Author Topic: BUR.L - Burford Capital  (Read 14218 times)

peterHK

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Re: BUR.L - Burford Capital
« Reply #140 on: July 12, 2019, 08:22:22 AM »
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

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Re: BUR.L - Burford Capital
« Reply #141 on: July 12, 2019, 09:09:56 AM »
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/
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Normax59

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Re: BUR.L - Burford Capital
« Reply #142 on: July 13, 2019, 02:36:37 PM »
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

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Re: BUR.L - Burford Capital
« Reply #143 on: July 14, 2019, 11:01:12 AM »
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.

Normax59

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Re: BUR.L - Burford Capital
« Reply #144 on: July 14, 2019, 01:38:56 PM »
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.
« Last Edit: July 14, 2019, 01:49:27 PM by Normax59 »

Normax59

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Re: BUR.L - Burford Capital
« Reply #145 on: July 14, 2019, 01:55:42 PM »
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.


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peterHK

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Re: BUR.L - Burford Capital
« Reply #147 on: July 15, 2019, 04:48:35 PM »
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

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Re: BUR.L - Burford Capital
« Reply #148 on: July 15, 2019, 04:52:38 PM »
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.

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Schwab711

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Re: BUR.L - Burford Capital
« Reply #149 on: July 16, 2019, 12:35:39 PM »
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:
Quote
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:
Quote
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.
« Last Edit: July 16, 2019, 12:40:32 PM by Schwab711 »