Profits double at Burford Capital

Steve Clayton - Fund Manager

23 March 2018

Burford Capital is a pretty unique business. It’s the largest player in the world of litigation finance. Rather than fund PPI claims, or the pursuit of spurious “a tummy bug ruined our holiday and it was the hotel’s fault” lawsuits, Burford provides capital to allow commercial litigants to maximise the value of their legal claims.

Burford look at the law as a unique asset market. In commercial law, there is typically a large sum of money at stake, with two or more parties claiming the right to it. Companies can pursue these claims but pursuing a claim for recovering what is due, means lowering profits in the near term. Quoted companies in particular, don’t like things that lower profits.

So along comes Burford, who essentially offer a no-win, no-fee service. They’ll assess the case’s merits and offer to finance it if they think it’s likely to succeed, in return for a share of the proceeds.

Stellar results

Not only is it the largest stock holding in the HL Select UK Growth Shares fund, it’s also by far and away the most successful position we have taken to date. Earlier in March Burford released full year results that saw revenues and profits more than double, and the shares jumped by 31% on the news.

The results, while no guarantee of what lies in store for the future, showed the business making strong progress. One of their larger claims, Teinver, which related to an airline that was basically stolen by Argentina, reached a favourable judgement earlier in the year and Burford have brought its realisation forward by selling on their claim for a 700%+ gain on their investment.

The Petersen claim, also against Argentina, remains in progress. Burford sold part of their interest early in 2017 valuing their stake in the claim at over $400m. Although no further judicial milestones have been passed, some of the new investors in the claim have sold their stakes on at significantly higher values, suggesting confidence in the Petersen claim is building.

The GKC litigation fund management business that Burford acquired in late 2016 has grown significantly and now allows Burford to generate income from legal assets under management that are not wholly dependent on a case’s outcome. Additional funds have been raised and we are hopeful that performance fees will soon start to be earned in this division.

Healthy outlook

Results are always unpredictable in the short term for Burford. Claims may take years to settle, and if they go to court, judges can take a long time to actually deliver a verdict. No-one is paying any attention to Burford’s desire to publish results on a particular day. But what we can look at with a degree more certainty is how much Burford is able to invest into backing new claims and the rate of return it is generating from existing cases. Here the numbers look very encouraging.

Last year, Burford generated a 75% return on invested capital, its highest for some years. Because cases typically take more than a year to reach a conclusion, the Internal Rate of Return, which looks at the return on an annualised basis, was 31%. The investment portfolio now stands at over $1.5bn and Burford invested almost $700m in new commitments last year, almost double the previous year’s level. If those rates of return hold up, then the outlook for profits, which came in at $265m after tax last year, ought to be very healthy indeed.

The Petersen claim has the potential to deliver a one-off gain of exceptional magnitude. The case relates to Argentina expropriating an oil company that was worth billions of dollars, bankrupting Petersen, who owned 25% in the process.

The scale of the claim is such that the case may well be fought for many years to come and Argentina is likely to pursue every avenue of appeal, should judgements go against it. So we would not be surprised to see further sales by Burford along the way, once their current lock-up agreement expires at the end of this year.

Lock-in profits

Burford’s results were one of the most impressive sets of numbers we have seen in a fair old while. Despite this, we actually took the decision to sell a slice of the holding. Having more than doubled in value since we first invested in December 2016, the position had grown to be valued at over 6% of the fund.

That’s a big exposure to a medium sized company, however promising. So we took the decision to trim the holding, locking in some of our profits. We retain a position of around 5.5% of the fund’s value in Burford, reflecting our confidence in its prospects.

The monies have been reinvested by increasing the holding of Ideagen, where corporate performance has been very strong since we first invested. The company has exciting growth targets which, if achieved, will see the business roughly double in scale over the next three years.

Getting hold of the stock was not easy, but we discovered an unidentified potential seller out there by anonymously advertising our interest on an electronic brokerage, which institutional investors use to trade blocks of stock discreetly.

Negotiate on price

For days we found ourselves at loggerheads over the price. We were happy to pay the mid-price for the stock, the seller would electronically signal that they wanted more, increasing their demanded price with each day that we declined to pay up.

In the event, late on Thursday a medium sized trade, at the level we had been advocating was printed, whether our reluctant seller was involved or not, we will never know. When we posted our interest the following morning the seller immediately capitulated and sold us almost 1.5 million shares, equivalent to almost four days of normal trading volumes, at the level we had been holding out for.

Events like this prove the benefit of fund management, for the real issue was not the half-penny per share that we were arguing over, but the ability of professional investors to deal well within the spread price on their clients’ behalf.

Throughout the period when we were haggling, the bid (sell) and offer (buy) prices of Ideagen had been either side of our desired level. We could have dealt quicker, by paying a higher price, but even then, we doubt we could have achieved the scale of purchasing we did. Equally, the seller could have sold to a market maker at a lower price, but even though they blinked first, they still got a much better outcome for their clients too.

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