BUR.L - Burford Capital

[matts]

 

 

OK, fair enough? Question though... were these details "unearthed" by MW and then after being called out, subsequently disclosed and written down, or disclosed willingly by Burford?

 

By details, you must mean the exchange of the litigation proceeds to debt, then debt to an equity stake, and then taking a loss on that equity while never adjusting the main metric which they peddle to investors. No, these details were not disclosed by Burford. All they did was quietly write down a closed case once they were able to water it down with large gains in other cases. The details were absolutely "unearthed" by MW.

 

[peterHK]

FWIW, using just the AM side and annualizing management fees, you can rather cautiously get to 450-500 on that alone. The liabilities can likely be offset by the Peterson stake alone... leaving everything else.... pretty much free, IF it's real...

 

Pretty spectacular how one person's opinion, based entirely off of already known public information can effect the valuation like this. But that what you get when you list on a shitty exchange and use confusing and sketchy accounting metrics(even though they are doing so not by choice, but because IFRS requires them to).

 

At this point, I think its a buy.  Maybe a small position, but no way this is worth book value. 

 

Basically, anyone who was reading this forum critically basically knew they were smoothing and juicing earnings (hat tip Schwab and nomax) in ways that were sketchy, but not illegal as far as the accounting goes.  I don't think people knew the intricacies of the Napo deal, but you can guess there was some shady stuff going on that we didn't know about just based on there dissembling behind Peterson and mark to market.  MW didn't really say anything unexpected, although the Napo accusation and Desert Ridge were new examples. 

 

Also, MW ROIC calculations are wrong, which is a big part of the short.  They use committed capital divided by net returns which is problematic because over 50% of total capital was deployed in the last 2 years.  Most of those cases are not resolved so it's unfair to use the entire capital commitment as the denominator for returns that are likely not even close to being closed.  This is why earlier years had good ROIC calcs but 2018 and 1H2019 had terrible.  Additionally Peterson which external parties value at 1-2billion alone and the other 3 big cases skew IRRs a lot.  Thirdly they seem to use total capital committed.  Burford uses total capital deployed.  Neither is quite right.  80% of the capital committed is actually used.  That should be the number in the denominator if you use capital committed. 

 

MW also way exaggerating that liquidity thing.  They can literally just sell Peterson and fix that problem and the rest of their investments are not just going to return cost.  Debt is due at 2022 at the earliest. 

 

Just thinking back of the envelope: What is left over of Peterson is worth the debt.  They still have $800m investments leftover at cost.  Assuming a 20% IRR which is lower than what Burford currently reports and is likely lower than correcting MW ROIC calc (Peterson gains by itself recovers all invested capital), on the 800m investment probably makes it worth 1.5x book (after taking out overhead).  Assuming a 20% IRR  the sovereign wealth fund would deliver 150-200m USD (3 years times the payout on IRR - internal stake) in earnings alone (although this fund is only 25% committed).  I didn't look at the funds specifically yet, but they have 2.8b in AUM. If they only keep 1b of the 1.8b remaining in assets, that still is a perpetual earning stream of 40m dollars a year (assuming a 2 and 20 format - costs).  That is worth another 400m USD conservatively.  This is just back of the envelope, but there are multiple ways to win. 

 

Based on this short and the Jumia short, I think the big shorting companies are providing research that looks unbiased and damning but is very biased and designed to cause a huge fall in the stock.  The whole teasing the announcement and providing enough information to identify the stock and causing people to panic was genius and much respect, although maybe that treads into market manipulation (although no one would be complaining if it were a long).  I think they are trading on their credibility only to move markets and twisting the information for maximal gain.  Its a profitable strategy for them but I think looking at these shorts after they announce may be a profitable venture.  I think Burford was a little too expensive for my taste before, but clearly people just panic based on a big name shorting.

 

Took the words from my mouth. I think MW had some good stuff, and some stuff that made little sense, and this was a prime case where tanking the stock can self reinforce by making the business more vulnerable. MW was very smart in how they did this, from their POV, but I think the market has sort of over-reacted to this whole thing.

[5xEBITDA]

What penalties do they face for backing out of litigation commitments?

[cameronfen]

What penalties do they face for backing out of litigation commitments?

 

You can sell them to other litigation financers.  Typically you don't get that good a deal as these deals are the most attractive types of deals for litigation financers (case already close to settlement/judgement imply high IRRs).  But again they can still continue to monetize Peterson for the time being. 

[5xEBITDA]

What penalties do they face for backing out of litigation commitments?

 

You can sell them to other litigation financers.  Typically you don't get that good a deal as these deals are the most attractive types of deals for litigation financers (case already close to settlement/judgement imply high IRRs).  But again they can still continue to monetize Peterson for the time being.

 

Who would buy them? I'm interested in what % of Burford's ~$700 million future litigation commitments they would ultimately be on the hook for if they wanted to back out of everything.

[cameronfen]

What penalties do they face for backing out of litigation commitments?

 

You can sell them to other litigation financers.  Typically you don't get that good a deal as these deals are the most attractive types of deals for litigation financers (case already close to settlement/judgement imply high IRRs).  But again they can still continue to monetize Peterson for the time being.

 

Who would buy them? I'm interested in what % of Burford's ~$700 million future litigation commitments they would ultimately be on the hook for if they wanted to back out of everything.

 

IMF for 1.  DE Shaw and other hedge funds with lots of assets in litigation finance.  Then you can go down the list of all the smaller players, public and private.  These would be attractive assets if they had to sell, because much of the trial has already played out so you are more sure about the settlement or damage amount.  Also, the time to recovery is shorter so IRRs are much higher.  That's why litigation firms don't typically sell assets that need more funding.  I think if IIRC the youtube video linked upthread discusses this when discussing types of assets litigation financiers buy.  I don't think it would be a problem to sell all of these commitments but they probably would make significantly less money then if they deployed the capital themselves. 

 

I'm not sure about this, but I don't think this is considered a pure liability per se.  What I mean is that you could actually sell some of these commitments for some money.  As some of these commitments will have obviously positive IRRs due to an attractive turn in litigation procedings.  Don't quote me on that though as I am not sure.   

[Guest cherzeca]

I view Burford similarly to KKR and Blackstone, insofar as much of their investment merit is attributable to "unrealized gains".  it's in the nature of the investment, private non-market valued assets comprise a significant portion of the investment prospects...though KKR/BS are increasing their recurring fee component.

 

I have no position in the name, but I have a familiarity with litigation and biglaw, and I think this is a worthwhile investment sector.  unfollowed, moatish, uncorrelated to market returns.

 

I have always considered this a too hard name, in the sense that due diligence would be near impossible to perform.  but now perhaps there is a margin of safety...

[Normax59]

I just want to say this one more time because it doesn't seem to be going over. This company was just shown less than 24 hours ago to have fraudulently deceived investors on multiple occasions for years and years while at the same time telling investors to "trust us", there is no margin of safety here.

 

If you want to start with DD look into the Chevron case they were involved in and why they ended up almost being added to a RICO case after adding a long time Chevron lawyer to their management team then had to remove almost everything about the case from their site and how the plaintiff lawyer who was the partner was recently disbarred for using corruption and brides to get the Supreme Court in Ecuador to rule in the plaintiff favor which was overturned by the Permanent Court of Arbitration in The Hague

[Gregmal]

Pretty spectacular how one person's opinion, based entirely off of already known public information can effect the valuation like this.

 

Are you suggesting you (and most longs) already knew about the specific cases referenced with aggressive accounting?

 

Greg, do you really think most investors holding Burford's stock were familiar with the intricate details of the Napo deal, including Invesco's involvement? How about all the twists and turns of Burford's arcane IRR and ROIC calculations? Were you, yourself, aware of all the info included in the report? Of course not.

 

Some but definitely not all. It depends how you frame it though.

 

For instance, Jaguar... One of the advantages this company is said to have, as a market leader is resources and pull. So lets put Jaguar into the context of what it is. This could have been an outcome that fell within the reasonably expected outcomes range. There will be investments that dont work and due to the binary nature, they are 0's. Burford, could've just taken that. Instead, they used their resources and leveraged a transaction to return something for shareholders. They marked it quite aggressively, and then wrote it down when it became clear it was pennies on the dollar. It could have just been called a 0 from day 1. They did a little better.

 

The problem isn't the steps they took in the Jaguar case but with how they disclosed the information. They kept increasing the disclosed ROI even as there was less and less chance of a recovery. And they were doing this for YEARS. Then suddenly in

H1 2019, they decided "hey, maybe we shouldn't be showing this at 196% roic". Of course, now taking this write-down is a much smaller impact due to the much larger portfolio years later.

 

Which to me the following just translates like this:

 

Person 1 "We know they have aggressive accounting and must consider this."

 

Person 2 "Oh but did you see how they did it?"

 

Person 1 "Yes, we know and expect the accounting to be aggressive/borderline"

 

Person 2 "But did you also see this transaction where they did this?"

 

Person 1 "yes, we know they engage in shady account. We prefer they didn't but accept that they do and adjust for this in our basis for investing"

 

Person 2 "But they were shady in how they recorded this"

 

Person 1 "Is it illegal"

 

Person 2 "well not necessarily but their numbers are misleading"

 

Person 1 "yes, we know and expect the accounting to be like this"

 

 

Thats all there really is to this. No one should be surprised about any of this. Provided it is not illegal, I fail to be taken aback by these things because they are a given and something one has to accept in order to invest in this space. Even the people contesting this are not debating there are profits and frankly as the AM business grows it will smoothen out the volatility in the litigation based revenue. So lets stop pretending this is Dreier LLP...

 

 

 

 

 

[cameronfen]

I just want to say this one more time because it doesn't seem to be going over. This company was just shown less than 24 hours ago to have fraudulently deceived investors on multiple occasions for years and years while at the same time telling investors to "trust us", there is no margin of safety here.

 

If you want to start with DD look into the Chevron case they were involved in and why they ended up almost being added to a RICO case after adding a long time Chevron lawyer to their management team then had to remove almost everything about the case from their site and how the plaintiff lawyer who was the partner was recently disbarred for using corruption and brides to get the Supreme Court in Ecuador to rule in the plaintiff favor which was overturned by the Permanent Court of Arbitration in The Hague

 

I don't know about those, but looking at the news, it could very well be that Burford was actually misled.  Again adding a former Chevron lawyer happens and may not be evidence of any misdeeds.  He was a former big trial lawyer and these are the stars that every litigation financier is trying to poach and right around that time Burford already sold all its interest in the Chevron case because the case was too controversial.  Again this is also in 2011 and they have funded probably 200+ cases it's not a surprise one or two is controversial.  As far as the other point, employees/customers of Burford will do illegal things from time to time.  They fund like 50 cases a year (16ish cases and 16ish portfolios) with multiple lawyers on each team.  I would be surprised if every couple of years a lawyer didn't do something illegal. 

 

The important point is that if you take out 2018 and 2019 portfolio returns for obvious reasons (most of the cases haven't been resolved), add in Peterson which has an external market for its value, ROIC is about 100% (using MW own IRR calculations which are already conservative for someone who is long (uses committed capital and not deployed capital)).  This implies IRRs maybe around 30% estimated from a 3 year holding period.  Say what you want about their shady marks, this company still makes IRRs that arguably supports a 3b valuation, not that I will sell my position I started for that much.  I think reputation loss will affect how much they gather assets, but will have limited effect on the returns on assets deployed. 

 

Let me ask you something, if MW didn't come out with the report and let say Schwab reported Napo and Desert Ridge etc. etc., would you be buying at 7 or 8 pounds a share (from 16 pounds a week ago)? 

[Guest cherzeca]

the company is going to come out with its own reply.  this will either be histrionic (think Musk) or factual and refuting (or at least presenting a cogent opposing argument).  we shall see

[matts]

the company is going to come out with its own reply.  this will either be histrionic (think Musk) or factual and refuting (or at least presenting a cogent opposing argument).  we shall see

 

Not sure what they can say to change the story. The Napo case seems to be very well researched by MW. Burford will say that "legally, we are allowed to do this" which is, I think, true and not something MW is disputing. There are lots of instances where accounting standards don't reflect economic value (real estate under US GAAP for example). But usually, investors know about these issues and adjust for them. Here, I think most investors were not adjusting for more than aggressive, but ridiculous accounting around Napo and Jaguar. Burford's ROIC and IRR metrics they peddled to investors every chance they got were misleading, plain and simple. "we didn't do anything illegal" won't change that narrative.

 

I'm not sure what kind of money manager will take the risk of investing their AUM with these guys now. managers don't usually take this kind of career risk, they will go to the smaller players who offer basically the same service. I just started buying some LIT.L. They mark investments at cost until resolution.

 

 

 

 

[Spekulatius]

A litigation finance company mired in pot. Misconduct and litigation of its own finances doesn’t sound like a good business environment for these guys. Soon we will get a real life example of reflexivity.

[SnarkyPuppy]

Burford response:  https://www.burfordcapital.com/wp-content/uploads/2019/08/2019.08.08-Burford-Capital-Response-to-Muddy-Waters-FINAL-1.pdf

 

Conference call 10am EST.

[Gregmal]

https://www.thetimes.co.uk/edition/business/carson-block-defends-critical-report-that-halved-burford-capital-share-price-vm2snf263

 

"admitting that short-sellers were deliberately targeting stocks owned by Neil Woodford "

 

Like I said, more at play here than people seem to think.

 

 

Just roughly speaking, put the accounting aside for a minute. Litigation finance is definitely a fertile place for investment. That goes without saying. So from a standstill lets look at the setup here.

 

Burford is/was by far the largest player here. They have the most capital at their disposal, and certainly some of the widest reach within the industry. Assuming everything disclosed relating opex and g&a is somewhat accurate, of the 100+ people they employ, at last 20 were 7 figure earners and/or equity partners at firms that are widely regarded as THE BEST law firms in the world. This tells me, 1) that these are legitimate professionals who very much chose to be at Burford for what is likely a good deal less than they made prior, and 2) because of this, they aren't here just to jerk off shareholders. Burford employees, for the most part, are all equity holders.

 

So now take the above and the people involved here. With the listed resources above, and the incentive to succeed via their pay structure, are we really to assume that these people can't continue operating in this space? I mean there isn't an industry as scummy as finance/WS. If there is, its law. So this industry is the Goliath scumbag that combines the worst of both and as such, are you really going to tell me that going forward, participants just won't deal with Burford because a noted short seller wrote something?? Not a chance. People will go where the money and the value is, and to the extent Burford doesn't lose its personnel(indeed a risk as lawyers are notorious for moving around), they will be fine operating in this space and the current share price gives investors more than an adequate head start to account for the shortcomings.

[Gregmal]

Burford response:  https://www.burfordcapital.com/wp-content/uploads/2019/08/2019.08.08-Burford-Capital-Response-to-Muddy-Waters-FINAL-1.pdf

 

Conference call 10am EST.

 

The suggestion that Burford is “arguably insolvent” is baseless. Presumably, the reason “arguably” is inserted is because Muddy Waters knows they would lose a lawsuit if they accused Burford of insolvency, and they know they can’t support such a claim.

 

Pretty much what I said...

[thepupil]

anyone able to trade the bonds? if so, through whom?

 

Bloomberg shows retail notes in $62-$80.

 

Think those could be the more assymetric in that the bar for those being worth par is lower than the business being worth book value or whatever.

 

Bonds $65-->$90 in a day. Too bad I was busy doing my day job and didn't figure out how to / where to trade these.

 

 

[writser]

 

Back on topic, bought my last piece to fill out the desired BUR allocation at 418. Total average cost today 530s. Average cost on entire position is 870. If its legit, can't think of a better opportunity to add. Its a 1% position and from here I intend to let nature take its course. Finance companies can disappear overnight. I have no inside info so if its fraud I lost a around 1.5%. Good luck to all.

 

Today's rebuttal seems solid. Factual and refuting rather than threatening and denying. Seems like you might get into the black today already. Good for you.

[Gregmal]

 

Back on topic, bought my last piece to fill out the desired BUR allocation at 418. Total average cost today 530s. Average cost on entire position is 870. If its legit, can't think of a better opportunity to add. Its a 1% position and from here I intend to let nature take its course. Finance companies can disappear overnight. I have no inside info so if its fraud I lost a around 1.5%. Good luck to all.

 

Today's rebuttal seems solid. Factual and refuting rather than threatening and denying. Seems like you might get into the black today already. Good for you.

 

Agreed, and thanks. From nothing but a trading perspective I'd expect 800-900 to be kind of a resistance area. Looking forward to the call. Below are the details.

 

The dial-in number for the conference call is +44 (0)20 3481 3258 / +1 646 843 4609 and the access code is 9034616 #. Participants are encouraged to dial in no later than 2:45pm BST / 9:45am EDT to facilitate timely access to the conference call.

[Gregmal]

$4m+ in purchases by CEO and CIO this morning

[Read the Footnotes]

I collected quotes from the first three pages of this thread that describe litigation finance as having a binary nature. I believe all these examples are from posters who were long Burford. I think categorizing litigation finance as binary is a gross oversimplification. The truth is that a more thorough mental model would describe the outcomes as a binomial tree with MANY nodes on it. By the time it come to estimating final probabilities, especially if you are calculating IRR (which is also dependent on time to reach each outcome on the tree), the outcome should be a probability distribution even at the level of a single case, much less the IRR of a portfolio of cases.

 

Using the term binary could be a sign that an analyst is using an effective simplification. It could be the analyst is actually thinking of a bimodal distribution, but calling it a binary outcome. I also think it could be a sign that an analyst is much closer to being the patsy at the table than they realize.

 

This linguistic point might be of little value, but it might also be a signal as to level of sophistication of analysis within an area of investment.

 

I think this also applies to the analysis of other industries such as developmental stage biotech and pharma.

 

 

Over time, I think this evolves into a PE style industry, and Burford is going to be the Blackstone/BAM of it. Returns will fall, but they need to still be high because of the binary nature of the underlying litigation, so my guess is that they settle out in the 15% IRR range. Again, PE firms have tons of competition, but regularly earn mid teens returns, so there's no reason that competition here has to erode returns immediately.

 

 

The problem for smaller operators is precisely that because the outcome of litigation is binary, they are at risk of a string of negative outcomes. The portfolio approach has lower returns, but is far more sustainable and carries far lower risk of permanent capital loss. This is why it's like BAM/BX: only the big guys with sufficient capital can have their portfolio diversified enough through portfolios as well as different strategies that returns across the book are diversified, steady, but still high. I'd rather have a sustainable stream of 30% than a 70% and then a -30% and then a 70% and -30% etc.

 

 

Litigation is binary. YOu either win, or you lose 100%. So that is why returns are high IF you have skill in underwriting. Burford already has scale and diversification, they do not need to achieve it quicker than other.

 

Burfords argument is that the nature of the business makes switching costs high because the diligence process is so intensive (with sensitive subject matter) the cost to "shop" the deal around is high. Burford's higher levels of diversification give them lower cost of capital (again w/ binary outcomes diversification is even more important than in other asset classes) and they become the "go to" for cases both large and small, picking the cream of the crop and passing the rest on to other players

 

The diversification point re 20 companies is not relevant to the outcomes in binary litigation finance.

 

 

As for risk, lets say you have a random 50/50 flip of heads and tails. Heads you win 200%, tails you lose 100%. Yes, your expected value is positive, but there is still a non-zero chance that you lose absolutely everything because of the binary outcome. 2 points to this. First, a firm with a greater number of cases, more capital, and therefore more coin flips, is going to have a lower level of risk. So diversifying beyond your 20th asset DOES matter.

 

Second, in order for the expected value to make sense in the above, you have to have 101% win, 100% losses and over time with enough coin flips you can make money. Now, let's say you were very skilled in evaluating opportunities so you could tilt the odds instead of 50/50 to 60/40. Expected returns there would be 20%, up from 0.5% with 50/50 odds. Thus, even very tiny shifts in the ability to judge outcomes skews expected returns massively because of the binary and large win/loss nature of these sorts of investments. Skill here matters exponentially more than in other alternative investment classes.

 

 

The problem for smaller operators is precisely that because the outcome of litigation is binary, they are at risk of a string of negative outcomes. The portfolio approach has lower returns, but is far more sustainable and carries far lower risk of permanent capital loss. This is why it's like BAM/BX: only the big guys with sufficient capital can have their portfolio diversified enough through portfolios as well as different strategies that returns across the book are diversified, steady, but still high. I'd rather have a sustainable stream of 30% than a 70% and then a -30% and then a 70% and -30% etc.

[5xEBITDA]

anyone able to trade the bonds? if so, through whom?

 

Bloomberg shows retail notes in $62-$80.

 

Think those could be the more assymetric in that the bar for those being worth par is lower than the business being worth book value or whatever.

 

Bonds $65-->$90 in a day. Too bad I was busy doing my day job and didn't figure out how to / where to trade these.

 

Bonds were the biggest no brainer I've seen in a while. Took all of ten minutes to figure out they were money good.

[cameronfen]

Did anyone listen to the conference call?  I may listen to it later but curious what happened?

[Gregmal]

Did anyone listen to the conference call?  I may listen to it later but curious what happened?

 

Still ongoing.

 

Some notes

 

Buybacks are being considered up to 10% depending on where market settles.

 

Only half of ~$750M commitments are expected to be utilized in next 12 months.

 

Comfortable taking on more debt and preference vs issuing equity

 

several hightlighted instances, particularly the Nantucket address, where Muddy Waters deliberately used information it knew to be erroneous in order to draw a self serving conclusion(the Nantucket address has nothing to do with BUR or Investco and out of numerous SEC filings by unrelated company, looked to be an erroneous typo on ONE)

 

spoken with many of their important clients and most "view this for what it is". In fact "some of the laws firms who worked on the cases mentioned in the MW report, called us immediately and said this is totally wrong"

 

see the benefit of a US dual listing but also dont want to react on emotion and make knee jerk react. Would like to continue evaluating the tangible benefits of such

 

in relation to mark to market vs cash realized, historically, the difference has been small. biggest difference generally occur when "a judge indicates a favorable sentiment, and the jury ends up providing a very different decision themselves, which is rare"-paraphrasing there

 

insolvency claim is a total joke. would have to ignore cash, receivables, current cases all being 0's, no more access to capital markets, and 100% of maturities, which ladder out from 2022-2026, all coming due today

 

If I recall anything else or new stuff pops up will post

[LaGrandeBelleza]

Did anyone listen to the conference call?  I may listen to it later but curious what happened?

 

They haven't provided much extra colour on many of the points so far. Basically they've repeated what was already on the statement. I've found Elisabeth to be quite erratic, she was quite nervous on most of her interventions.

 

Certain points that could have been addressed were skipped such as how much is Petersen on their books right now, cumulative IRR excluding Petersen, reconciliation between the investments table and the CF statements and so forth.

 

Additionally, in my opinion of course, they haven't been firm enough when it came to answer about the buybacks, market up-listing also their personal purchases haven't been that big if we put them into the context of past sales by principals at highest market valuations.

 

I understand their cautiousness but in order to turn bullish I'd have needed a much stronger reaction especially regarding personal market purchases as they are the only ones who can know with certainty what's in their books and what the discount to NAV at current levels lies around.