cases. They can provoke settlement. They can ultimately lead to actual judicial decisions. And so we are certainly seeing, as we saw in the first quarter, the steps towards first unrealized gains in the portfolio from positive litigation outcomes and then hopefully turning those unrealized gains into realized gains and the production of cash. So I'm certainly not going to disagree with Bruce's question.

Our next question comes from Martin Devine. How does the current level of identified or introduced opportunities compared with pre-pandemic conditions in terms of number and scale?

Well, I think one thing that is particularly exciting is the continued rise in corporate monetization activity. This is a theme that we've touched on before. The business obviously has 2 basic flavors of investments. The first is when we're addressing a business's P&L needs. So businesses don't want to be spending the money on legal fees and legal expenses and have those payments run through their P&L as operating expenses. They would prefer a world in which we shoulder those costs and they effectively pay us with a portion of the ultimate outcome of the case. Those transactions tend to be smaller because you're bounded by the total amount of legal fees paid, although it's still a highly desirable business. The other piece of the equation is the balance sheet side, where businesses don't have -- don't really going to be market value from holding their own litigation assets. Many of you are active investors in things far beyond Burford. And I dare say that none of you probably know, because companies don't disclose it in their accounts know very much about what affirmative litigation, the other companies that you're invested in might have. So for all you know, there are very valuable assets sitting there that are just not doing anything in terms of shareholder value. And we have a public case study that shows this now example, which is a company called Sysco, a Fortune 100 U.S. company that's a large food distributor. Sysco is a point to in a number of large valuable antitrust cases in the United States. But those cases are nowhere in Sysco's accounts. There's no asset value associated with them, and I don't believe Sysco is giving any market value for their existence. And so Sysco quite cleverly used the collateral value of those cases to secure $140 million in financing from us, which it used to bolster its own liquidity and enhance its ability to have access operating funds. And so the fact the companies are sort of moving from, if you will, litigation between 101, the P&L side, utility finance 201 is certainly good news in terms of further opportunities on our ability to deploy capital.

Thanks, Chris. There's a follow-up question from Martin. Is increasing competition, having any impact on your pricing when looking at opportunity?

Well, I'm not sure that I necessarily agree with the premise of the question, the competition is increasing. This asset class has been characterized by having robust competition for quite a long time. If you think about the other significant players that we bang into on a regular basis, many of those firms are now well over 10 years old. And so it is not as though we have been operating in a competition-free zone for some years, which is only now starting to change. There's robust competition here and there always has been. That being said, we compete -- this is not commodity capital, and we compete on more than just price. We add real value to our clients beyond just fulfilling their capital needs. And we routinely are told that we've secured assignments. We've secured investments when we were not the lowest cost capital provider, but where the totality of what we bring to the table contributed real value from the clients' perspective.

Our next question relates to AI, and it comes from Sean Johan. Could you provide an example of one or more tangible benefits does of seeing as the usage of AI increases?

Yes. I think AI, and I talked about this in the first quarter earnings call as well. AI really, from our perspective, fits into 2 different buckets. First of all, there's the impact on our business of AI. We have, as many of you know, been investing meaningfully in data science for some years now. And we have developed a meaningful competence with sophisticated data science, which is only continuing to improve as we layer in yet more machine learning and traditional AI concepts. We use that actively our investment process, both in terms of including a meaningful quantitative and data science aspect to making investment decisions in the first place that relies among other things on our significant pool of proprietary data. And we continue to use those tools in the management of our portfolio after there after we have made investments. And so -- and that's an area that we expect to continue to expand. When I was referring in response to the prior question, to the kinds of things that go beyond commodity capital when we talk to clients, this is clearly one of them. We have what we believe is the leading proprietary data set about commercial litigation in the industry. And we make extensive use through our data science of the information that we have. And that is interesting to clients. There's value there that goes beyond us just writing a track. The other side of AI is that AI has already disrupted and will continue, in my view, disrupting elements of legal practice. And that disruption likely is favorable for us. The most notable immediate consequence is that the kind of litigation that we do historically needed to be done by the big law firms because only those law firms have the teams and the resources necessary for the kind of high-volume complex work that goes into a large dollar complex litigation. Now with the greater ability to use AI style tools, we can, in fact, go and have disruption in that marketplace so that smaller firms are now competitive with larger firms. And so you've seen a rise in new firms and litigation boutiques. Often people have spun out of the big firms. And so there is now a larger pool of potential clients for us to finance and some of those firms can more efficiently attack litigation that might not be being brought and so broaden our own funding opportunity set. The research that we regularly do tells us that it is not at all uncommon for corporate clients not to pursue all of the viable cases that they have. And typically, that's an economic motivation. They simply don't have the budget to do so. And so if we can make it more easy for those cases to be broad without necessarily having to engage the superstructure of a giant law firm, that just continues to expand the market opportunity. So we're -- I'm excited by and a big fan of the potential technology in our business.

Our next question comes from Peter Thompson. I understand the year-end delay with the accounts and the knock-on effect on the first quarter results timing. However, for the second quarter and thereafter, are you able to commit to a more prompted reporting of results?

So let me set a little bit of context for this. We are still in the middle of what I would characterize as a journey that will end up with us becoming a full U.S. market issuer as well as, of course, maintaining our U.K. listing. We are a fair bit of the way there on the U.S. side, but we're not entirely there. And part of the reason is because we are still not at the 50% mark of U.S. shareholders. When we cross that 50% mark, which is something that we test for once a year at the end of June. And so we'll know in the next couple of months, if we've passed it for 2023, we moved to this full U.S. issuer status. We would then be obliged to issue quarterly reports and to do so on a faster time scale than the time scale to which we're subject today. The current status is that we are voluntarily doing quarterly reporting, but we're not required to do so. And we said that we would do so starting in 2023 as part of our move to access to the U.S. public debt markets. So we're sort of in this hybrid role where we are both, as you can see, continuing to build the reporting processes to have those full quarterly reports. So I don't today have a target date for each quarter's reporting in 2023. And by the way, as a footnote, there's slightly more complexity in our quarterly reporting this year because we weren't reporting quarterly last year. And so we have to go back effectively and recreate the comparative quarters to be able to report against. So we have had sort of a flat out pace between the revised valuation policy, the first quarter numbers, which we needed to get out so that we could enable a debt offering and now the financial work around the debt offering that's in the market. So as I said, I don't have a date, but we will -- as you get into 2024, I think that you will see this on a more regular cadence, and it's entirely possible that we will be able to put out a sort of a conventional U.S. style IR calendar. But you'll need to give us just a couple more quarters to get all of the sand out of the gears...

There's a follow-up question from Peter in relation to Sysco, Chris. Are you able to tell us how things stand with Sysco and the potential settlement of claims?

Well, the -- if potential [indiscernible] claims means the underlying claims -- sorry, let me step back and just be clear on what's happening there. So Sysco, as I said earlier, is a plaintiff in a number of large antitrust cases. And I won't bore all of you with the history of how we got to where we are. But suffice it to say that Sysco made a couple of corporate mistakes, corporate control mistakes along the way, has signed away a bunch of our collateral. And then ultimately, we needed to restructure our deal around that. And that has led to a degree of misalignment between us and Sysco, which ultimately led to a spat over weather, the settlements of that collateral were adequate. We have won the various proceedings that have been adjudicated so far. And the next stage in that process as it continues to unfold is a final arbitration hearing, which I believe is in November. The -- that just relates to the relationship between us and Sysco. The underlying antitrust cases are simply continuing to move through the litigation process effectively on the conveyor belt...

Our next question comes from Andrew Ian. How likely will Argentina pay the judgment? In other words, how certain is it that Burford will cut on the YPF judgment?

So maybe I'll start the IPF discussion with the same kind of health and safety warning that I gave in the conference call a few weeks ago. The -- I obviously understand that there is an enormous amount of investor interest in this case, in part because it's big and in part because it's public and therefore, it's something that people can sink their teeth into as opposed to some of the other cases in our portfolio where there's no public mention of them and therefore, no opportunity to do that. That being said, the -- our approach to YPF just cannot be any different than our approach to any other piece of pending litigation. And this is ultimately in the best interest of shareholders, of which John and I are obviously join you in that category. I know that people would like to know more than we have been able to say, but we're just not in a position to be open about our assessments of strategy, our approaches, the -- anything about timing or anything like that. We couldn't do that in any other case and we can't do that in YPF either. I think the obvious answer to the question is that we wouldn't have done the investment and litigated for 8 years, unless we believe that we would be successful in turning an ultimate judgment into a recovery just in the same way that we've been successful in basically every other investment that we've succeeded at. But in terms of how we are going to do that, I'm afraid that has to remain within the cone of the legal teams and not subject for public consumption.

Moving on to law firm equity. The question from Martin Devine. What has been the success or otherwise and longer-term potential of the equity investments in the law firm you made? Is this scope and a desire to expand this area?

Yes, there absolutely is. The -- I think the question is just about how rapidly the market will move. So the current state of play is that in the U.K., it has been acceptable for quite a long time now, going on 15 years for law firms to have the non-lawyer owners, whether that's by listing them on an exchange and going public, whether that's by taking private equity capital, whether that's by taking capital from us, all of that has been risk for the mill. And it has been, unfortunately, not particularly robust in its success. As you know, there are not very many listed law firms in the U.K. and the ones that are listed tend to be smaller and using the listing to expand into other kinds of businesses. You haven't seen any movement from what people call the Magic Circle law firms, the really big law firms towards public listings or control transactions or private equity transactions. So it's a slow-moving market in London. I would venture to say that part of that is because of regulatory overreach in the U.K. We've had the unfortunate experience of taking this excellent idea, positioning the U.K. as really world-leading in opening up the markets. And I think people at the time, including me, by the way, I thought that maybe we were going to see a law version of the finance big bang of the '80s and really catapult London into the lead. Unfortunately, the regulatory process involved in doing this in the U.K. is cumbersome and byzantine and not really fit for purpose. And so there have been a variety of reasons, but that's probably a part of them that has caused just not very much growth. So what you now see is the U.S. having some interest in moving in this direction. Arizona is the first U.S. law firm to permit these kinds of structures. Utah is moving along behind it, but you haven't yet seen that kind of activity in the states like New York and California. And this in the U.S., by the way, is a state law issue. It's not a federal issue. So each of the 50 states will have their own approach to this. But that all is a long-winded version of saying, we think that law from equity is a significant and important future part of our business. It is not today a currently important part of our business because there's just not scale. Although the deal that the question refers to has been perfectly satisfactory, and we're certainly happy to do more of them.

Okay. A question on commitments and deployments. It comes from Kaye Tran. We know that COVID is effective realizations, but will commitments deployments affected by COVID and how so?

They were, especially deployments because what you saw with COVID was the -- to sort of maybe overuse my conveyor belt analogy, you saw the conveyor belt stopping. And therefore, there were any number of cases where nothing much was happening. And therefore, we weren't deploying our historical levels of capital because the lawyers simply weren't doing any work. As I said, that's all come back to life. And I was talking earlier about case milestones. Those are really court-driven -- but the other thing that is certainly back to life is the pre-court conveyor belt. So when you file a piece of litigation, you don't just rush in the court. There's a whole lot of process that occurs just between the parties and the lawyers without any or very much involvement of the court, parties exchange documents, they take depositions, witnesses and so on. And all of that is expensive. And that also slowed or stopped during COVID. And so you do see deployments resuming now because the whole system is back in operation...