Author Topic: BUR.L - Burford Capital  (Read 40808 times)

no_free_lunch

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BUR.L - Burford Capital
« on: July 04, 2019, 01:26:42 PM »
No position yet, just recording my research.

Burford specializes in legal financing.  Essentially they will take on the cost of a lawsuit in exchange for a cut of the profits.  It appears to be a win-win business proposition.   The claimant takes on no cost for the lawsuit and shows the market that litigation will be pursued.  If they win they get a portion of the profits, if they lose it comes them nothing.  Burford can and does lose but they have a large portfolio of investments.  They are up to around 100 cases invested in per year.  This should be a recession resistant industry, you can see how there might even be more demand for this type of thing during a recession.  Presumably in a downturn there wouldn't be the excess cash to pursue lawsuits.

They are a fast growing company, the stock is about 15x since the 2010 IPO.  As you would expect  they are not cheap, they are sitting around 3x BV.  However they are highly profitable and are at around 13x PE based on lawsuit payouts.  They have an asset management wing and there is something like $2B managed, not sure how to add that into the valuation.   The industry is substantial, they did about $1B in commitments last year and there are something like $400B in tort settlements in a year, so maybe there is still room for growth?   

ROE claims from the company are substantial.  They are generally hitting 20-30% ROE.  There are some gotchas though, some lawsuits are still pending after years.  They also tend to over-commit capital and not end up deploying it.  To me that doesn't seem to be a bad thing but the ROE would be lower if you included the full commitment.

They appear to be logical business men.  They only write 5% or so of the deals that they review. 

They claim to be the dominant player, out-sizing the next largest firm by over 5x as I recall.   As a result, they claim to have some scale advantages.

The real questions are: can they continue to grow this quickly and what will happen to their ROE as they grow?  If you look on their website there is a link to investments in Australia.  In the link they say a deal was signed at a 10% ROE level so maybe the profits are going to start shrinking?

I know there are lawyers on the board.  Appreciate any feedback.
« Last Edit: July 04, 2019, 01:30:15 PM by no_free_lunch »


cameronfen

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Re: BUR.L - Burford Capital
« Reply #1 on: July 04, 2019, 01:39:49 PM »
I'm long Litigation Capital Management (LIT.L) which is an litigation financing company that is much smaller and so it has a larget oportunity set.  I don't know if Burford can compound capital at the same rate historically given its size.  There are a couple other litigation finance firms that are also the same size as LIT.L.  There probably is some scale advantage for investing in a portfolio of cases which Burford does a lot of, however I think the RoE is more attractive when you have a smallish portfolio as cases require usually something less than 5 million dollars.  If you want to look at IRR tends in real time in the industry (more relevent to small players) Lexshares is a "crowdsource" litigation finance platform and if you register I think you can see returns on recent cases allowing you to monitor the health of the industry. 
« Last Edit: July 04, 2019, 01:58:19 PM by cameronfen »

peterHK

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Re: BUR.L - Burford Capital
« Reply #2 on: July 04, 2019, 01:58:55 PM »
I'm long Litigation Capital Management (LIT.L):which is an litegation financing company that is much smaller and so it has a larget oportunity set.  I don't know if Burford can compound capital at the same rate historically given its size.  There are a couple other litigation finance firms thatvare also the same size as LIT.L

Burford's size IS it's advantage. It's gotten something like 2/3 of all new fund inflows into the space, ROIC's are still in the 30's, but the risk is far lower because Burford can spread its portfolio out over more bets. They can pay more, attract better talent, and have better institutional relationships and dealflow, which is very very important in this business. I wouldn't be long anyone else in this industry.

I'm very long Burford. My thinking is this: if they can compound off of book value at 30% falling to 25% over the next 3 years, and then 15% after that, they are easily a double from here. That leaves out the upside from their growing asset management business (which looks far worse than it is because performance carry won't likely start for another year or so). Note that at 3x BV today, 3 years of compounding at 30% means you trade at book value in 3 years.

What's the value of a business that can earn 15% IRR's unlevered, 20% ROE's, with a WACC of 10% (implying say 12% for the equity) that pays out 100% of earnings? 2x book value (I won't put the math here, but this is a provable fact). So even if returns compress very quickly, this business is still worth 2x book value, meanwhile book value/share should double from here quite easily. What happens, also, if ROIC's don't decline to 15% in 3 years? Well then you have a business earning probably 35-40% ROE's that can reinvest most of those earnings back into the business. That alone is worth far more than 3x book.

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.

Woodford owns a big stake, that's why the stock is where it is. I'd be buying hand over fist. I think the risk of permanent capital loss is very low, while the opportunity for this to be a 2-5x over the next 5 years is very high.

cameronfen

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Re: BUR.L - Burford Capital
« Reply #3 on: July 04, 2019, 06:24:47 PM »
Sure, but the roi on there deals are lower.  If you look at lexshares, small deals have roi in the 60 to 70%. Asset management firms have decreasing returns to scale and that should be your prior.  The main reason, I think, they invest in portfolios instead of individual deals is because they are too big for small deals to make economic sense.  Remember in a portfolio of uncorrelated assets, there are very marginal returns to risk adjusted return after the 20th equal weighted asset.  Maybe Burford has some special sauce that makes them better than the competition and they likely can attract better talent, but the diseconomies of size usually win out for asset managers.  Furthermore this isnt like BAM or BX for one reason because there are no single mega deals that only the big guys can only finance.  Like 99.99999% (exaggeration but...) of the deals that need financing require less than 10 million in capital (although I have read somewhere some firms put you on retainer and on call for more but again they wouldn't do that unless they got a decent deal).  The reason Burford is bigger than the competition is likely due to being the first to the public market and they issued stock and lots of it (which is exactly what you should be doing when you trade at 3x book and have roe in the 30% range and historically plenty of investment opportunity).  However, everyone has picked up on this and is copying the Burford strategy.  Even so, currently dealflow is not a worry for anyone.  LIT has 40 pounds million in equity and 200+ million in deal flow. Again, maybe I'm being a cowboy, but LIT.L has a historical IRR of 77% vs 30% for Burford and as a sanity check this is inline with returns you can get with Lexshares (if you can get a deal.). 

I think woodford's long this because the fund is too big to invest in anything else (but don't know if he would invest in another player). 
« Last Edit: July 04, 2019, 06:30:37 PM by cameronfen »

Gregmal

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Re: BUR.L - Burford Capital
« Reply #4 on: July 05, 2019, 05:50:23 AM »
I bought a little starter here this morning. Very unique business. Seems to have lower correlation to broader market. Kind what I'm looking for in my investments at the moment. Thanks for bringing this up. And LIT as well cameronfen.

peterHK

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Re: BUR.L - Burford Capital
« Reply #5 on: July 05, 2019, 06:14:56 AM »
Sure, but the roi on there deals are lower.  If you look at lexshares, small deals have roi in the 60 to 70%. Asset management firms have decreasing returns to scale and that should be your prior.  The main reason, I think, they invest in portfolios instead of individual deals is because they are too big for small deals to make economic sense.  Remember in a portfolio of uncorrelated assets, there are very marginal returns to risk adjusted return after the 20th equal weighted asset.  Maybe Burford has some special sauce that makes them better than the competition and they likely can attract better talent, but the diseconomies of size usually win out for asset managers.  Furthermore this isnt like BAM or BX for one reason because there are no single mega deals that only the big guys can only finance.  Like 99.99999% (exaggeration but...) of the deals that need financing require less than 10 million in capital (although I have read somewhere some firms put you on retainer and on call for more but again they wouldn't do that unless they got a decent deal).  The reason Burford is bigger than the competition is likely due to being the first to the public market and they issued stock and lots of it (which is exactly what you should be doing when you trade at 3x book and have roe in the 30% range and historically plenty of investment opportunity).  However, everyone has picked up on this and is copying the Burford strategy.  Even so, currently dealflow is not a worry for anyone.  LIT has 40 pounds million in equity and 200+ million in deal flow. Again, maybe I'm being a cowboy, but LIT.L has a historical IRR of 77% vs 30% for Burford and as a sanity check this is inline with returns you can get with Lexshares (if you can get a deal.). 

I think woodford's long this because the fund is too big to invest in anything else (but don't know if he would invest in another player).

Burford invested $17 million in Petersen and it's now worth $1 billion and they have realized $200+ million in proceeds already from the sale of their stake, and retain a 60%+ stake on the balance sheet. What's that for an ROI?

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.

Also worth noting that the real money here is going to be in the AM business, I think. It allows, for the sovereign wealth fund for instance, Burford to put up 33% of the risk, and receive 60% of the reward between the return on their balance sheet investments and the management/carry fees. Volatility in results doesn't translate well into a sustainable AM business, you need to demonstrate a repeatable process across the portfolio that can work, and I think only BUR has really got there today.

Also worth noting (IIRC) BUR was NOT the first to the public market and certainly, by quite a long ways, BUR was NOT the first in this industry. They have been vastly more successful than others in performance and fundraising for other reasons than just first mover advantage.

writser

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Re: BUR.L - Burford Capital
« Reply #6 on: July 05, 2019, 06:45:18 AM »
Burford invested $17 million in Petersen and it's now worth $1 billion and they have realized $200+ million in proceeds already from the sale of their stake, and retain a 60%+ stake on the balance sheet. What's that for an ROI?

But that was kind of cameronfen's point, right? They only invested $17m in this deal. Can they find another 200 deals of this size that are even remotely as attractive? It's an interesting business for sure, and looks like a good one too. Seems like they had a few home runs and then quickly raised a lot of capital at a super high valuation and secured AUM at very favorable terms. Very smart moves. But hard to believe growth won't slow down after that. Still, intriguing idea.
« Last Edit: July 05, 2019, 06:50:38 AM by writser »
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Jerry Capital

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Re: BUR.L - Burford Capital
« Reply #7 on: July 05, 2019, 07:13:55 AM »
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cameronfen

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Re: BUR.L - Burford Capital
« Reply #8 on: July 05, 2019, 08:15:36 AM »
Sure, but the roi on there deals are lower.  If you look at lexshares, small deals have roi in the 60 to 70%. Asset management firms have decreasing returns to scale and that should be your prior.  The main reason, I think, they invest in portfolios instead of individual deals is because they are too big for small deals to make economic sense.  Remember in a portfolio of uncorrelated assets, there are very marginal returns to risk adjusted return after the 20th equal weighted asset.  Maybe Burford has some special sauce that makes them better than the competition and they likely can attract better talent, but the diseconomies of size usually win out for asset managers.  Furthermore this isnt like BAM or BX for one reason because there are no single mega deals that only the big guys can only finance.  Like 99.99999% (exaggeration but...) of the deals that need financing require less than 10 million in capital (although I have read somewhere some firms put you on retainer and on call for more but again they wouldn't do that unless they got a decent deal).  The reason Burford is bigger than the competition is likely due to being the first to the public market and they issued stock and lots of it (which is exactly what you should be doing when you trade at 3x book and have roe in the 30% range and historically plenty of investment opportunity).  However, everyone has picked up on this and is copying the Burford strategy.  Even so, currently dealflow is not a worry for anyone.  LIT has 40 pounds million in equity and 200+ million in deal flow. Again, maybe I'm being a cowboy, but LIT.L has a historical IRR of 77% vs 30% for Burford and as a sanity check this is inline with returns you can get with Lexshares (if you can get a deal.). 

I think woodford's long this because the fund is too big to invest in anything else (but don't know if he would invest in another player).

Burford invested $17 million in Petersen and it's now worth $1 billion and they have realized $200+ million in proceeds already from the sale of their stake, and retain a 60%+ stake on the balance sheet. What's that for an ROI?

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.

Also worth noting that the real money here is going to be in the AM business, I think. It allows, for the sovereign wealth fund for instance, Burford to put up 33% of the risk, and receive 60% of the reward between the return on their balance sheet investments and the management/carry fees. Volatility in results doesn't translate well into a sustainable AM business, you need to demonstrate a repeatable process across the portfolio that can work, and I think only BUR has really got there today.

Also worth noting (IIRC) BUR was NOT the first to the public market and certainly, by quite a long ways, BUR was NOT the first in this industry. They have been vastly more successful than others in performance and fundraising for other reasons than just first mover advantage.

So first of all, you will make a lot of money in BUR likely as well IMO.  So I'm not saying BUR is a bad stock to buy.  If you are only comfortable with big names then that's your choice. 

Attached is LIT's portfolio performance.  You will notice unweighted (and unweighted IRR was derived by combining average ROIC with time to resolve) IRRs are around 41% (they say IRR is 75+% but I'm guessing their winners have higher amounts of capital and you have higher IRRs by staggering investments and payouts). 

In terms of volatility, they have only 4 cases out of 35 where they lost money.  The reason is in civil trials 95% of cases settle, and the financing is set up in a way so that you still make a lot of money when you settle.  So the benefit of diversification is muted by the fact that all these are uncorrelated assets and these things typically make money most of the time.  The risk of a string of negative outcomes with permanent loss of capital is basically zero as long as you have a portfolio that's larger than 10-15 million pounds (and you know what your doing). 

I think you are right that the asset management business is where BUR will shine as the big names will want to partner with Burford (for both rational and irrational reasons I think but it's true).  Again all the firms in litigation finance are now building out asset management businesses.  But Burford will attract the bulk of the fund flows and basically reap infinite ROI on these flows. 

So I don't know if BUR was first to the public markets.  Based just looking around, I'm pretty sure they were the ones with the ideas to repeatedly issue stock and invest in attractive returns which is the correct strategy, but also the reason they are so much bigger than everyone else. 

edit comment: The other thing to note is LIT.L is generating these IRRs unleveraged I think.  BUR is using modest amounts of leverage to do this.  As alwasy BUR is doing the right thing, but again the small guys all already know the playbook, and wouldn't be surprised if they started copying BUR. 

Regarding the Peterson stake LIT.L has one deal that had an ROIC of 56x (roughly in line with Peterson ROI) and another at 39x so these returns aren't abnormal for the industry.  I guess what I'm trying to say is this is a really good industry to be in, for all players, and the vast majority of BUR growth is due to financial engineering (which everyone has caught onto) rather than a really good moat. 

« Last Edit: July 05, 2019, 08:23:43 AM by cameronfen »

Foreign Tuffett

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Re: BUR.L - Burford Capital
« Reply #9 on: July 05, 2019, 08:39:15 AM »
1) What keeps new companies and capital from flooding into the litigation funding market, thereby depressing returns for existing players?

2) As others have mentioned, I would question the runway here given the large size of the company relative to the niche (?) nature of litigation funding.

Looking at the total $ value of tort settlements and trying to somehow distill the future size of the litigation funding market seems misguided.