Burford Capital H2 2022 Earnings Call Transcript

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Provided by Quartr
May 16, 2023

There are 7 speakers on the call.

Operator

Hello and welcome to Burford Capital's 2022 Annual Financial Results. My name is Harry and I'll be your operator. It is now my pleasure to hand you over to Christopher Bogart, Chief Executive Officer to begin. Christopher, please go ahead when you're ready.

Speaker 1

Ask. Thanks very much, Harry. And hi, everybody. Thank you for joining us once again for some discussion about ask? Burford and its performance.

Speaker 1

As usual with me is John Malo, Burford's Chief Investment Officer and Jordan Leach, Burford's Chief Financial Officer. Ask. And you're going to hear from both of them during the course of the call as well. We're very pleased to be doing this today, Which meets our prediction about when we would have full year results for you. And while you already have a sense from our call in March ask?

Speaker 1

But those results were going to be strong, today really confirms that and our performance. We're going to do a few different things on this call and they are summarized on ask Slide 3. First, we're going to talk about our audited 2022 financial results, ask Which show our EPS more than doubling with strong growth in both capital provision and asset management income, which adds to the strong cash performance ask That we reported to you in March. Then John is going to say a few words about early 2023 activity And just how much is going on in the portfolio right now as well as touching on events in the YPF matter. Ask you.

Speaker 1

We've talked before about our data science work and we'll update that a little bit in the context of rapid developments in AI. Ask you. And then Jordan will spend some time walking you through our revised fair value methodology, how it works and what its impact is as well as touching on liquidity to ask you. And we'll leave a substantial amount of time for your questions. Turning to Slide 4, to talk about results.

Speaker 1

To ask. In the context of an environment where courts were still suffering meaningfully from the effects of the pandemic, ask. We had a really strong 2022 and look forward to 2023. Just looking at the numbers on this page, ask? Our net income more than doubled, our asset management income doubled and our capital provision income effectively our core business ask?

Speaker 1

Rows 64% on a consolidated basis and 30% on a Burford only basis. That was happening because of the ask Increased velocity in the portfolio as courts came back to life and cases started to move forward again. Ask. And that velocity shows itself in 2 ways. Sometimes it's with cases that actually conclude ask Either by settlement or adjudication.

Speaker 1

But it's often by cases simply moving through adjudicated milestones ask? That takes them closer to that conclusion. So we had both species of those things going on and we continue to in 2023. Ask? John will talk in a minute about the velocity we're seeing in 2023, but the short version is that it has increased considerably even over 20 22s levels.

Speaker 1

Ask us. However, beyond the numbers that are on this page, our story is actually even stronger than those numbers indicate. Ask. Because as Jordan will go through in a few minutes, our new valuation methodology caused 20 21's numbers to improve a fair bit, ask While also imposing a penalty on 2022 for the increases seen in market interest rates. Ask?

Speaker 1

So while our net income more than doubled under our new approach, it would have at least quadrupled under our prior approach. Ask you. So we're pretty pleased with where things stand. And with that, John will talk about 2023 and YPF.

Speaker 2

Ask you. Thanks, Chris, and thanks to you all for joining. Turning to Slide 5, it really picks up on a theme I mentioned ask a few weeks back when we updated you on 2022 performance that the portfolio's activity is at a level we just haven't experienced historically. Ask. Remember, our business expanded dramatically in the years just before COVID.

Speaker 2

And what would have ask, expected this larger, more robust portfolio to lead to much more activity, but for COVID slowdowns. Ask you. And then 2022, we saw a resumption of activity, but on a much larger portfolio than we had had before the pandemic. Ask. And 2023 has seen that pace continue unabated.

Speaker 2

So that if you look at Q1 2023, we had ask a 23 case milestones. We've had 5 already in Q2 with 17 more that would be expected based on court schedules. Ask. And the pace is expected to continue into the second half with more than 40 expected case milestones based on course schedules I mean course schedules. So ask.

Speaker 2

What is a milestone? It's trials, it's appeals, it's rulings on dispositive motions. It's the important motions and rulings ask you. That affect the case's value and trajectory. Sometimes those dates do get pushed back at calendar shift.

Speaker 2

The court may schedule a trial and then push it back a couple of months. Ask a question. But sometimes they pop up when not expected. A motion could be pending for a long time and the court just decides it out of the blue, as we'll talk about on the next slide. Ask you.

Speaker 2

But the message is that the large valuable robust portfolio we put on that I've been talking to you guys for a while about how ask a question. Pleased I am with the deals we are doing. That portfolio is now actually moving through the litigation process at a very good ask a question? And that's what we like to see because that's what leads to results. We'll have more to say about all of us when we release ask our Q1 2023 earnings, which we expect to do in early June.

Speaker 2

Turning to Slide ask you. I'll just say a few words about the YPF matters, which we've obviously put out a release about when it happened. Ask you. To go over it again, the ruling resulted in summary judgment on liability against Argentina and summary judgment in YPF's ask a favor. In addition and importantly, the court rejected Argentina's efforts to evade damages or reduce them through a variety of legal arguments.

Speaker 2

Ask you. And it reserved just 2 issues for a short trial on damages. Those issues are the precise date of the breach, ask. Which would be somewhere between April 16 May 7, 2012, and the pre judgment interest rate to be applied ask you. From 2012 to the present day, the court did rule that the rate would be the higher commercial rate rather than the lower administrative rate ask That Argentina had argued for, but it reserves the question of precisely what rate to apply.

Speaker 2

We don't have much more to say than what was in our release right after ask. The opinion was handed down. But after the court rules on the damages hearing and issues a final judgment, there'll be appeals. Ask. So the judgment would be immediately enforceable at the Nastay or Argentina posting a bond.

Speaker 2

And I suppose that there'll be more about this

Speaker 3

ask you. As time goes on, we're not in

Speaker 2

the same long term waiting pattern that we were for a while before March 31. And with that, ask. I will turn it over to Slide 7.

Speaker 1

Thanks, John. And just ask? On the subject of YPF, I know we all know that people would love to ask a lot of questions about it ask? And would love for us to go into great detail about our strategy and our thoughts and our methodology. Ask.

Speaker 1

And I understand the human desire for that, but as everybody steps back and just thinks about it, ask? It's pretty obvious why that's a bad idea. And ranging from hurting the case to angering the judge ask. And so we're just not going to be in a position to do that. So while we love your questions on every topic, We're just not going to be able to say anything more about YPF than we have already said.

Speaker 1

The procedural posture is clear ask. And we're now just waiting for the next step. So please avoid torturing us ask? By trying to get more out of us because it's just actually not good for the company and for shareholders to try to make that happen. Ask you.

Speaker 1

On Slide 7, I'm just going to talk for a minute about AI. Given that we have a lot to show you about our revised approach to Fair value. I'm not going to spend a lot of time here. And instead I'm going to talk more about it in the future. But given the speed of change that we are ask In the world of data science and machine learning, I wanted to give a little bit of an update from the discussion we had on this topic at our Investor Day about 18 months ago.

Speaker 1

Ask? What we said then is that we have a few significant things going on in Burford's business that set us apart from our competitors ask And create a significant advantage, a significant competitive moat for us. In the succeeding 18 months ask? Since the Investor Day, we have invested more, we've expanded and built more and we've deepened that advantage. Ask?

Speaker 1

The real root of our advantage comes from the substantial amount of proprietary data we have about litigation outcomes ask you. Combined with years of investing in data science and quantitative analysis, today the outputs from that work Are an integral part of our investment decision making process, both at inception and throughout a matter's life thereafter. Ask you. Given the increased cycle times of AI development, we can make increased use of machine learning as part of our process ask At ever more attractive cost. And we can also use AI to increase our use of the truly massive amount of data ask Available publicly about litigation that is difficult to integrate and to assess on a human level.

Speaker 1

Ask you. Fear not, however, Chad GPT is just as afraid as everyone else who looks at our space to make predictions and you can see the Chad GPT output Sitting there on the slide. We're it's worth reading and just smiling at it. We're a very long way away from lawyers and judges being ask But AI is a big net positive for our business, and we're going to continue to talk more about it in the months to come. Now, let's turn to fair value and start with Slide 8.

Speaker 1

I said in March ask? On our call that while I regretted the timing and the resulting delay in the release of our financials, I was actually pretty pleased ask you about this happening and about our engagement with the SEC. And the reason that I was pleased is that

Speaker 3

ask us. I hope never again to need

Speaker 1

to have 6 slides in a presentation deck on fair value. Indeed, I hope after today that I never have to talk about it again. To ask? Just as when you listen to Blackstone or KKR's earnings call, they don't talk about their approach to fair value. It just is.

Speaker 1

To ask you. Financial firms fair value their assets. They're required to do so. And we will now be doing so under an approach that looks and smells just ask Like other finance firms and has been the subject of extensive engagement with the SEC, so that we now have something we think is an industry standard, ask? Certainly for U.

Speaker 1

S. GAAP Firms and likely for IFRS Firms as there is very little difference between GAAP and IFRS on this point. Ask you? Jordan is going to take you through the details of this, but I'm just going to make a couple of broad points at the beginning. Ask?

Speaker 1

First of all, the fundamentals of our approach remain the same as they always have. The largest driver of value in this business is court decisions ask And they will remain the key driver of our valuations just as they have been since our founding 14 years ago with ask By the way, 14 years of unqualified audit opinions on this very topic from Ernst and Young.

Speaker 3

2nd, the quality of our modeling and our investment work is

Speaker 1

such that we're ready to Quality of our modeling and our investment work is such that we're ready to join the mainstream and also take into account other typical valuation factors ask? Like the passage of time, changes in interest rates, foreign exchange and other non litigation risk. Ask a question. Some of this is really just common sense. While court decisions are a critical element of our asset valuation policy, ask?

Speaker 1

I think we can all agree that if I offer you 2 choices, behind door number 1 are 10 brand new litigation cases just filed ask you. And behind door number 2 are 10 identical cases that while they have not had any court decisions, they've all been running for 2 years. Ask? You'd pay more for what's behind door number 2 and you do that just because the cases are closer to the end. Ask?

Speaker 1

So that's an appropriate thing to take into account when we think about fair value. Importantly though and I really want to underline this, ask. As I have said for years, we run this business on a cash basis. I can't spend fair value. It is just an accounting concept.

Speaker 1

Ask. We don't pay people on the basis of fair value. And so while we obviously have to comply with the accounting rules and put out audited statements for all of you, ask? All of what we're talking about here really has very little to do with our day to day lives and running the actual business. And now here's Jordan to take you through this.

Speaker 1

Ask you.

Speaker 4

Thank you, Chris. Good morning or good afternoon to everyone. I've been at Burford now for 8 months ask you. And I spent my entire career in specialty finance, whether it was a banker, a consultant or ask A senior executive. And what I see here is Burford and the litigation finance ask 3 continuing to evolve similar to how other industries have in the past.

Speaker 4

We're adopting a valuation approach that's more consistent with ask With specialty finance firms or other financial assets more generally. And while doing ask So we're retaining, as Chris mentioned, the key valuation principles of the asset class, namely using case milestones to ask you. To continue to drive value, but also building in traditional metrics like time value and duration. Ask you. So on Slide 9, what I'll walk through here is the theory behind our prior approach and our revised approach.

Speaker 4

Ask? The top of the slide shows our historical approach or what I'd like to refer to as cost plus. We deploy cash and we put that deployed cash value on the balance sheet. And in each ask Period deploying more cash would increase the fair value by that deployed amount. When we experience the case milestone, ask?

Speaker 4

We would write that asset up or down pursuant to ranges in our valuation policy when we witnessed an observable event. Ask? However, that approach doesn't incorporate traditional valuation factors like time value and duration. Ask? So our revised approach now moves us to the mainstream of fair value.

Speaker 4

Instead of just holding our assets at cost ask Building up value over time, we start with expected value, what we call our wind node. Ask? Our windowed is what our modeling suggests is the most likely outcome if the case goes all the way through the litigation process. Ask? Everything in litigation starts from that point.

Speaker 4

A great example, which most of you or many of you have seen recently is the case of ask. Dominion Voting Systems against Fox News. That case claimed $1,600,000,000 but ask you. Settled for $757,000,000 and everyone who talks about that settlement considers it against the perspective of the original damages ask a question. So we have our windowed, we then work backwards.

Speaker 4

We take the windowed and discount back to the initial NPV ask. And we show that on the graphic as t equals 0, which is where deployed cost equals fair value. Ask you. Kate milestones still drive the bulk of future valuation changes, but duration, discount rates and other factors Are relevant to the changes. I think though this is going to be a little bit easier, not in theory, but in some numbers.

Speaker 4

So let's turn to the next slide and I'm going to start with an example. So on Slide 10, We start with expected outflows. The cash flows we expect to provide to the case over time. For simplicity, let's use a single outflow of a ask 100 at tZERO, which is how a monetization would work. We then consider expected inflows.

Speaker 4

I just discussed the concept ask. The window in this case that is 200. And we have a market observed discount rate and ask In predicted by the individual case dynamics and the experience in the underlying court. Ask you. At this point now, if we were to simply discount back on that basis, 207% over 3 years, ask?

Speaker 4

We would end up with a much larger present value than the $100,000,000 of deployed cost. Or ask. If we force the discounting to get to the present value of 100, we would end up with a very high discount rate. Ask? And as we've said before, we don't think it's appropriate to accrete income on that purely time based approach.

Speaker 4

Ask. So what do we do instead? At this point, we calibrate the modeling to the present value of 100. So So we look at the future value of 100 at the 7% over 3 years and then that gives us 123. Ask?

Speaker 4

And we'll use that as our market and time based component, which is going to accrete over time and it's going to adjust every period based on changes in interest rates, ask a question? Duration and other factors. However, we're expecting 200 from the wind node, which leaves ask 77 for what we call the litigation risk premium. That premium just sits ask you? Not on the balance sheet, but waiting for CAES milestones.

Speaker 4

Then as CAES milestones occur, ask? Some of that premium, the $77,000,000 will come into income just as it did under our prior methodology. So let's now walk through how that happens. Ask. So turning to Slide 11, in the 1st period, that's the left hand side, We demonstrate no case activity.

Speaker 4

So all that happened was that the duration of the case

Speaker 5

ask you. Declines from 3

Speaker 4

years to 2. That reduction in duration causes some accretion of income, ask 7 in this example, as opposed to no revenue recognition under our prior approach.

Speaker 3

Ask you.

Speaker 4

That part is easy. Now let's move to the 2nd period. On the right, we show the impact of some positive case activity. Ask. And here again, our approach has not changed.

Speaker 4

This case success under old regime would have resulted in a 50% write up. Ask. And under our new approach, we also take 50% of the litigation risk premium. That premium was 77 originally. So half of that ask?

Speaker 4

Take us to 39 with some rounding. 2 ways to look at this. We take the 123 and add 39, which takes us ask To 161, again ignore the rounding or you could have just started at the 200 wind node and reduced by 39 to 161. Ask? Then again, it's just adjusted by the remaining duration at this point of 1 year.

Speaker 4

Ask? At the end of the day, under our old approach, we would have taken 50 of revenue from the CAES milestone in year 2. Ask? Under the new approach, we've taken 51 of revenue, 7 in year 1 and 44 in year 2. Ask you.

Speaker 4

Hopefully that example helps. I'm going to now turn to page to Slide 12 and go from kind of ask? The specific to the general, what this slide shows is a few macro points about this new approach. Ask you. A key point is the impact of a rising discount rate on asset values.

Speaker 4

As you can see, our discount rate has increased ask you. From 4.1% to 7.3% in the span of 4 years. And that's had a meaningful downward effect on asset values ask. As we're discounting at a higher rate than in the previous years. The graphics then on the right hand side ask a question.

Speaker 4

Attempts to quantify that effect and basically shows around $400,000,000 in foregone income from the portfolio because of the increase in discount rate. Ask you. But of course, that this doesn't change the ultimate resolution of the case. And we would ask. Recognize this income assuming the case performs eventually as expected.

Speaker 4

Going forward, we We can expect to see sensitivity to interest rates. So that increases in interest rates can cause declines in asset value and vice versa. Ask. I turn to Slide 13, another illustration of the macro effects of the policy. Ask?

Speaker 4

To begin, you'll see that deploy cost is the same across the board, no changes there. The YPF asset value didn't move meaningfully ask. And we do adjust the model every period based on all the factors we've already discussed previously. Ask. So fundamentally you're seeing moderate increases in total non YPS fair value based on the methodology that we talked about, ask you.

Speaker 4

But it's not in any way a dramatic change. Overall, you'll see the deployed cost still makes up around 50% ask you. Of the value of CPAs on our balance sheet including YPF. Also you'll see that fair value market excluding YPF ask? As a percentage of deployed cost is about 24%, which is similar to the 20% under the old methodology.

Speaker 4

To ask you. So before I move on, in conclusion, we have a valuation approach that at its core similar to many financial assets with respect ask To time value and duration. But we've been consistent with our principles that case milestones continue to be the principal determinant ask you. In driving fair value. We're happy to present this to you today.

Speaker 4

Excited to continue being the leader in the industry, ask? Whether as the leading global finance provider or in setting the standards for fair value. Ask. I then move on now to slides that you've all seen before, so I won't go into all the details. Ask you.

Speaker 4

Two simple takeaways. Low leverage remains and I'm on Slide 14. Low leverage remains ask? And that was our leverage level was slightly improved upon with the updated methodology given the slight rise in asset value ask. And we can continue to maintain an appropriately laddered maturity schedule.

Speaker 4

Overall, we'll continue to be prudent users of leverage ask In our capital structure, we'll deploy capital as appropriate into litigation finance opportunity. Ask. And then finally Slide 15. So on the left hand side, we see a bridge of our ask. Cash movements in 2022, I'd highlight the $328,000,000 of cash receipts, which was up 17% ask from the prior year.

Speaker 4

And then finally, while we're planning on releasing our full Q1 numbers later in June, ask you. Our cash balance at the end of the year represented $210,000,000 with an additional $115,000,000 receivables ask. And we show our Q1 balance of $183,000,000 with $99,000,000 of receivables, the bulk of which we expect to receive this year. So with that, I look to hand it back over to Chris.

Speaker 1

Great. Thanks very much George. And turning to Slide 16, ask. I think that we've probably exhausted you on the question of accounting, although we're happy to take your questions about our new methodology. Ask?

Speaker 1

Let me come back to the basics of the business here. And this is a slide that you saw in March, but I think that it really does sum up ask? The value proposition of holding Burford Equity. We think an investment in Burford gets you four things. Ask?

Speaker 1

It gets you a $6 plus 1,000,000,000 portfolio of legal finance assets that have produced high returns in the past ask And whose velocity is accelerating after several years of COVID slowness. It gets you the industry's leading origination platform, which Which has done more than $1,000,000,000 in new business in each of the last 2 years. It gets you the sector's largest asset management business, Whose income doubled last year as BAWFC, our large fund with our sovereign wealth fund partner Continues to mature and it gives you what remains in our view close to a free option on the YPF matters, ask? Which we now know are going to result in a multi $1,000,000,000 judgment. So we're pretty pleased with where the business stands.

Speaker 1

It's been ask? An aggravating couple of years as we've seen the courts really impacted by COVID and really ask Slowed to a crawl which has had an impact on our portfolio. And so there is a great sense inside the business of excitement and enthusiasm ask? About not only being back to sort of a normal pace, but also having the court system ask Increase its velocity to try to catch up and to clear that backlog. And with that, we will take some questions.

Speaker 3

Ask

Operator

And our first question today is from the line of James Hamilton of Numis. James, your line is now open if you'd like to proceed. Thank you and thank you for the presentation. A couple of them may. Firstly, you had 28 milestone events so far and you got a further sort of 61 in the pipeline, ask.

Operator

Useful. So the data point, I'm just wondering if you could compare that to the same time last year in terms of number of ask milestones you've had and expect. And secondly, in terms of the relative quantum of the deployed capital in those cases where you ask Have had milestones and expect milestones. On the second one, you had record commitments and deployments to gain ask. Yes, the sort of future value pipeline, I was just sort of wondering how does the pipeline for commitments and deployments look as we stand today?

Speaker 1

Ask? So let me take them in reverse order, because I'm going to do the first one and then John Malone will do the second. Ask. So as I've said before, when you think about our pipeline and how much new business we're going to do in any particular period, ask? That's really a function of 2 almost separate things.

Speaker 1

First, we have an ongoing level of business activity Just as the largest player in the space with just a sheer number of cases that we look at. Ask. And those that has now turned itself into almost just sort of an ongoing annuity like ask Approach to things. And these are really the cases where we're putting out $10,000,000 $20,000,000 $30,000,000 against pieces of litigation. Ask?

Speaker 1

So that's something that we are constantly looking at. We've got a flow of those cases. And then the other part ask? The pipeline and what really ultimately determines the fundamental numbers that you see are whether we end up doing Sort of 0, 1 or 2 really big chunky deals on top of that run rate business. Ask you.

Speaker 1

Those deals are much more episodic and they're much more difficult to predict or to ask? Yes, just to predict. And so in any period it's really a question of whether that's going to happen and if so in what kind of size. And you've seen big numbers in the last couple of periods because we had big deals in those last couple of periods, but it's not necessarily the case that every single time we'll have that. Ask.

Speaker 1

So you will see some volatility in that number, but the fact remains that we're still seeing and originating a very significant amount of business ask And there's no question that there has been demand. We've also been a lot in the news of late ask? For a variety of reasons and all of that frankly has contributed I think to the corporate sense that we are ask. The place to be with, if you will, the clear leader sort of like, if you're going to try litigation for the first time, You know sort of the old tech adage, nobody ever got in trouble for buying IBM. Burford has sort of fallen into that category I think for users of litigation finance.

Speaker 1

Ask. John, do you want to give a little more color on the sort of the forthcoming case events and how they relate to the last couple of years?

Speaker 2

Ask? Sure. I can tell you that anecdotally, there is a market difference. But in the ask a question. The feeling in the team in 2022 was it is very much a relief to have things to ask?

Speaker 2

Back to where they were, that basically to feel like things were moving through again after I think I I don't know how many earnings calls it was, probably 3 during COVID, where we would say not much has happened, nothing bad has happened, but there just ask. It hasn't been with things moving through to in 2022, it looks like things are finally happening again. 2023 is a whole new level. Ask. Just the number of things each week on calls getting updates on, there'll be a single underwriter who's got to ask you.

Speaker 2

Multiple cases that are having major events that week and that's across the whole portfolio. So there's a market change. To ask you. And in terms of what that bodes for the portfolio, more important than the actual numbers, we give you the numbers ask if you could that's my concrete way of conveying the sort of sense of the business of what's happening. Ask.

Speaker 2

But basically, we had modeled our entire portfolio ask you. Based on our underwriting, which we update every quarter, and we had a sense internally that as courts resume, this is ask a question. The trajectory we would expect things to follow. And now we are seeing things follow that trajectory. And so ask?

Speaker 2

I wouldn't say that there's any surprise in what's happening in the portfolio, only it sort of reaffirms ask the investment thesis we had when we made each individual investment and our overall sense of the value of the portfolio to actually

Speaker 3

ask a few things moving through.

Speaker 2

In a way, the 2022 was reassuring that finally the world come back to life and the courts are ask you to ask. We're operating, but we hadn't yet seen the robust level of activity that was leading to conclusions ask? That we would have predicted when we put the investments on.

Operator

Okay. I have a sort of a quick follow-up and I apologize to everybody else. Would you describe what you're seeing as catch up from the backlog that COVID ask Produced or would you say that core capacity is core capacity and we're now at a sort of a new normal?

Speaker 2

Ask you. That's a really good question. I'd say it is somewhere between those 2, and that's anecdotal. But ask? I think there is some catch up.

Speaker 2

But as I say, it's not unexpected. Ask? It's not that all of a sudden there's more going on in the portfolio than we would expect to given the case stage. Ask? Chris has said from the beginning when we founded this business, the great thing about this asset class is there are

Speaker 5

ask a few questions. Stages of litigation,

Speaker 2

they go through a motion to dismiss, they go through discovery, they go through summary judgment for U. S. Commercial litigation. And there's similar stages in international arbitration, ask It's a jurisdictional phase and a merit phase, quantum. And we're basically just once again seeing things move ask us Through those phases as they should be rather than at some unexpected lightning pace ask you.

Speaker 2

To catch up for the past. So I think probably there was

Speaker 3

ask you. A moment where we

Speaker 2

were doing catch up, but probably when we were doing catch up that meant an older case was moving, but a newer ask a question? The case wasn't yet. And now I think we're moving toward sort of the new normal. I think that's probably the best way to ask you. And the new normal is the old normal, it's what we expected, but it's just on a much larger portfolio than we had before COVID.

Speaker 1

Ask. Thanks, James. And the other part of what I've always said, which I think it's important to underline here ask. In this context is, especially as we go into a period of some economic turbulence, is that unlike ask? Many other kinds of investments like Private Equity and Venture Capital for example, we don't need a positive market To exit our investments.

Speaker 1

We don't need a buyer, we don't need a process, we don't need an IPO. The litigation system delivers us an exit in every single investment that we make, just by the passage of time. Ask. And as John said, that was slowed because of COVID. It is now resuming, But the fundamental point remains absolutely true and it's why this business doesn't have any correlation to ask To sort of underlying economic trends and conditions.

Speaker 1

So we've got a question on the webcast ask From Julian Roberts at Jefferies. And Julian asks, one of your largest investments saw a ask. Partial resolution in the second half, resolutions relating to about half of the deployed capital have been reached at an ROIC of over 40%. Ask. Is it reasonable to suppose that the other half is also quite close to Resolution 2?

Speaker 1

Is the timing difference related to differing jurisdictions? Ask. John, would you like to comment on that?

Speaker 2

I can't really say too much about an individual investment. But if I recall, the investment that you are ask. But if I recall the investments that you are referring to Julian is the IRRs were also ask In excess of 40%. And we've said, with respect to the portfolio generally, and I don't want to to ask us to speak to or make predictions about any particular investment, but very often if we have an early resolution, it can lead to ask? Higher IRRs, lower ROICs and later ones can lead to the reverse.

Speaker 2

I don't know that this one will I don't want to make a prediction that this one will follow that. Ask. But I don't know that you can draw a conclusion about the exact return levels you're going to get from this other than to say it is always a positive ask. When we have a successful partial resolution, it bodes well that the investment is going well, that the investment thesis ask you? It's borne out, but I don't really think I should say more about the trajectory of an individual case

Speaker 3

ask In keeping with our policy.

Speaker 1

So another question from the webcast. This is from Jeff Keane at Waverton, ask Who has taken a break from making money from charity by handicapping the masters. Ask. So thank you so much Jeff for doing that. I think that's a fantastic thing that you do.

Speaker 1

Jeff's question is you have referred to the fact that The portfolio has the potential to release a significant flow of realizations ex YPF. Are you confident that you have enough opportunities to redeploy those proceeds? Ask. So I think the answer from us is yes. It's obviously a high class problem to have ask?

Speaker 1

And not one that we've had for the last couple of years because of COVID, but I think the answer is yes. And I think the reason the answer is yes ask? Is a couple fold. Number 1, you've seen us continue to migrate the business towards higher ask? Levels of deployment in cases higher average deal sizes and a good deal of that is happening because of the presence of corporate deals and corporate monetizations.

Speaker 1

Ask? When this business was younger, much of what we were doing was what we today call fees and expenses business. In other words, We're just financing the legal fees and expenses associated with bringing the case and those don't correlate necessarily to case size. Ask. So it can cost the same amount of legal fees to bring a $50,000,000 claim and a $500,000,000 claim.

Speaker 1

Ask. However, if the underlying investment transaction that we're going to do Is a monetization for the corporate client, then it makes a great deal of difference for us whether it's a $50,000,000 or $500,000,000 case Because a $500,000,000 case allows us to monetize at a significant level. And you've seen

Speaker 3

a public illustration of

Speaker 1

this because ask The creation of this because one of our large monetization transactions became public during the course of the last 6 months or so. And so you've seen sort of a case study in action of how that capital has been used. We provided $140,000,000 to Cisco, ask? Sysco with an S, not the computer company, a large food distributor, a Fortune 50 company ask? Against a series of large valuable antitrust claims.

Speaker 1

And so when we have the opportunity to do deals like that, ask? Those obviously soak up a lot of capital and we continue to see opportunities like that in the market. Ask. So not only do I think we can redeploy our capital, as Jordan said, we've been a regular consumer ask Of some amount of debt in the business as a way of topping up the capital that we generate organically you. So that we can continue to meet demand.

Speaker 1

So now there's a question, another webcast question from Alistair Lindsey. Ask. Can you explain please the decision to cease publication of your modeling output to the SEC require you to stop? Ask? Clearly you need to report on a fair value basis, but like you and much more interested in cash generation and found the model useful ask For assessing future cash generation.

Speaker 1

So I think the way to put some color around this is ask. To think about the dynamic in the accounting world where there is a tension between publishing GAAP and non GAAP Information and our modeling output is clearly non GAAP information. And so what we are ask? Doing instead because we are not using today the full panoply of our modeling and our valuation process. Ask?

Speaker 1

We're just as Jordan described earlier, we're starting with the wind node. That constrains our ability To provide the full non GAAP output publicly. And so what we're going to do in months to come to ask you. Is figure out a way to at least provide something relating to the wind node inputs to ask us. Into the fair valuation process and that will give you I think a valuable piece of information from the modeling given that Everything else in the model derives from that starting point from that window which is why we're using it for valuation.

Speaker 1

So I think ask? We will find a way to share some meaningful portion of the modeling output. And then as time goes on ask. And as we continue to develop modeling work and continue perhaps to use it more broadly, this is not necessarily a ask? Static position, this is something that I think will evolve as the business does as well.

Speaker 1

Ask. And now we have a telephone line question, I believe.

Operator

That's That's right. We have a question here from the line of David Chiaverini of Wedbush. David, your line is now open.

Speaker 6

Hi, thanks for taking the questions and all the detail. Ask. In the presentation, I had a question on the leverage, so on Slide 14. Curious as to your comfort level ask On the leverage and if there's any change to that comfort level based on the new fair value approach?

Speaker 5

Ask? I'll

Speaker 1

let Jordan pick that up, but my quick answer to the second part of that is no. Ask? Again, because I think of the business in cash terms. So when I think about leverage, I think about how much leverage John and Jordan, I think the portfolio ask Can serve us and take, I don't really think of it in terms of what the sort of the balance sheet numbers ask you? Provide

Speaker 4

for. Yes. And as you can see, we're well, I would agree with what Chris said, but we're also well within whether ask. The covenant levels or what we would consider prudent leverage. Ask.

Speaker 4

And so, like I'm quite comfortable and I think while the valuation approach obviously does change asset values ever so slightly, I think to ask? It fits neatly into the way we've constructed our current debt structure, capital structure.

Speaker 6

Great. That makes sense. And my Sorry. To ask you. Yes, go ahead.

Speaker 6

I just had a quick follow-up. So wanted to ask about the competitive environment. You noted how Burford has been in the news more recently and it's really to ask. Drawing attention to how attractive this asset class is, can you comment on any new entrants and if they're impacting your business at all?

Speaker 1

Ask? Well, as you know, I've long been a fan of entry and competition in this business. Ask? And the reason I say that is because I think a business like this does better with a robust market instead of Trying to be sort of an esoteric monopolist. The more credible people who are out in the market talking up ask?

Speaker 1

The use of capital in law, the better from my perspective. And I remain close to 15 years in ask. Entirely unconcerned about Burford and its team's ability to meet any sort of competitive threat that we face. And indeed, I think the passage of time has only solidified that position for us. But the reality is we are still just ask?

Speaker 1

Scratching the surface of this stuff. The legal market is absolutely enormous. To ask? The top 100 law firms in the United States employ 100,000 lawyers. The law firms around the world bill close to $1,000,000,000,000 a year in legal fees.

Speaker 1

And I'm not suggesting all of that is addressable for us, not at all. Ask you. But I am suggesting that this is an enormous market. And so when we get very excited about doing one big deal a year, you? Great.

Speaker 1

We did $140,000,000 with Cisco, a Fortune 50 company. Well, we've done a couple of other big company deals, but that still leaves ask? The vast majority of those companies still out there for us to bring into the fold. And so what I'm after more than anything else is ask us. Now it's ubiquity.

Speaker 1

I want a world where corporate CFOs and corporate Chief Legal Officers ask? Just as a routine matter for every new substantial case that they are contemplating doing, run the same kind of analysis they do before they buy a new photo ask. Am I going to buy it? Am I going to sell? Am I going to lease it?

Speaker 1

Am I going to rent it? And in our case, am I going to use legal finance for? To ask? That's what I think of when I think about competition. So yes, there hasn't been really any notable entry of late, ask But there is there are lots of players in this market and it's a competitive market and I think that's a terrific thing.

Speaker 1

And our numbers suggest that we keep on winning the race.

Speaker 6

Ask you. Great.

Speaker 3

Thank you.

Speaker 1

If I

Speaker 2

could just add, I know Chris has been preaching this for a long time. Ask a couple. I really do think his point about experience is borne it out. I just want to echo that because we've seen entrants generate interest to ask you. Among counterparties, among law professors writing about it, judges talking about it, it's just become ask?

Speaker 2

A much more commonplace thing to discuss. And as a result, as Chris said, CFOs are starting to ask not just general counsels. Ask. And as that begins to happen, the expansion opportunities are tremendous and we've reaped the benefits of it because we really can ask? Compete head to head when we're forced to and very often we're not forced to.

Speaker 6

Thanks very much.

Speaker 1

Ask you. Sure. Thanks. Next we have a webcast question from Dominic Warren. Why is there a large difference ask.

Speaker 1

Between net income of $97,000,000 but with only $30,000,000 in income attributable to shareholders. Additionally, assuming this is linked ask. The lag in fund fees, what is the timeframe for fund fees to be received by Burford and to be seen in the results? Jordan, do you want to ask?

Speaker 4

Yes. I'll take it in the reverse order. So we don't go out there and try and predict the duration ask Of when those fees will come in and so I'm going to skip that part, but what I will comment on is a couple of points. So one, while you do see ask you. The difference between consolidated and income attributable to shareholders, that's just demonstrating the fact ask?

Speaker 4

As the portfolio and the business is coming out of COVID and demonstrating the strength of the portfolio, ask? It's natural to see the funds perform slightly beforehand given the fact that the expense base is borne by the company. Ask. And we'll see that expand, meaning what is attributable to shareholders and hopefully in the coming years to the extent that The portfolio continues to perform. I think that the other piece is important to note that we continue to focus on deploying ask capital to the balance sheet.

Speaker 4

On those asset classes with generating the 20 plus percent IRRs were focused on retaining 75% of those assets to the Burford only balance sheet as opposed to Historical years where that might have been a different split. So, and the last piece I would say is that ask? As the funds perform, we perform and you can see that in the growth in asset management fees in 2022 versus a question?

Speaker 1

2021. Great, thanks. Next from the webcast from Trevor Griffiths. Could you give a breakdown of operating costs ask Split between those associated with the in force portfolio and those associated with new business such as marketing, business development, due diligence and case ask? Selection.

Speaker 1

Unfortunately, the answer is not really and here's why. So the way that we operate the business, ask? We do have a dedicated marketing team. And so the costs associated with what we spend on marketing to ask You know are sort of in the low single digit millions. So that is a cost that we can isolate.

Speaker 1

Ask? After that though, we don't have very many people who are ask? Specific to one or the other of those functions. In other words, when ask. The fictional John Smith who works for Burford, that person

Speaker 4

is going to be out in

Speaker 1

the market talking to lawyers and law firms and corporate clients. Ask you. That person is going to be looking at cases as they come in the door. That person is going to be doing diligence and underwriting on those cases assisted by others and with With a heavy overlay of our quantitative and data science work and that person may well if we close that deal may well ask. We'll continue to own both the case and the client and go forward into continuing to case manage.

Speaker 1

Ask? So the expenses there don't really fall out. But if you look at our overall operating expense, we've got as I said marketing, ask. We've got what seems to me to be an ever more expensive finance and operations function ask? Just by virtue of how big we are and our dual listing and then everything else in the business to ask?

Speaker 1

Is devoted to making money, is devoted to bringing in the business, doing the business and getting that business ask To its logical conclusion.

Speaker 5

Could I just say

Speaker 1

Yes, John ask. John wanted to add something and then we'll take a book probably will be a final question from the phones.

Speaker 2

Ask. I just wanted to point out, I think the last three questions are very much related and are all great questions about costs, about management fees ask you. And about competitors. And I think part of the reason we've really reaped the benefit of competition and we've ask you. Excelled in comparison to competitors, there's a lot of them have the wrong capital structure.

Speaker 2

As Jordan said, we're gravitating toward more balance sheet investing and that's what ask if you You need to do so you reap the benefits, you reap the rewards when you have wins and a lot of competitors are not reaping ask? Enough of the rewards to cover costs and generate the kind of returns that they need to interest and reward their investors. And so ask? They generate a lot of interest, but we ultimately are able to do deals and raise the profits. So, it's been a very good cycle for us.

Speaker 1

Ask? Yes. It's a terribly important point. It's one that we wrote about in I believe last year's annual report. Ask you.

Speaker 1

And as John and I have said to you before, it's really what's driving our approach to capital allocation, to Capital management to our funds business and so on. And we are unique I think in our industry about being able to do that. Ask. So let's take the final question from the phones.

Operator

Thank you. Our final question here is from the line of Morbukai Yinnish. You. Admiral Kai, your line is now open if you'd like to proceed. Yes.

Speaker 5

Hi. Thank you for taking the question. You ask a question. You said that obviously, you don't want to comment anything on YPS. I just want to confirm that the valuation of YPS ask.

Speaker 5

It's being conducted the same way as the rest of the portfolio. So let's say in 2022, where there were no milestones in the case itself, any changes to valuation ask. Would have been purely from path to time, changes in expected duration ask a question. And discount rate, is that correct? Do I have that right?

Speaker 4

Yes, that is correct. So ask? YPF, just like any other asset to the extent there was a market transaction. And so for us, in this case, there was a market transaction ask. In June of 2019 allows you to calibrate the model.

Speaker 4

And then from that point on what you described is exactly what would happen. To ask? To the extent that there is a case milestone, then that would be a factor in it ask? Or the passage of time change in discount rates.

Speaker 5

Right. So in 2022, there was no actual case milestone because there might have been ask you. Submissions, the submissions to the court don't cancel the case milestone. Do you have that correct? Okay, got it.

Speaker 5

Thank you.

Speaker 1

Ask. So with that, thank you all very much for joining. It was nice to talk to you twice in the space ask you. 2 months and we're actually going to look forward to talking to you again within a month when we put out our Q1 numbers. Ask.

Speaker 1

So, thanks for all of your thoughtful questions and your time and attention and your support for Burford. Thank you very much.

Operator

Ask you. This concludes today's call. Thank you all for joining. You may now disconnect your

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Earnings Conference Call
Burford Capital H2 2022
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