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Burford - House Of Claims

Apr. 06, 2021 8:30 AM ETBurford Capital Limited (BUR)17 Comments
Orange Ranger profile picture
Orange Ranger


  • Legal finance as an asset class provides uncorrelated returns from a diversified portfolio of legal claims.
  • Venture capital like returns with a better batting average and dispersion of returns partly from the ability to get to negotiated settlements.
  • Track record of delivering >30% IRR and attractive money multiples on invested capital, and asset management fees plus future performance fees from third party capital.
  • Risks relate to recent short attack, fair valuing legal claims, the esoteric nature of legal finance and limited visibility of future returns.
  • For now we take a slightly positive stance on the largest legal finance player.
Legal BattleAnd Lawsuit
Photo by wildpixel/iStock via Getty Images


We like the asset class of legal finance. Investing in legal claims is less esoteric to us than investing in cryptocurrencies. Legal finance lacks the immediate connotation of a meteoric rise to stardom that seems to be required for the sex, drugs

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Orange Ranger profile picture
Non-bearded medium rare value investor finding ideas that are undervalued, and unloved, misunderstood or underfollowed. Preferably all of it.20+ years in private equity, M&A and other lateral thinker roles. Unconstrained approach to invseting.Investing success is based on skill and luck. One way to finetune skill for me is by writing down an investment thesis since it gives me time to reflect on self-congratulatory thoughts that are a disguise for behavioral pitfalls or potential stupidity.An 'I don't know mentality' is a good tool to think through uncertainty. Therefore all my investments are bets in the non gambling sense of the word based on weighted probabilities of scenarios and expected returns.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (17)

a well written article Orange Ranger.

business is a pass for me until the YPF matter is sorted. Like any investment portfolio, diversification is key and represents too much of a binary outcome on the stock performance. The fair value accounting, although open to interpretation, does not bother me that much.

I am invested in their fellow listed peer Litigation Capital Management (also listed on AIM) in London. Better IRR's / ROIC and more conservative accounting (cash accounting). Makes for lumpy revenues though. With a win / loss rate on investments of 226 / 11.

are there other funders listed in the US for comparison purposes?
Eadwig profile picture
@AussieInvestor708 Check out MANO in London.. Similar model and about to get a tsunami of defaulters as UK government support cease later this year.

i have actually had a very good look at MANO, decided to pass (after i was vey close to buying in). He headlines look great and returns amazing, but i think there is a lot more to be said deeper down. Before investing in this stock its essential you read the criticisms of Tom Winnifrith on www.shareprophets.com/...

Their interpretation of fair value accounting is the most aggressive of all players, their cartel case is much like Burfords YPF matter (monster balance sheet risk), and although their legal case durations are short, settlements are much drawn out affairs.
Orange Ranger profile picture
@AussieInvestor708 - i think the fair value accounting in itself is acceptable and some of the other players have labelled legal claims as a different type of assets that does not require to 'fair value' it. All the other players estimate the potential value of the legal claims but show it then as a separate KPI. I do not have an issue per se with the resulting volatility, it rightly reflects the nature of the underlying economic of the assets. I do not know the details of Mano nor LCM but will have a look !

On the balance sheet risk for Burford it should be stated in my view that the YPF case has been a huge success from a cash return on investment perspective. The balance sheet risk is a non-cash item. If the case goes against Burford the resulting write-off reduces the tangible asset value but by no means will get close to triggering a breach of covenants (notably the 50% consolidated net debt / tangible assets ratio). I think the upside is potentially massive so it is really about how you see those scenarios and probabilities unfold.
I think this company is a pass. I wouldn't say it's a short, because a buyer could always swoop in and take them private (which is needed IMO), but this business is doomed for failure. Three reasons - YPF, Headcount, Management

YPF - Do you really think Argentina is going to fork over $800 million to Burford anytime soon? No. It's never going to happen. The key for any case to be successful as an investment is recoverability. How do you recover $800 million from a sovereign government? Short answer - you can't, and Argentina has literally no incentive to ever make this payment. This "receivable" will stay on Burford's balance sheet forever, but will never be collected. Mark it as a zero.

Headcount - From the website, it looks like there is about 15 investment professionals working there and about 130 people total. That is absurd. Comp that against any other asset manager, and the ratio is the opposite. You are seeing this play out in the deployment data, no substantial increase in deployments over the past three years, while headcount and opex has exploded. What are they paying people to do over there?

Management - I am hard pressed to find a Board of Directors and Management team that all keep their jobs in the wake of their Company losing 60% of its market cap. The management team should be gutted and start over, and the ten year Board of Directors, which don't really seem to do anything, should all resign. The management team lacks any sort of asset management background - also there have been no new big hires at a senior level for the life of the Company (the GKC management team left after the acquisition, likely laughing all the way to the bank for that massive over-payment for that business). Why don't talented executives from finance or law want to work at Burford?

Like I said, I wouldn't short this name, but I sure would not buy it.
Orange Ranger profile picture
@diametric88 - hi, thanks for commenting;

1/ Being conservative I would be inclined to put YPF-assets in as a zero and see it as a huge call option (as 1aonic mentioned above the range of pay-out as calculated is theoretically many x higher than $800m); if the litigation is finalized Burford could convert this (partly) into cash as a secondary trade like they did before; they don't need to do the full recovery to get paid. Putting the YPF asset at zero hurts the balance sheet NAV but not really the deployed capital of which YPF related is only 3-4% on top of my head, so from that perspective not a big deal.

2/ Fair point; difficult to compare i think; it could also be that Burford is already built with an infrastructure / team for further scale; i see 45 investment underwriters on their website by the way

3/ I am more neutral here currently; management should not manage the share price but create shareholder value in my view; as long as they are focused on that (i think they are and hold stakes in company and some of their rewards are linked to performance of the portfolio) that is ok for me; perhaps they did a bad deal in the past (most deals are bad but that is M&A for you); their response to MW looked appropriate, fast and factual to me.
@Orange Ranger thanks for the response. I think these issues are much more dire.

1) The market doesn't view YPF as a call option. Right now, Burford is trading at about a 1.0x Price to Book, and that includes the full value of YPF. If YPF turns out to be a zero (which it will be, Argentina will NEVER pay), that price to book shoots up to a 1.66x, and based on Burford's historical MOIC performance of about 1.5x, you are now underwater on the future value of your portfolio. Once that loss is realized, shares slide hard, retreating to the 1.0x P/B ratio, losing about 40% to 50% of their value.

2) I spend a lot of time looking at these things, because financial services companies are only as good as their employees. Sure, the website has 45 people in the underwriter category, but about half of these people are in administrative or advisory roles, i.e., don't actually appear to be in the weeds on new deals. So you have about 15-20 actual investment professionals and $86 million per year in opex. I ask again, what exactly do these 100+ other employees do to support the 20 person investment team?

3) Where are the new hires? Where is the growth? It looks like the CFO has been interim CFO for 2 years. Why not name him full-time CFO, and if he doesn't want it, why haven't they been able to find someone else? No new verticals, no new people from PE / HF / Banking, no new law partners like Jeff Hammes from Kirkland (who is running his own SPAC now, by the way). This signals to me that the husband & wife, CEO and former CFO, are running this business like a vanity project, and asset management / law talent doesn't want to touch it with a ten foot pole.

I don't see an explosive growth story on the horizon for Burford. I see a slow death spiral with an ineffective management team competing against a market over saturated with other funders.
Eadwig profile picture
Excellent and very worthwhile analysis of a company that many find difficult to understand, especially the fact this is a company leading the way in establishing a secondary market for this asset class.
Your view of the YPF assets appears to be limited to a range of values from zero to the current carrying value, when those who have followed Burford closely for some years understand that there is very substantial upside potential to the current carrying value. Given the acknowledged importance of this swing factor, your overall assessment of the shares should take this full range into account, one would hope.
Orange Ranger profile picture
@Trevor Griffiths - thx, you are right, if it is worth more that would be additional upside but as far as my understanding goes the last market transaction of the YPF-assets is the basis for the fair value in Burford's balance sheet; what is your upside case and probability factor for the YPF asset ?
@Orange Ranger You've actually answered your own question! BUR has only adjusted to the value of the secondary market sales, not to any estimated value of the claim itself. Bear in mind that if the evenual outcome equated to that secondary sales value, the extremely sophisticated investors that have purchased a stake at that level would only break even. Obviously that's not their intention and, having done significant due diligence before committing their millions, see significant potential upside to their investment. What that upside is and what the probabilities are... much harder to determine. A theoretical range of outcomes is given in the FY19 report.
Orange Ranger profile picture
@1aconic - surely that was impressive but unintended from my end ! Thanks for pointing me towards the FY19 report disclosures on the YPF-assets with quite a bit of detail on potential outcomes. If these are the ranges than the probabilities assumed by the market for 'success' in this case are very low. It may require some detailed case reading on my side into the YPF-assets (with potentially no additional edge), or to invert: is Burford is a good buy without any further cash return from YPF-assets (fair value > market price) ...
Take into account the ROIC is for the whole duration of a case: average of 2 years with a very skewed distribution (many settled cases in less than 2 years as the court issues the hearing date, but a long tail of cases that can take many years to get an adjudication), that there's always cash in the balance sheet to meet the commitments (not included in the ROIC nor the IRR), and then you have to substract expenses, mainly staff, whose compensation is PE-style.
The point is Burford has not been able to grow it's deployed capital for 3 years (if we take for 2020 just H2) and they have to show they're able to grow again to return to the share price previous to MW attack.
Orange Ranger profile picture
@gusrezo - thanks for commenting; i agree that eventually the deployed capital needs to grow to further support the equity valuation (more money deployed = more potential return, c.p.); i think they just added $400m in senior debt in terms of liquidity (not sure if used for refinance or funding of deployments) ... on the commitments that are still to be deployed, purely on the litigation finance side Burford states that "of the $922 million of
litigation finance commitments, $575 million (62%) are discretionary and $347 million (38%) are definitive." ... so yes they will need to have the cash available to fulfill the capital call from their clients (like a reverse capital call compared to their fund business where they do the calling)
VMCH Corp profile picture
Great overview of the company. I was about to publish a similar article, but you beat me to it.

The company is best compared against the Blackstone Group in my opinion, but in the early days (20 years ago or so). I believe that this company will end up trading at a comparable multiple + keep growing for at least a decade.
Orange Ranger profile picture
@VMCH Corp thank you and looking forward to reading your views ! Being Blackstonesque is not a bad ambition level to have ;-)
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