BUR.L - Burford Capital

[Pondside47]

How is this 75% -80% calculated? Is it by dividing the portion of revenue that is unrealized by the total pretax profit? Then it can also be said 75% of the EBT is made up of realized gains.

[Pondside47]

This is nothing like CAT bonds. CAT bond return came down and capital invested went up because you can buy cat models from modelers and the bidding process became highly standardized and transparent. I have a hard time seeing lawsuits being standardized. Even in the U.K. markets where broker of litigation finance is ubiquitous, it doesn’t have the same dynamics as CAT bonds

[Guest Schwab711]

How is this 75% -80% calculated? Is it by dividing the portion of revenue that is unrealized by the total pretax profit? Then it can also be said 75% of the EBT is made up of realized gains.

 

Realized gains actually pay expenses. That's why people say unrealized is [X%] of EBT.

 

 

To Jerry's point, I think portfolio financing is the end point of this industry. The industry needs to originate enough claims to generally mirror overall contingency returns. Once we reach a point where sample sizes are large enough to bucket claims by type, returns will be lower but more predictable. If origination is high enough at that point, those with sufficient originations can securitize claims to allow end investors access to a stable, uncorrelated return product. That's the BUR bet as I see it.

 

As it stands, BUR lumpy and relative decent returns (that seem to be declining some) with a very high standard deviation. If origination count increases by enough, the truly good business is pooling claims to create 8%-10% yield securities which you can sell to the market at a 4%-6% coupon. BUR is the closest to that very high ROE business but there's no guarantee origination volume will increase fast enough to offset industry knowledge that is accumulating. But that's the investment thesis imo.

[writser]

Just some basic thoughts here. The selling point for litigation finance seems to be "if you don't have the resources, we'll litigate for you in return for a share of the profits". That makes sense, up to a point. However, if you look at a company like Shell or Microsoft there's no chance they will sell something with the risk/reward of a Peterson case - they have the resources to do it themselves. Burford can say what they want about how attractive litigation financing is but it seems to me that it is only an attractive option if you are so small that you can't afford legal costs and/or can't stomach the volatility. If Burford makes a consistent 30% IRR they are basically ripping off their clients, right?

 

It seems unlikely to me that there's a big market of $100m+ legal cases - I'd expect a large company with a solid legal department won't take a $50m haircut on the expected value of their legal portfolio just to get rid of it. So, if you want to deploy lots of money in this space you will probably end up buying a lot of small cases. And given that the field seems to be booming, is in the news, and there really isn't a barrier to entry to buying a couple of small legal cases, where lies the pricing power? If I'm a small company with a nice legal case for sale I'd just shop around a bit.

 

It seems to me that if a random petrostate gives away a billion to invest in this space, and you have a bunch of competitors, and (I think) there's a limited amount of case sellers, and the field is booming, that buying legal cases won't provide a 30% IRR for a long time anymore and that it will be harder and harder to deploy large ($1b+) amounts of money in this space (which is exactly what Burford has to do the next few years). It's like Warren Buffett buying microcaps.

 

Burford seems to be a smart operator, growing at the right time and locking up AUM while the getting is still good. Maybe there are a few good years ahead, maybe they have a first-mover advantage, good management, etc. etc. But I think that projecting a 30% IRR for a few more years is optimistic and it wouldn't surprise me if they start chasing (or are forced to start chasing) more marginal opportunities with, for example, the petrostate money.

 

Then again, I could be completely wrong and this company could have a decade of solid growth ahead of it. But in general I tend to bet against that. I'm a pessimist though. Also, I haven't made a significant attempt at valuing this company myself - could be that the current price is attractive despite my worries.

[cameronfen]

Just some basic thoughts here. The selling point for litigation finance seems to be "if you don't have the resources, we'll litigate for you in return for a share of the profits". That makes sense, up to a point. However, if you look at a company like Shell or Microsoft there's no chance they will sell something with the risk/reward of a Peterson case - they have the resources to do it themselves. Burford can say what they want about how attractive litigation financing is but it seems to me that it is only an attractive option if you are so small that you can't afford legal costs and/or can't stomach the volatility. If Burford makes a consistent 30% IRR they are basically ripping off their clients, right?

 

It seems unlikely to me that there's a big market of $100m+ legal cases - I'd expect a large company with a solid legal department won't take a $50m haircut on the expected value of their legal portfolio just to get rid of it. So, if you want to deploy lots of money in this space you will probably end up buying a lot of small cases. And given that the field seems to be booming, is in the news, and there really isn't a barrier to entry to buying a couple of small legal cases, where lies the pricing power? If I'm a small company with a nice legal case for sale I'd just shop around a bit.

 

It seems to me that if a random petrostate gives away a billion to invest in this space, and you have a bunch of competitors, and (I think) there's a limited amount of case sellers, and the field is booming, that buying legal cases won't provide a 30% IRR for a long time anymore and that it will be harder and harder to deploy large ($1b+) amounts of money in this space (which is exactly what Burford has to do the next few years). It's like Warren Buffett buying microcaps.

 

Burford seems to be a smart operator, growing at the right time and locking up AUM while the getting is still good. Maybe there are a few good years ahead, maybe they have a first-mover advantage, good management, etc. etc. But I think that projecting a 30% IRR for a few more years is optimistic and it wouldn't surprise me if they start chasing (or are forced to start chasing) more marginal opportunities with, for example, the petrostate money.

 

Then again, I could be completely wrong and this company could have a decade of solid growth ahead of it. But in general I tend to bet against that. I'm a pessimist though. Also, I haven't made a significant attempt at valuing this company myself - could be that the current price is attractive despite my worries.

 

The point Burford makes and others are that large public companies would rather pay for financing because if they pay for litigation by itself, they pay X out of earnings and if the market assigns a 20x multiple on the company, that decreases the market cap by 20x the cost of litigation.  Now obviously there are counterarguments to this: its a one time fee... (but again the payoff is one time too), but I think some of these costs do get hidden in operating expenses especially because you do have to litigate every year as a big company.  If you finance it, you don't have to take the earnings hit, which is why a lot of big companies even if they can afford it, give Burford and others their business via the portfolio business. 

[Jerry Capital]

Some cases come directly from CFOs the other come directly from law firms. I am not sure about the exact split.

 

The reason they get flows from law firms is because law firms don't have balance sheets they simply cannot finance the asset themselves all the LPs take their money out every year. That will most likely never change, it's hard for most professionals to change from having no skin in the game to putting up the $...

[peterHK]

Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

[Pondside47]

 

Discussion on litigation funding returns and competitions

[Normax59]

Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

 

Take a look at some PE financials, let me know if you find one that has mark to market revenue represented 65% by unrealized gains. Unrealized gains are so minute for them it’s not even an equivalent comparison. And if they did I would bitch about it.

 

 

[Guest Schwab711]

Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

 

You seem to think Petersen is marked at something other than sales despite that contradicting FV accounting standards and you are surprised others care? Every VC fund marks investments at the last raise. Honestly I don't think you get the magnitude of the suggestion BUR has a marking policy that doesn't match accounting standards. You even seem to think it's a positive somehow.

[cameronfen]

Just some basic thoughts here. The selling point for litigation finance seems to be "if you don't have the resources, we'll litigate for you in return for a share of the profits". That makes sense, up to a point. However, if you look at a company like Shell or Microsoft there's no chance they will sell something with the risk/reward of a Peterson case - they have the resources to do it themselves. Burford can say what they want about how attractive litigation financing is but it seems to me that it is only an attractive option if you are so small that you can't afford legal costs and/or can't stomach the volatility. If Burford makes a consistent 30% IRR they are basically ripping off their clients, right?

 

It seems unlikely to me that there's a big market of $100m+ legal cases - I'd expect a large company with a solid legal department won't take a $50m haircut on the expected value of their legal portfolio just to get rid of it. So, if you want to deploy lots of money in this space you will probably end up buying a lot of small cases. And given that the field seems to be booming, is in the news, and there really isn't a barrier to entry to buying a couple of small legal cases, where lies the pricing power? If I'm a small company with a nice legal case for sale I'd just shop around a bit.

 

It seems to me that if a random petrostate gives away a billion to invest in this space, and you have a bunch of competitors, and (I think) there's a limited amount of case sellers, and the field is booming, that buying legal cases won't provide a 30% IRR for a long time anymore and that it will be harder and harder to deploy large ($1b+) amounts of money in this space (which is exactly what Burford has to do the next few years). It's like Warren Buffett buying microcaps.

 

Burford seems to be a smart operator, growing at the right time and locking up AUM while the getting is still good. Maybe there are a few good years ahead, maybe they have a first-mover advantage, good management, etc. etc. But I think that projecting a 30% IRR for a few more years is optimistic and it wouldn't surprise me if they start chasing (or are forced to start chasing) more marginal opportunities with, for example, the petrostate money.

 

Then again, I could be completely wrong and this company could have a decade of solid growth ahead of it. But in general I tend to bet against that. I'm a pessimist though. Also, I haven't made a significant attempt at valuing this company myself - could be that the current price is attractive despite my worries.

 

The point Burford makes and others are that large public companies would rather pay for financing because if they pay for litigation by itself, they pay X out of earnings and if the market assigns a 20x multiple on the company, that decreases the market cap by 20x the cost of litigation.  Now obviously there are counterarguments to this: its a one time fee... (but again the payoff is one time too), but I think some of these costs do get hidden in operating expenses especially because you do have to litigate every year as a big company.  If you finance it, you don't have to take the earnings hit, which is why a lot of big companies even if they can afford it, give Burford and others their business via the portfolio business.

 

VIC on Burford: https://valueinvestorsclub.com/idea/Burford_Capital/0338285456

 

Most of the stuff they say we already know.  I highly recommend reading the part about the earnings generated by the asset management business and the unrealized gains accounting part. 

[racemize]

Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

 

You seem to think Petersen is marked at something other than sales despite that contradicting FV accounting standards and you are surprised others care? Every VC fund marks investments at the last raise. Honestly I don't think you get the magnitude of the suggestion BUR has a marking policy that doesn't match accounting standards. You even seem to think it's a positive somehow.

 

Honestly, every time you talk about this, it is very clear you haven't actually read the reports.  They are crystal clear that they do not think secondary sales are the primary driver for marking assets.  They are an input, yes, but they do not mark it based only on the secondary sale.  They believe that the valuation is based on the ultimate outcome and are conservative because if 0 is a possibility, then a secondary sale may not be the best mark (particularly from non-lawyers who don't understand the details of the case).

[Guest Schwab711]

Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

 

You seem to think Petersen is marked at something other than sales despite that contradicting FV accounting standards and you are surprised others care? Every VC fund marks investments at the last raise. Honestly I don't think you get the magnitude of the suggestion BUR has a marking policy that doesn't match accounting standards. You even seem to think it's a positive somehow.

 

Honestly, every time you talk about this, it is very clear you haven't actually read the reports.  They are crystal clear that they do not think secondary sales are the primary driver for marking assets.  They are an input, yes, but they do not mark it based only on the secondary sale.  They believe that the valuation is based on the ultimate outcome and are conservative because if 0 is a possibility, then a secondary sale may not be the best mark (particularly from non-lawyers who don't understand the details of the case).

 

I think you are partially misreading my posts and hand waving away some major issues.

 

While my post does seem to assume an opinion you know I hold, I don't actually state it within this comment that I think Petersen is marked at $800m as of 12/31/2018. So when you say it looks like I haven't read the reports, it's your misreading causing the problem.

 

The point of the post is that no one seems to care that in the past BUR hasn't acknowledged their own sales as a basis of FV. The inconsistency of logic (though by different long-leaning posters) is baffling. I think one thing that keeps getting misunderstood is the idea of selling in to the secondary market (BUR selling to sophisticated 3rd party investor) vs secondary transactions BUR is not party to (the $660m valuation mentioned by BUR that they didn't mark to). I understand considering and acknowledging, but not benchmarking to the latter. I don't understand not benchmarking to the former. VCs and PEs benchmark in this manner consistency under GAAP and IFRS. For VCs, they occasionally also hold relatively binary outcomes on these investments. The idea that it is somehow acceptable to ignore that the sale of Petersen interests to sophisticated 3rd parties that also considered the binary nature of the claim because the outcome is binary defies common sense. FV accounting standards must be followed except when the outcome is binary? What an odd rule to assume. Purely as an example, if the market considered the likelihood of payoff for Petersen to be 50/50 and the implied valuation is $1b, you can imagine that the purchaser thought that the ultimate payoff will be greater than $2b. This isn't rocket science.

 

BUR has acknowledged that they have lost money on writeups before, contrary to what is assumed on the thread. That loss occurred in 2H18 and was "fair-sized".

 

 

Edit: Another example of the logical disconnect within the thread. Some have said that Petersen can't be marked at secondary sales (BUR selling to other parties) because the cases are binary but they also assume the Petersen valuation in BUR's BV and future earnings. The idea that it's risky so it can't be marked higher, but also it's definitely going to happen so it's undervalued is logically inconsistent. Whatever path is chosen should be consistent with BUR's own accounting, which is why it's logical that those sales represent the marks.

 

The binary nature of the outcomes and the homeruns representing a large portion of overall value is the whole point behind my criticism. You can't expect smoothed accounting in a volatile business and multiples associated with smooth cash flows because the company is smoothing the accounting. It doesn't make any sense. Further, if the Petersen case somehow ultimately fails to pay off, BUR will have some serious issues and the stock will decline drastically.

 

Whether you like it or not, the returns of BUR will also be binary (or nearly mirror the probability distribution of Petersen).

[Guest Schwab711]

A couple things regarding marking comments by BUR that are worth clearing up.

 

First, a timeline of sales:

 

12/30/2016: BUR sells an undisclosed amount of their Petersen interest. The total amount sold between 12/2016 and 3/2017 was 10% at an implied valuation of $400m. Based on the 2016 AR, we know that this sale was 1% at an implied valuation of $400m.

 

3/13/2017: BUR completes the remainder of the 10% sale.

 

https://www.burfordcapital.com/wp-content/uploads/2017/03/2017.03.14-Burford-RNS-re-further-Petersen-Sales-FINAL-2.pdf

 

6/12/2017: BUR sells an additional 15% interest in Petersen claim at an implied valuation of $440m.

 

https://www.burfordcapital.com/newsroom/burford-reports-secondary-market-activity-press-release/

 

7/10/2018: BUR sells an additional 3.75% interest in Petersen claim at an implied valuation of $800m.

 

https://www.burfordcapital.com/newsroom/petersen-appeal-result-update/

 

6/23/2019: BUR sells an additional 10% interest in Petersen claim at an implied valuation of $1b.

 

https://www.burfordcapital.com/wp-content/uploads/2019/06/2019.06.24-Burford-Capital-Supreme-Court-denial-of-Petersen-hearing-sale-of-Petersen-interests-FINAL.pdf

 

 

 

Now, what has BUR said about their FV accounting policy.

 

1H2016 Report: https://www.burfordcapital.com/wp-content/uploads/2016/08/Burford-Capital-2016-Interim-Report.pdf

 

There is also a third way to earn income, which

is actually to engage in secondary market

transactions. This has not historically been a

significant part of Burford’s business; we have

largely operated a “buy and hold” model.

There were several reasons for that: our average

transaction size used to be smaller and thus

the level of effort to syndicate a portion of a

smaller investment did not make sense; the

potential syndication market was in any event

very thin; and on the occasions when we did

dip our toe in the water, the complexity of each

undertaking was such that it did not seem

worthwhile. However, we do think that some

secondary market activity is likely to develop

as more capital becomes aware of litigation

finance and we intend to be in the vanguard of

establishing such a market. We view the ability to

originate transactions and then sell participations

in them as a way of managing risk (especially

in larger or riskier investments) and enhancing

capital efficiency as well as potentially opening

up additional avenues for us to earn income.

Thus, in the current period, we closed one

secondary market transaction, in which we

sold a portion of our investment to a third

party investor at a gain and at a price that

suggested the value of the majority of the

investment that we retained was worth more

than its carrying value, and we had an offer

(which we did not accept) to sell a portion of

another investment at a similarly enhanced

value. That third party market activity resulted in

valuation adjustments because it established

arms-length values for the assets concerned.

While we have historically resisted significant

valuation adjustments during pending litigation,

litigation is not the only asset class in the world

that is hard to value and has binary results that

are difficult to predict. We are also mindful that

we have by now a significant track record – not

only of making money across our investment

portfolio, but of never having increased the fair

value of an investment only to have to reduce it

later following a realised loss (although that will

doubtless happen at some point). Thus, while

we have railed against the IFRS approach to

asset valuation in the past, we think our business

and the asset class as a whole may have now

developed the scale and maturity to become

more mainstream, especially when there are

objective third party transactions to which to point

– although we need to emphasise that it is entirely

possible for a fair value increase to be reversed

by an actual result (and for our earnings volatility

to increase somewhat as well). That said, we

note that our approach to fair value adjustments

remains quite consistent (and conservative).

Even with the adjustments described above, the

level of unrealised gain in our litigation finance

portfolio has remained relatively constant over

time, at 26% of the portfolio’s value at both 30

June 2016 and also at 31 December 2015, up

only modestly from 22% at 31 December 2014

 

In 1H 2016, BUR thought secondary transactions were an important factor in FV marking.

 

 

2016 AR: https://www.burfordcapital.com/wp-content/uploads/2017/03/BUR-26890-Annual-Report-2016-web.pdf

 

The development of secondary market activity

naturally introduces the IFRS treatment of such

transactions and their impact on our long-running

discussion of fair value. It is inescapable that

a significant secondary market transaction is a

potentially key input into our determination of the

fair value of an investment, and to the extent that

there is truly a secondary market with appetite for

a significant amount of one of our investments,

we are to some extent joining the mainstream of

the financial services world where market-based

pricing is accepted unquestioningly as the basis

for accounting “marks” on assets. We do, however,

remain cautious, as we remain entirely aware that

a litigation investment is capable of going to zero

in one fell swoop, unlike many other categories of

assets. Thus, we do not reflexively accept a market

price for a portion of one of our investments as

being necessarily indicative of the market clearing

price for the investment or the appropriate

carrying value for Burford’s accounts. Instead, we

engage in more analysis, including looking at the

size of the transaction and the market conditions

around the offering, especially given the early

days of this secondary market process. As a result,

despite concluding a small toehold Petersen

sale in December 2016 at what was ostensibly

a $400 million implied valuation for our investment,

for the reasons outlined above we did not believe

that the sale of a mere 1% of the investment made

it appropriate to value the entire investment at

that implied value, and we did not do so; we

increased the fair value of the Petersen investment

to a level substantially less than that implied value

in 2016, although it was our largest fair value

adjustment. In total, 2016 saw, as usual, a number

of fair value adjustments in the portfolio, both

positive and negative, and total unrealised gain

increased modestly as a percentage of the total

portfolio asset value, from 26% in 2015 to 31%

in 2016.6 Finally, we have not reached any

conclusion about the impact on the fair value

of the Petersen investment in 2017 of the further

sale we have just announced and we will not

do so until the valuation process leading to the

release of our interim accounts in July.

 

At 2016 AR, BUR acknowledged that the only reason Petersen wasn't written up to the implied valuation was because only a 1% interest had been sold at that point. By March 2017, 9% more was sold. Prior to the 1H 2017 report, 25% of Petersen had been sold.

 

 

 

I will continue this later to point out some misleading comments by BUR along the way that incite analysts in to believing that the mark is less than the implied valuation while remaining coy about correcting their misinterpretation. BUR is following IFRS and they are lawyers (both not surprising). You need to read their reports/presentations as if they were written by lawyers. The words written seem to be picked carefully.

[peterHK]

Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

 

Take a look at some PE financials, let me know if you find one that has mark to market revenue represented 65% by unrealized gains. Unrealized gains are so minute for them it’s not even an equivalent comparison. And if they did I would bitch about it.

 

Go look at any leveraged real estate entity under IFRS. They all monkey with cap rates to show FV gains y/y. It's not 60%, but it's not a small number either (looking at BPY for instance).

 

The reason we can trust those IFRS numbers is that, again taking BPY, they repeatedly sell assets for above IFRS values. That shows us the marks are conservative.

 

Burford has repeatedly generated cash from investments, and they have also shown with Teinver and Petersen that there exists a secondary market and what the marks for those investments are.

 

Now, we don't cry when BPY recognizes a 5 or 10% % gain on sale because they are marking assets at IFRS and they are able to arrange a secondary sale at a higher price. Similarly, I don't think we should be crying that Burford's estimate of value is different than a secondary market. Was the secondary market's estimate of Enron correct? Was the secondary market's estimate of Snapchat at the IPO correct? What about Blue Apron's IPO? How about Zoom? The IPO price didn't seem so "fair" for that when it rocketed 100% on the day.

 

The idea that the secondary market represents some sort of all knowing entity that is appropriate to mark your investments to is questionable. Yes, Burford's marks are significantly below market, unlike BPY, but I think the principle stands (at least for me): we know their marks are conservative, we know that secondary markets are not always correct, and I for one have far more comfort in Burford's accounting and fair value estimates than I do some set of institutional investors looking with a 15% cost of capital vs. Burford's 30%.

 

If I thought for all intents and purposes that the fair value of my assets was $100, and I was able to sell them to $200 to some idiot and recognize $100 gain on sale, then I would do so. What I would NOT do is adjust my accounting.

 

Further, I'd look at IAS 37 (https://www.iasplus.com/en/standards/ias/ias37)  as a sort of inversion for Burford: you mark litigation liabilities based on estimates and based on specific events happening. One marks liabilities similar to how Burford marks assets, which makes intuitive sense because Burford is the other side of those liabilities. This isn't a real estate asset where we can get this year's NOI, cap it, and boom, you have an asset value. These are all contingent assets. My reading of Burford holding this below the most recent sale price is that they have a different view of the risk than the market does.

 

Further, on contingent assets, one doesn't even recognize them AT ALL, until the recognition of income is virtually certain. One could argue Burford should account for cost only, and realize all gains on receipt of cash. I'd be fine with that tbh.

 

Here is Burford's own discussion of their accounting:

https://www.burfordcapital.com/investors/investor-information/financial-reporting-and-investment-valuation/

 

Here's Burford on their significant estimates:

 

"Fair values are determined on the specifics of each investment and will typically change upon

an investment having a return entitlement or progressing in a manner that, in the Group’s judgement,

would result in a third party being prepared to pay an amount different from the original sum invested

for the Group’s rights in connection with the investment"

 

Further, because these are level 3 assets, secondary sales are just one valuation input. That is in compliance with IFRS, so Burford is doing nothing wrong by disagreeing with where one or two secondary marks are if it's own valuation process differs. For instance the single difference could be an institutional investor willing to buy the asset at a 20% discount rate when Burford wants 30%. That does not mean Burford is wrong or that Burford should change it's process or it's marks: it means that two parties are willing to pay different prices for the assets as an outcome of two different individual return hurdles. That's it.

 

Here's Burford's explanation:

 

"The development of secondary market activity

naturally introduces the IFRS treatment of such

transactions and their impact on our long-running

discussion of fair value. It is inescapable that

a significant secondary market transaction is a

potentially key input into our determination of the

fair value of an investment, and to the extent that

there is truly a secondary market with appetite for

a significant amount of one of our investments,

we are to some extent joining the mainstream of

the financial services world where market-based

pricing is accepted unquestioningly as the basis

for accounting “marks” on assets. We do, however,

remain cautious, as we remain entirely aware that

a litigation investment is capable of going to zero

in one fell swoop, unlike many other categories of

assets. Thus, we do not reflexively accept a market

price for a portion of one of our investments as

being necessarily indicative of the market clearing

price for the investment or the appropriate

carrying value for Burford’s accounts. Instead, we

engage in more analysis, including looking at the

size of the transaction and the market conditions

around the offering, especially given the early

days of this secondary market process. As a result,

despite concluding a small toehold Petersen

sale in December 2016 at what was ostensibly a $400 million implied valuation for our investment,

for the reasons outlined above we did not believe

that the sale of a mere 1% of the investment made

it appropriate to value the entire investment at

that implied value, and we did not do so; we

increased the fair value of the Petersen investment

to a level substantially less than that implied value

in 2016, although it was our largest fair value

adjustment. In total, 2016 saw, as usual, a number

of fair value adjustments in the portfolio, both

positive and negative, and total unrealised gain

increased modestly as a percentage of the total

portfolio asset value, from 26% in 2015 to 31%

in 2016.6 Finally, we have not reached any

conclusion about the impact on the fair value

of the Petersen investment in 2017 of the further

sale we have just announced and we will not

do so until the valuation process leading to the

release of our interim accounts in July."

 

You can absolutely argue that a 10% sale is a much more important mark, or that the 15% sale is a more important mark. We can guess at what Petersen is held on the balance sheet at and the difference may be for this level 3 asset that Burford has a different process than the buyers. Let's wait and see what this quarter brings: the sale of a further 10% to a wide range of institutions may cause them to mark this very close to market, we'll just have to see. I'd be willing to bet that there will be A LOT of questions on the call about it, and a lot of discussion in the annual report on it.

 

I doubt this will convince anyone because the bears seem deadset on never becoming comfortable with Burford, and the bulls seem deadset on saying that it's fine.

 

[Jerry Capital]

I think both sides have said enough of these specifics.

 

Ideally the thread could evolve to sharing some interesting links, videos, news etc.

 

I'll start

 

Here is a good trade journal I found for litigation financing. Does anyone else have similar resources they found interesting?

 

https://litigationfinancejournal.com/top-judge-recommends-london-establish-special-fund-tackle-uks-access-justice-problem/

 

[Normax59]

It was mentioned that PACER could be used to track their cases and figure out when certain case recoveries came in. Companies located in the UK must submit annual accounts as well as other documents to the Companies House. Here is a link to one of Burfords' subsidaries you'll see on page 15 of the 2017 annual accounts that it lists some US based LLC's that they could be using to hide their dealings. 

 

https://beta.companieshouse.gov.uk/company/07359945/filing-history

 

 

[Pondside47]

I did a reconciliation of the ROIC column vs my calculation. For CONCLUDED investments,ROIC = Total Recovered / Total Deploy -1. For the most part, the difference between what I get vs what's shown in the PDF file is between 10~5%. A lot of it due to rounding.

 

However, for partially realized cases, the numbers are way off. The reason is because, I think, the formula does not work for partially realized cases. The correct formula for partially realized cases should be ROIC = (Total Recovered (cash) + Fair value of what's carried on the book )/ Total Deployed -1.

 

For the Petersen case, the ROIC is shown  as 2553%. The only explanation I can come up is this reflect the carried value of the remaining stake as of 12/31/2018. (2553%+100%)*18.2 - 136 = 347. This should be the carried value of the Petersen case. The total unrealized write up to date is 347 - 18.2*0.7125 = 334 mm plus the incremental realized value of the 3.75% stake sold over what it was carried on the book back then. I estimate this is about 334mm + 15mm = 349mm This implies a valuation of the original stake of 487mm. Much smaller than the 800mm valuation in the 3.75% transaction to fund Eton Park, smaller than 660 of the 2nd market trading. The Eton Park stake is carried on the book at cost as can be seen in case 167287 of the 2016 Vintage.

Burford_Capital_Investment_Data.pdf

[Normax59]

I did a reconciliation of the ROIC column vs my calculation. For CONCLUDED investments,ROIC = Total Recovered / Total Deploy -1. For the most part, the difference between what I get vs what's shown in the PDF file is between 10~5%. A lot of it due to rounding.

 

However, for partially realized cases, the numbers are way off. The reason is because, I think, the formula does not work for partially realized cases. The correct formula for partially realized cases should be ROIC = (Total Recovered (cash) + Fair value of what's carried on the book )/ Total Deployed -1.

 

For the Petersen case, the ROIC is shown  as 2553%. The only explanation I can come up is this reflect the carried value of the remaining stake as of 12/31/2018. (2553%+100%)*18.2 - 136 = 347. This should be the carried value of the Petersen case. The total unrealized write up to date is 347 - 18.2*0.7125 = 334 mm plus the incremental realized value of the 3.75% stake sold over what it was carried on the book back then. I estimate this is about 334mm + 15mm = 349mm This implies a valuation of the original stake of 487mm. Much smaller than the 800mm valuation in the 3.75% transaction to fund Eton Park, smaller than 660 of the 2nd market trading. The Eton Park stake is carried on the book at cost as can be seen in case 167287 of the 2016 Vintage.

 

They don't base partially realized calculations on carry values, its based on the amount they have sold, try (18.2*.2875) = 5.2325 the number ties out to their IRR as well based on the payment dates they have given for Petersen.

[Normax59]

I did a reconciliation of the ROIC column vs my calculation. For CONCLUDED investments,ROIC = Total Recovered / Total Deploy -1. For the most part, the difference between what I get vs what's shown in the PDF file is between 10~5%. A lot of it due to rounding.

 

However, for partially realized cases, the numbers are way off. The reason is because, I think, the formula does not work for partially realized cases. The correct formula for partially realized cases should be ROIC = (Total Recovered (cash) + Fair value of what's carried on the book )/ Total Deployed -1.

 

For the Petersen case, the ROIC is shown  as 2553%. The only explanation I can come up is this reflect the carried value of the remaining stake as of 12/31/2018. (2553%+100%)*18.2 - 136 = 347. This should be the carried value of the Petersen case. The total unrealized write up to date is 347 - 18.2*0.7125 = 334 mm plus the incremental realized value of the 3.75% stake sold over what it was carried on the book back then. I estimate this is about 334mm + 15mm = 349mm This implies a valuation of the original stake of 487mm. Much smaller than the 800mm valuation in the 3.75% transaction to fund Eton Park, smaller than 660 of the 2nd market trading. The Eton Park stake is carried on the book at cost as can be seen in case 167287 of the 2016 Vintage.

 

They don't base partially realized calculations on carry values, its based on the amount they have sold, try (18.2*.2875) = 5.2325 the number ties out to their IRR as well based on the payment dates they have given for Petersen.

 

5.1 to be exact.

 

Credits to Schwab.

 

[Liberty]

Some commentary on the company in this letter:

 

https://static1.squarespace.com/static/58f7798829687f53ff30baf8/t/5d2cb4770f60db0001b4a56c/1563210872722/Upslope+-+2019Q2+Letter.pdf

[peterHK]

On the uplisting, the implication that them not uplisting is a problem because AIM names are subject to potentially less stringent accounting requirements. Burford has been over that: they have issued bonds on the main board, and so they are treated as an LSE company.

 

The CEO/CFO being married is indeed a red flag, but frankly so is a father + son duo running a company. I don't see why it's any worse than that, yet we frequently praise "founder led" companies. All accounts I've read are that the CEO and CFO are both upstanding people with significant prior experience and absolutely no history of any fraud or funny business.

 

On the accounting, yes it's opaque.

 

So on my end, I find the uplisting one in particular quite odd because I'm reading it as a "they might be doing funny business because they're AIM listed", when I think that's not really a valid issue.

[Jerry Capital]

It should also be clear that at some point they probably will uplist. The reason they are on the AIM is because they did, indeed start there as a micro-cap, and specifically started in the UK because the UK is the standard for international contract law. This is why they as well as their competitors are there. You might say that lowers the level of "suspicion," it all flows naturally from the history of the business. 

 

These are all very valid concerns and should be expressed in your position size.

 

 

[Guest Schwab711]

Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

 

Take a look at some PE financials, let me know if you find one that has mark to market revenue represented 65% by unrealized gains. Unrealized gains are so minute for them it’s not even an equivalent comparison. And if they did I would bitch about it.

 

The idea that the secondary market represents some sort of all knowing entity that is appropriate to mark your investments to is questionable. Yes, Burford's marks are significantly below market, unlike BPY, but I think the principle stands (at least for me): we know their marks are conservative... [snip]

 

 

 

Further, I'd look at IAS 37 (https://www.iasplus.com/en/standards/ias/ias37)  as a sort of inversion for Burford: you mark litigation liabilities based on estimates and based on specific events happening. One marks liabilities similar to how Burford marks assets, which makes intuitive sense because Burford is the other side of those liabilities. This isn't a real estate asset where we can get this year's NOI, cap it, and boom, you have an asset value. These are all contingent assets. My reading of Burford holding this below the most recent sale price is that they have a different view of the risk than the market does.

 

Further, on contingent assets, one doesn't even recognize them AT ALL, until the recognition of income is virtually certain. One could argue Burford should account for cost only, and realize all gains on receipt of cash. I'd be fine with that tbh.

 

 

I'd be willing to bet that there will be A LOT of questions on the call about it, and a lot of discussion in the annual report on it.

 

 

The first part is literally the point of FV accounting. It's to mark positions at what the market would pay (not you, me, the company, or otherwise - what the mark would take the asset for). That's why secondary transactions (especially ones where you [the company]) are personally party to matter so much.

 

Second, IAS 37 specifically says financial instruments are exempt from the accounting standard you bring up. Litigation claims can be seen as roughly equivalent to CDS contracts. They have negative carry (expenses of case or on-going premiums for CDS) and have a binary payoff. The CDS has a known payoff vs unknown. In that case we can look at European call options, which have an unknown binary payoff. Both Euro calls and CDS are marked to FV greater than $0 without complaint. These are often illiquid markets and still marked to secondary transactions. I think BUR is misleading people with the idea of overly conservative accounting. At some point, it allows BUR to smooth results that by their nature aren't smooth (I'm repeating myself at this point but this feels like VRX so I'm not surprised).

 

Third, I agree and hope that this is addressed on the call. I understand strategically why BUR doesn't want to state their marks but that's the downside of taking outside money.

 

 

 

In other examples of 'conservative' being thrown around in potentially misleading ways, BUR said in the 11/12/18 investor day presentation that:

Only two investments that were written up, amounting to 0.2% of total write-ups by dollar value, have ever turned into a loss

 

First, this comment implies the loss was roughly $1m or so. It's a weird stat. Anyway, in the 2018 AR, BUR noted that one claim that was previously written up was twice written down 2 years ago and in 2H 2018, which caused a "fair-sized" loss. So while that stat was correct on 11/12/2018 about completed investments, it's misleading. It looks like BUR writes down multiple claims every semi-annual period.

 

 

On 7/25/2018, BUR noted in their 1H 2018 investor presentation regarding Petersen:

We sold 3.75% of our entitlement for an effective

cash price of $30 million, implying a valuation of

$800 million for the original total Petersen

entitlement.

 

We carry our Petersen investment at a

lower carrying value than that for the

reasons we have enunciated previously.

 

Obviously Petersen wasn't marked at an implied valuation of $800m at 6/30/2018 if the sale supporting that valuation occurred on 7/11/2018. What BUR wrote isn't wrong. It can even be read as an appropriate comment. It's about the method of communicating though. BUR is clearly run by lawyers that know how to spin a story.

 

 

I'm not trying to pick on you, Peter. It just feels like the narrative of BUR doesn't match the financial picture so i'm trying to attack the narrative.

[Jerry Capital]

It's a good point re the ability to smooth out earnings.

 

It is no appropriate to value Burford on earnings, its clear that NI is not FCF... A company is worth the present value of its future FCF.

 

BUR management knows NI is not FCF and therefore uses only a modest amount of leverage. You can't pay off debt with NI!

 

If they were giving guidance and using a lot of leverage and supporting those with "adjustments" (like VRX) I would run very quickly... They are not doing that.

 

So even if they are keeping the Peterson case a little low to "smooth" earnings it does not present blow up risk, it simply means paying a multiple of earnings is not the best way to look at the business... And as an analyst we have to decide what the normalized FCF for the company is (not an easy task indeed!).

 

If management was selling shares or increasing the leverage those would be deal breakers for me.