Burford Capital Limited (BUR) Earnings Call Transcript & Summary

Hello. This is Rob Bailhache, and I'm Head of Investor Relations, EMEA and Asia, of Burford Capital. I and the whole team of Burford would like to welcome you to today's 2024 CEO and CFO audio webcast for our retail shareholders around the world. Thanks for your interest. And for many of you, long-standing investments alongside employee shareholders that today own around 10% of the company, we hope you find this forum useful. Before we start with my handing over to Chris for some [indiscernible] prepared remarks, I'd like to do some very quick housekeeping. Once we have concluded the prepared remarks, we will move to Q&A. [Operator Instructions] We'll try to get through as many questions as possible due to the fixed time available. We likely won't be able to respond to each of them on this session today. A selection of the questions we've already received are grouped by topic, and we plan on getting to 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, there will be a replay available to registrants a short while after today's event using the webcast registration link you've been provided with. And with that, I'd like to turn the call over to Chris Bogart, Burford's Chief Executive Officer.

Great. Thanks very much, Rob, and hi, everybody. Thank you for taking some time to chat with us today. As Rob noted, we had a significant number of excellent questions that touch on a wide range of the aspects of the business submitted in advance. And so I'm going to try to use virtually all of the time we have available for Q&A and not spend very much time on a presentation, especially since -- now that we've gone to quarterly earnings, you hear from us four times a year on investor calls and with slides. And we -- it was only last month that we did our most recent call on, so I don't know that there's any point in repeating the things that we said there. You can certainly go back and listen to that call again. I will use this slide that's on the screen just to sort of set the table, if you will, about what we call the four pillars of Burford and its value proposition. One of those pillars is obviously the fact that we have a large, significant portfolio of diversified legal assets. That portfolio was more than $7 billion right now. And as we've noted, that continues to experience robust activity as courts try to come back and fully normalize after the lingering effects of the pandemic. And that's a normalization that is occurring at different paces depending on the court system. Some courts are completely back to normal now, whereas others still do have some meaningful backlogs. And that's caused for us a meaningful level of activity in the business as we work through the many cases that otherwise, if you haven't had the pandemic, probably would have previously resolved. So as we say here, we're seeing robust activity in that is keeping us very busy. In addition to the value that, that portfolio is expected to throw off over the years to come, we also have a strong origination platform that enables us to write a significant amount of new business every year. We are by far the market leader in terms of the scale and scope of the business that we undertake. We have people all over the world and an excellent team of people that does high-value, complex litigation and arbitration matters for corporates and for large law firms, really anywhere they present themselves. We are a large asset manager in addition to investing from the balance sheet. And on top of all of that, we have a significant judgment pending in the YPF cases, a $16 billion judgment that we received in the fall of last year, and that judgment that continues to move its way through the judicial and frankly, political processes. There's an appeal pending in the U.S. of the judgment, and there's also enforcement activity going on in multiple jurisdictions, given that the judgment is today fully enforceable. So that's what we think of as the Burford value proposition. And really, what we've done in our 15 years in existence is we've built a mouse trap that really works. And what I mean by that is that when we get quality matters in the door, we are very good at diligencing those matters, understanding them at creating financing transactions around them. We've done that with respect to meaningful capital here. And then one of the things that makes this business both attractive to you as investors, but also frustrating for you as investors, is the fact that once we embark on one of these litigation investments, the litigation process then takes over. And the reason that's attractive is because that process is entirely uncorrelated to market conditions or economic activity. It has its own life cycle, it has its own pace and it has its own rules. And those vary by jurisdiction, but they share a common theme that our investments move along a process. They ultimately come to the end of that process. We don't need a functioning market to generate an investment exit, unlike private equity or venture capital. The exit simply literally pops out of the litigation process, and that is our investment return. So that is, as I said, an entirely uncorrelated process. And we have -- any number of investors who have made investments in Burford, literally earmarking Burford as an allocation to an uncorrelated product. On the other hand, the frustrating part for you and for us as a management team is that, that lack of correlation translates also into a lack of predictability about timing. And that is simply the nature of the beast. I know that investors would love us to be able to say with great precision, here is what we think is going to happen next quarter or here's what we think is going to happen next year. But it's just not within our gift to be able to do that on any sort of responsible and reliable basis. What we can do instead and what we do, do is we give you data like this. And this data now is across a very substantial volume of activity, as you see on the right-hand side, covering not quite $3 billion of cash realizations. And all of the numbers on this page, by the way, are cash numbers. There's no accounting dynamic in these numbers. And so what you can see is that we have an extensive track record of producing the kinds of results that you see in the center of the page, the three possible outcomes of pieces of litigation. They either go to trial and win or they go to trial and lose or they settle. And as you can see, almost 3/4 of them settle. And settlement is very pleasant because it tends to happen somewhat faster, and it eliminates the litigation risk associated with the investment. We're not taking the case to trial anymore. We're settling it and getting paid instead. There is obviously a price associated with that derisking, and that means that nobody settles claims for their full value. They settle claims for a discounted value. And so settlements happen faster, they're riskless, but they also are somewhat lower returning than if we go to trial and win. And as you can see, our loss levels are really quite low given the idiosyncratic risk of these assets. And we have brought those loss levels down over time through a variety -- for variety of reasons, including our experience in the asset class, but also the increasing use of data science in our investment process. We have a significant competitive advantage by having a very significant portion of proprietary data that we use in our investment process. And as you can see, we're down to about an 8% loss rate with them. And what all that does is translate into outcomes that look like this. And the other very nice thing about this is the degree of asymmetry that exists across these investments. In other words, when we lose, our losses are [indiscernible] have at the level of capital that we have invested. Whereas if we win, the red on the right-hand side, we can win multiples of that level of capital. And of course, the middle ground there tends to be the settlements that make up the difference. So it's a business that we've shown over time that we can do in a high-quality, repeatable way. And that, I think, is what should give investors quite a good deal of comfort now that we've been doing this for 15 years and then producing desirable results across that period. So that takes us really to your questions. And your questions actually explore a number of the points on this page. The fact that we're the global leader here, the quality and asymmetry of those uncorrelated returns, the fact that we enjoy a significant competitive advantage for a number of reasons in the business. We come with strong diversification, and we have demonstrated a long history of proven capital and liquidity management. And with that, why don't we take your questions?

Thanks, Chris. Our first question comes from Bruce Anderson. Burford's 2022 business review highlighted that the expected realized gains from definitive commitments made in 2021 and 2022, were $750 million and $900 million, respectively. Even the non-YPF realized and unrealized gains in FY '23 were only $345 million. This would suggest that non-YPF-realized gains may well be substantially higher over the next couple of years than they were last year. Do you agree? And the best is yet to come.

Well, I always think the best is yet to come. And let me tell you why for a couple of reasons. And you've heard Jon Molot on prior calls talk about his enthusiasm for the portfolio that we have constructed. One of the reasons for that is that when you look at the periods that Bruce has called out in his question, those are in litigation terms, relatively recent periods, 2021 and 2022, and that's doubly so because we've got the pandemic intervening there. And so I would not expect, in normal course, for us to be seeing only in the middle of 2024. I would not expect us to be seeing the bulk of the portfolio activity associated with the investments that we made during that time period. And so that's why I'm happy to agree that I think the best probably is yet to come. I would, as a footnote, just say that we have stopped, unfortunately, providing the outputs of our probabilistic modeling and we've stopped doing that for some arcane securities and accounting reasons in that the modeling does not comport with GAAP and IFRS. It was never attended to, obviously. But that makes the people who cross over the financial statements, unhappy about the idea that we're introducing a different kind of measurement. And so we are actually at work on looking for effectively a replacement way so that we can talk to you about the business without getting into that dilemma, because we still do use internally in the business that probabilistic modeling extensively, but it's not something at the moment that we are permitted to make public. I would just, as underlining though a point that we made at our last Investor Day when we rolled out the probabilistic modeling publicly, which is that it is just that, it is probabilistic modeling. And so what that means is that it's taking a wide range of possible outcomes, assigning weights to them and producing a single number that reflects that weighted outcome. What you can be sure of is that it won't be entirely accurate. In other words, just as a random example, the three possible outcomes are win, lost and settle, and you just -- we do this in a much more sophisticated way. But if you just say you just come along and say, "Well, we're going to assign a 10% possibility of loss, a 50% possibility of settlement, or 40% possibility of winning," all we know for sure is that only one of those things is going to be possible and they will occur at 100%. And so whatever number we assign to each of those weights is not actually going to be the ultimate outcome of the matter, but we nevertheless find it to be a very valuable tool. And going back to Bruce's question, I do believe because of the quality of the assets in the portfolio across numerous vintages, including the vintages that have been delayed by COVID, we do believe that there is real value there as we said when we talked about the four pillars.

Thanks, Chris. The next question is from [ Martin Devine ], and it's on growth. How does the current level of identified or introduced opportunities compare with pre-pandemic conditions in terms of number and scale?

I don't think the pandemic made a particularly large difference. In other words, I think the business was on a trajectory of what was happening with respect to new business. And I don't think that trajectory, other than being interrupted by the pandemic, I don't think the pandemic caused any change to the trajectory. And that trajectory is sort of wrapped up in sort of a fundamental element of what's happening in the business generally. When we started this business, we were doing what I often call litigation finance 101. In other words, we had a fairly simple product offering where we were advancing capital to clients to pay their legal fees. And we were doing so in exchange for share of the recoveries that we would receive. We still do that today. That's a meaningful part of our business. It's a good and nicely profitable business. But the limitation that it comes with, of course, is that our investments would not ever be larger than the amount of legal fees that the case actually needed. And so what has happened over time is that we have added some other features of the capital that we can provide to clients. We have done any number of multi-case portfolios. And we also today monetize some of the expected future value associated with litigation and arbitration matters. And that evolution has changed both the average deal size that we do, it's become larger and we've consciously started to exclude smaller deals. And it has also changed the mix of business to some extent. In the litigation finance 101 context, we were largely -- even though our contractual counterparty might have been the client, we were largely dealing with the law firm because law firm was highly motivated to get itself higher and get its fees paid. Whereas today, we also have meaningful engagement with corporate clients directly because the monetization element of what we do is of interest to them and of less interest to law firms. So law firms don't get any benefit out of -- besides when we do a monetization deal with one of their clients. And so that results in, if you will, a larger market than when we were just doing the litigation finance 101 deals, and that's been an exciting area for our growth.

And a further question on growth from Bruce Anderson. A recent litigation finance broker report stated that industry new commitments of $2.7 billion in the 12 months to June 2023, were down 15% from $3.2 billion in the prior 12-month period. Both its new commitments in that 12-months to June 2023 period were $1.1 billion, an increase of 27% over the same prior year period, while Burford's implied market share in 2023 was almost 40%, up from 26% in the prior year in 2022. Shouldn't you make more Burford achievements relative to the market as a whole?

Well, I suppose the answer might be yes, except that we tend to prefer a world where we give you data and let you reach your own conclusions from that data as opposed to us evangelizing our wonderfulness from the rooftops. So there is a little bit of an element of style associated with that. And I know that Bruce finds that frustrating from time to time. But given that we, as litigators, see public company to take many stumbles and many missteps, some number of which lead to litigation. I think we probably exist on the more conservative end of the spectrum. I would say though, in response to the specific question, that I don't know where this data comes from, which is part of the other reason that we don't make a use of it. Most litigation finance providers are private firms that do not do any sort of reporting. We don't ourselves engage with the broker that does the survey. I have no idea about the quality or reliability of the data that is there. And so I think that because somebody for advertising reasons is putting out numbers like this does not frankly tell me all that much. That being, I don't have any reason directionally not to believe that Burford is a very large market participant here, and we see significant market benefits from that position of market leadership and from scale.

Thanks, Chris. The next question is on the topic of underwriting data and analytics, and it comes from [ Sean Jahan ]. Can you elaborate on how Burford's proprietary dataset and quantitative modeling provide a competitive advantage? Specifically, how do these tools enhance your ability to underwrite price and manage legal finance assets? Since the dataset is growing all the time, have you found its accuracy to be improving?

So I'll comment on this, and then Jordan might chime in as well. But this is something that is very, very significant in our investment process. We began investing in data science half a dozen years ago. We now have a significant team and make meaningful investments in the area so that we can maximize the use of the data that we have. And just to step back and talk about that data for a second. The challenge that you have in complex litigation, and you saw on the slide that I had up a couple of slides ago, that we have a 74% settlement rate. Virtually all of those settlements are going to be confidential. They're not going to be publicly available. And so you don't know as a litigant, whether you're a client, whether you're a lawyer or a law firm, the data that you have is only the data that relates to your own individual experience. So if I'm a corporate, I know what I have paid in the past to settle some cases, but I don't know what my competitors have paid the settled cases. I don't know what the industry rate, if you will, is. And even lawyers at law firms, in big complicated cases, you only work on a few cases at a time. And so your base of data is just not all that large, whereas we have a very significant base of that kind of data, which makes us better able to predict how things are going to resolve. We just have access to a lot of nonpublic information. And that lets us do all sorts of things. It lets us, when we're underwriting an investment before making it, it lets us apply a lot of that learning and combine it with other data science techniques to really take a hard-nosed view about what we think the economic potential of the case before us is. And that's why you have to always ignore, by the way, the sort of the headline numbers that you see in litigation. Obviously, you're going to put forward the best possible case that you can have for every possible dollar of damages that a creative lawyer can possibly dream up. But that doesn't often correlate at all to what the ultimate outcome is. And so you need to be cautious about those kind of headline numbers. So what we're able to do is substitute, for those headline numbers, our pragmatic view of what the litigation actually could produce. And then on top of that, we're able to be of assistance to our clients as they're going through the litigation process in terms of being able to counsel them about where cases like this resolve and how to view the various ebbs and flows that you get in any piece of complex litigation when you consider settlement, when you consider various strategies and tactics. So it is a very significant benefit to us. And as the questioner notes, it's a benefit that only keeps on giving because every year, we're doing in round numbers, $1 billion more of this stuff. And to do that means that we need to be looking at lots of new cases every year and gaining yet more data and insight. Jordan, did I leave any room for you?

You did, actually. I think the only other piece that I would add, which wasn't quite directed at the question but it's always worth discussing when talking about the data and analytics is that we are not lawyers first, we're investment professionals first. And so when you think about the pipeline of activity when we look to underwrite, it's not good enough to just to be right on the law. This is an investment. And so this process begins on day 1 and operates in parallel with the underwriting of the case. And I think that, that is -- I think that's unique to us and actually extremely important in the way in which we evaluate the opportunity set. Otherwise, Chris, you got it all.

Thanks, Jordan. The next question comes from [ Yam Koo Nam ]. It's on origination. Around 1/2 of the origination of Burford comes directly from companies rather than law firms. Could you provide insight into the initial process of establishing contact and soliciting potential clients? But actually [ it's helpful ], it would be greatly appreciated.

Sure. So this happens in a number of different ways, and it's going to depend a little bit on whether we're talking about a corporate client that just has a piece of litigation that is unique to it or whether the underlying litigation issue affects multiple companies. So let me give you an example of the latter. Many of you probably know that the European Commission has concluded that there was an illegal price-fixing cartel with respect to the manufacture and sale of diesel trucks. So if you, as a business, are a buyer of diesel trucks, if you operate a fleet of trucks, you're going to have a claim for being overcharged for the trucks that you have purchased over a period of years. And that claim is going to exist for many, many businesses, but each of those claims is going to be slightly different because you will have bought your trucks from one manufacturer as opposed to another, you will negotiate whatever particular deal that you were able to negotiate and so on. So there is a commonality to these cases, but there is also a collection of individual factors. And so in a situation like that, we might actually reach out directly to businesses that we think are likely to have purchased meaningful quantities of trucks. And we might work with those businesses to educate them about the state of the law and the potential value of their claim and offer them financing associated with that. And we might do that for a number of businesses and build the book of such claims to be able to take them forward, including some cost efficiencies and some operating levers. And so that's sort of one flavor of what happens. Another flavor of what happens, especially when you're dealing with single cases where there's not that kind of industry commonality, is we may get approached directly by the corporate client. We're well known to lawyers in the industry, we're accessible. And if you're thinking about doing some financing for litigation, it doesn't take you very much Google searching to figure out that we're one of the people that you should clearly be talking to. And so some of our business literally just comes in over the transom, without us having established a preexisting relationship with a client. And then there's sort of everything in between. We spend time going and educating clients individually and at events about what we do and how it helped their business. I was just out in California, for example, speaking at a legal conference focused on the health care industry, where I was speaking to 100 or 200 general counsel about what they could do to make their legal functions and legal departments more economically efficient and more create some financial contribution into the business. So it's sort of all over the lot, but -- so we use all of, what I would call, the traditional techniques of B2B financial business development.

There's another question on origination from [ Sean Jahan ]. When you take on a new client, in addition to the standard due diligence, do you also assess how much future business may be possible with this said client?

Sure. And that, of course, also is going to determine how we deploy our limited internal [indiscernible]. So because we don't have any industry specialization because we -- like the big law firms, we're prepared to do any kind of case or any kind of clients, a client in the industry. It's not that we only do technology or we only do health care. And so because of that, virtually every business in the world of a certain size is a potential client of ours. And it's certainly not possible for us to have a business development and sales effort that goes and calls on every business in the world. And so we do a fair amount of the work to try to focus on businesses that we think are likely to have a higher potential for having larger and/or repeating types of litigation that would be useful for a long-term relationship with us.

The next question relates to realizations, and it comes from Peter Quinn. After the first quarter update last year, Mr. Molot, Jon Molot, our Chief Investment Officer, mentioned a record number of cases were in a holding pattern ready to land. And after the second quarter update, Mr. Bogart said that we should ultimately judge success on cash received. Have any of these cases landed? And how's the cash being received?

So I think that to answer that question specifically would basically require me to give you nonpublic information because we haven't yet reported on Q2. But what I can say in a more general context is, and we've said this before, but the portfolio is very active. But we are seeing -- and because cases follow this sort of preordained process, that level of activity ultimately leads to the conclusion of cases. It's just a question of how many twists and turns there are along the road to get to that resolution. But you always end up with a resolution even if it takes quite a long time. And you're seeing that -- I know that sometimes, just to digress for a second, I know that sometimes people look at old assets, and they have sort of a skepticism probably born out of the fact that if you look at a private equity firm and look at really old deals, mostly, those deals are in some sort of distress. They can't be sold, and that's why they're still sitting there. That's just not the case in our business. Hold assets simply mean that the conveyor belt is either moving more slowly or have twists and turns along the way than might be the case in some other types of litigation. But in the past 12 months, we've seen and continue to see meaningful resolutions from litigation that we did as long ago as 2010. So I think you should not think about duration of time as being a judge of anything here. But sort of back to the question, what we can say is we're seeing a lot of portfolio activity. We're seeing what we have described as a super normal level of portfolio activity because we're seeing the courts actively try to clear the COVID backlog, while also not putting newly filed cases at the back of the queue. And different courts are being -- having different levels of success with doing that. But that is certainly meaning that we're busy in the business.

[ Yam Koo Nam ] has a question on duration of our legal finance assets. The cumulative weighted average life for the concluded portfolio currently stands at 2.4 years based on realizations. With the expected clearance of the COVID-19 backlog, do you anticipate a notable increase in weighted average life? If not, what factors contribute to this expectation?

Well, every time I think the duration or weighted average life is going to extend it out, and I have thought that on multiple occasions. Every time I think that, I then get the numbers and it doesn't. And so why hasn't it? And I think the principal answer to that is the impact of some large and fairly fast settlements or partial resolutions. So if you look, for example, at 2023, we made an investment in June of 2023, a $325 million corporate portfolio into what we deployed, $225 million. So when we made that investment, the normal time frames of litigation would have suggested that, that case would be settled. And if it was on a normal track, it will probably settle in 2025. And if it was going to go to trial -- if they were going to go trial in those cases, it'd probably be even longer than that. . And instead, that settled in December, in very late December 2023. And it settled for reasons outside of the litigation context, probably what I've talked publicly before about the dynamic of year-end settlements where companies, if they have -- if they put a good year and they have some free cash, they want to go and clean up their litigation portfolio, clean up their balance sheet a little bit. And so that fairly large case only is going to have 6 months or so of duration from commitment to resolution. And that will offset some considerable number of COVID delays that would otherwise perhaps be dragging that number out. And so the simple answer is even though intuitively, it might seem like those should continue to push out, we haven't seen the numbers do so dramatically yet.

Thanks, Chris. The next couple of questions are related to our funded matters that are in the public domain. The first question comes from Paul de Gruchy. The Sysco case is well publicized with numerous, often conflicting judgment passed in many U.S. courts. Can you provide an update on how Burford has invested and the best- and worst-case scenarios for these cases? Can you also provide some color on which court decisions actually matter?

Sure. So let me start with an overarching point, but I really beg you to keep them firmly in mind, even though I know that it is almost irresistible to look at cases once they become public. But the simple fact of the matter is that you just do not have enough information about what's actually going on in any piece of litigation, even if it's out there in the public domain. So taking the Sysco cases or these are cases about a sprawling, complex set of litigation going on in the United States around 4 different animal proteins: chicken and beef, turkey and pork. And the allegations in the cases are that there was effectively an illegal price-fixing conspiracy in the supply of those 4 animal proteins. And Sysco is one of our clients that has significant claims in those cases, given Sysco's size as a major food distributor. So the challenge is what you do in these sprawling antitrust cases is the game afoot is that if you're a defendant, you're going to try sort of a very large number of tactics to try to narrow and/or derail the case. And if you're a plaintiff, of course, your goal is to get the cases to proceed as rapidly as possible in a straight line towards trial. And so what you see playing out is various strategies around those two overarching goals. But it can be often very difficult to define exactly what the strategy is and why things are happening and what they actually need if the only thing that you have are the public filings. And that's all you have in these cases. And so I have a good deal simply with the questioner. When you see conflicting judgments, you don't know quite how to read them and you don't know quite what the economic impact of them is. This is made even harder in antitrust cases because virtually, all of the data that would try to help you understand the cases is under a judicial seal. And so you can't even know the raw numbers that would maybe give you a little bit of color about what some of the judicial decisions mean. And so as unsatisfying as this is as an answer, there's really nothing that you can do along the way. You really just have to, and so do we. We really just have to wait as the conveyor belt continues its journey and wait for one of those three outcomes that I described earlier and trying to game out things along the way and say, "Oh, well, look, because this judge over here in 1 of the 4 cases made this kind of ruling, I think the overall value of the cases has either gone up a lot or are going down a lot." It's very, very difficult to do that.