Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: no_free_lunch on July 04, 2019, 01:26:42 PM

Title: BUR.L - Burford Capital
Post by: no_free_lunch 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.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen 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. 
Title: Re: BUR.L - Burford Capital
Post by: peterHK 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.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen 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). 
Title: Re: BUR.L - Burford Capital
Post by: Gregmal 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.
Title: Re: BUR.L - Burford Capital
Post by: peterHK 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.
Title: Re: BUR.L - Burford Capital
Post by: writser 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.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 05, 2019, 07:13:55 AM
Heads I win a lot tails I lose a little.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen 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. 

Title: Re: BUR.L - Burford Capital
Post by: Foreign Tuffett 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.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 05, 2019, 08:50:25 AM
At this valuation you can safely put the onneous of TAM size on the bear not the bull.

It's at least as large as the current year plus a good chunk larger than GDP given its really only operating in a few countries for the last few years... It's safe to say that it is highly likely to be significantly larger.

Why do some asset managers earn good returns while others don't?

Infinite money can flood into equities and there will always be someone that generates alpha. If that's BUR you make tremendous gains. If they just get their share of fund flows at market ROIs but the market is structurally attractive for 10 to 15 years you make tremendous gainz with little downside.

Not enough of the bears can paint a scenario with more than 20 to 30 downside... CG did a good job painting it down to 12 ish...


Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 05, 2019, 09:26:42 AM
At this valuation you can safely put the onneous of TAM size on the bear not the bull.

It's at least as large as the current year plus a good chunk larger than GDP given its really only operating in a few countries for the last few years... It's safe to say that it is highly likely to be significantly larger.

Why do some asset managers earn good returns while others don't?

Infinite money can flood into equities and there will always be someone that generates alpha. If that's BUR you make tremendous gains. If they just get their share of fund flows at market ROIs but the market is structurally attractive for 10 to 15 years you make tremendous gainz with little downside.

Not enough of the bears can paint a scenario with more than 20 to 30 downside... CG did a good job painting it down to 12 ish...

And CG was full of crap.

On returns and valuation, I think people miss the interplay.

Today, Burford earns ~40% ROE's, conservatively. Book value as of the last statement is 4.89GBP. It's worth noting that last year's 30% ROE was an abnormality:

"the FTSE 250 average) needs a word of explanation. Our ROE is of course affected not only by earnings, which increased materially, but also by the rate of growth in our net assets. Thus, because we deployed a record-breaking amount of new investment capital in 2018, we pushed down our ROE for the year".

If we get 40% ROE, then BV/Share at the end fo the year will be 6.85.

If next year returns compress to 25% ROE's (almost a 50% decline!), book value will  be 8.56.

If the year after that returns compress to 20% ROE's (which equates to ~15% ROIC's on their portfolio, down from 30% ROIC's today), then ending book value is 10.27.

Let's say BUR stops there and decides to pay out 100% of its earnings, reinvest nothing in the business, and has no asset management business generating any earnings. At 20% ROE's, and 10% WACC the justified P/B of this company is, with 0 growth (because they pay out 100% of earnings): (ROE - g)/(r - g). 20%/10% = 2x.

This gives us on 10.27 of book value x 2 = 20.54/share. This is with 0 value given to the fee stream from an asset management business, it assumes BUR pays out 100% of earnings in a dividend and does not grow. Were BUR to reinvest 10% of its earnings @ 20% ROE's, that gives you 2% growth, which means the justified P/B would be 2.25x (18%/8%). Even a little growth gets you to over 23GBP even if returns compress almost 50% from today over a mere 3 year period. Good for mid teens returns.

Now, what happens if returns DON'T compress?

If BUR compounds at 40% for 3 years, BV/S will be 13.41 share. What's the valuation of a business that can earn 40% ROE's, reinvest significant parts of their earnings and grow? Well, lets say you assume 30% ROE's is more normal, and they reinvest only 10% of earnings (growth is 3%): justified P/BV @ 10% WACC = 2.7x. That gives you 36 GBP price target on just book value, leaving alone any asset management business they have.

For the AM business, if you manage $3bn @ 1.5%/20% carry with an 8% hurdle and returns are 20%/year, you get a fee stream of $60mn in mgmt fees @ a ~50% operating margin, maybe 40% after tax (note that margins are high because BUR bears much of the costs of investing already, so there are a lot of synergies to doing your own BS investing and having a fund management business). At a 12x multiple, that's worth $288mn.

Your carry is another ~$70mn a year, say at another 50% margin. Capitalize that at 5x, another $180mn in value. So the AM business gives you another ~$470mn or so in value (~1.70GBP per share).

So if this goes poorly, you're looking at maybe 37GBP, 32% annualized.

For you to be a bear at today's prices, you need to prove that returns will compress immediately, and that Burford will be able to reinvest very little back into the business and that the asset management business will not do well.

Title: Re: BUR.L - Burford Capital
Post by: spartan on July 05, 2019, 09:30:12 AM
These types of investments really make me struggle... On the one hand, you have a large and growing industry that has been producing very attractive returns. On the other hand, there are a list of potential problems that cause me to worry, including:

1. No significant moats (at least none that I can think of). Capital is not a durable competitive advantage, especially in today's environment. Added to which, lots of lawyers hate their jobs. If they see other lawyers making more money than them doing something that sucks less, the industry will get flooded with new entrants. It does not survive Buffett's punch card test.

2. It is very difficult to predict future cash flows. For a variety of reasons, courts can very easily begin to reign in on litigation finance. It is already illegal in some states. And how can we determine the probability of winning the cases that these firms are committing capital? We can't.

3. It is unclear how shareholders will be treated. Companies are plowing back capital in their high ROIC businesses, which is obviously a good thing. But it is unclear whether this rationality will translate into more rationality down the road. Will they use cash to enrich shareholders? Or will they end up plowing it back into their businesses as their ROIC's inevitably decrease, thereby destroying value?

4. It is not entirely clear if this is an uncorrelated bet. When the economy begins its downturn, there is more incentive to litigate. People need the money and are generally more on edge. However, it's not clear whether payouts will match the increase in litigation in times of downturn.

I once heard a story about a bank that basically ran the tobacco loan industry in a particular region in the US (Well Fargo, but I could be wrong). Deutsche Bank saw this as an opportunity to enter and began committing capital to applicants that were turned down by the first mover bank. They ended up getting creamed because the first mover had all the data on these particular types of loans. They had been operating there for years and knew exactly who to loan to.

Perhaps data is a durable competitive advantage and Burford is large enough, and been around for long enough, to be able to make the smartest decisions. But after reading their annual report, they only briefly mention this. Seems to me like data is the most important part of a long-term investment thesis for Burford. Not sure how to analyze this though... maybe the low multiples are justified.
Title: Re: BUR.L - Burford Capital
Post by: Packer16 on July 05, 2019, 09:35:23 AM
This is an interesting business but I wonder how sustainable the advantage Bruford has is.  Fast growth allows others to enter & I have a hard time seeing what Bruford is providing other than financing which in the end is commodity in this low interest rate environment.  The thesis is Bruford can obtain scale/diversification quicker than others, this is true but I do not see anything that someone else could not copy.  Now if litigation finance was a slow growing field I would feel there is more of a barrier.  The growth itself allows competitors to get to scale also.  Also, I do not see what Bruford can do to increasing switching costs or make search more difficult.

How do you know the past returns are not just luck and the risk premium here will not be whittled away as in other asset classes?  Are there unique aspects to the business where the risks are hidden & not present in past returns?  Could the hidden risks be why the returns are so high?

Packer
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 05, 2019, 09:46:11 AM
Downside 30% upside 10 year compounder, hit the bid
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 05, 2019, 09:47:29 AM
Don't focus on the upside focus on the downside
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 05, 2019, 09:49:43 AM
This is an interesting business but I wonder how sustainable the advantage Bruford has is.  Fast growth allows others to enter & I have a hard time seeing what Bruford is providing other than financing which in the end is commodity in this low interest rate environment.  The thesis is Bruford can obtain scale/diversification quicker than others, this is true but I do not see anything that someone else could not copy.  Now if litigation finance was a slow growing field I would feel there is more of a barrier.  The growth itself allows competitors to get to scale also.  Also, I do not see what Bruford can do to increasing switching costs or make search more difficult.

How do you know the past returns are not just luck and the risk premium here will not be whittled away as in other asset classes?  Are there unique aspects to the business where the risks are hidden & not present in past returns?  Could the hidden risks be why the returns are so high?

Packer

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.

Why does BAM keep earning good returns? They're good underwriters, they're disciplined, they have relationships across the globe. Why does Buffett earn good returns: he's a good underwriter, he's disciplined, he has good relationships. Why does Fundsmith earn good returns? Etc. etc. etc. What's the sustainable competitive advantage to First Republic Bank? It's customer service. What's Markel's sustainable competitive advantage? Again, Gaynor is a good underwriter, he's disciplined.

The finance industry is never a "moaty" industry really, but you can do exceptionally well if the people and culture of the firm are exceptional. Spend your time looking at that and reading Burford's commentary and listening to what they have to say, rather than wasting time on whether they have switching costs or network effects or that sort of nonsense.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 05, 2019, 09:50:52 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.

1.) The current litigation market size is 50 - 100 billion USD.   (https://www.marketwatch.com/story/in-low-yield-environment-litigation-finance-booms-2018-08-17).  I read somewhere there is probably room to double that, but not much more.  Can't find that source as I read it a while ago.   Here is something that says commercial funding TAM is about 30 billion in the US.  You can at least double that for personal lawsuits, I think, and then apply some sort of multiple for the world (https://www.lawpracticetoday.org/article/trends-litigation-finance-2/https://www.lawpracticetoday.org/article/trends-litigation-finance-2/).

2.)  I agree, obviously, with that.  In addition to LIT, companies like Manolete which are even more niche (insolvency case financing) has IRRs in the 200-300% range.  BUR has already shown declines to 31% IRR.  I think, the vast majority of the competition I believe will be for the assets Burford invest's in.  50 million dollars + deals for instance to finance a company's entire litigation portfolio.  No Sovereign wealth fund is going to want their money investing in Manolete's portfolio of 1million pounds or less of individuals filing for bankruptcy.  The same is true for LIT although they seem to be going in the direction of portfolios too.  Keep in mind, BUR is also competing with large law firms and the companies who are deciding whether to farm out the financing or keep it in house.  If you are a small business or individual in a bankruptcy case (both defendant and plaintiff),  you likely don't have the same outside options as Gillette, or the class action law firm suing Gillette.  The upside for BUR is they will capture much of the assets flowing in for these kinds of deals, although there are already competing asset management firms like IMF Bentham, that can invest in these kinds of portfolios at better rates for investors. 

   

Title: Re: BUR.L - Burford Capital
Post by: deseretalts on July 05, 2019, 09:51:19 AM
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
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 05, 2019, 10:14:04 AM
At this valuation you can safely put the onneous of TAM size on the bear not the bull.

It's at least as large as the current year plus a good chunk larger than GDP given its really only operating in a few countries for the last few years... It's safe to say that it is highly likely to be significantly larger.

Why do some asset managers earn good returns while others don't?

Infinite money can flood into equities and there will always be someone that generates alpha. If that's BUR you make tremendous gains. If they just get their share of fund flows at market ROIs but the market is structurally attractive for 10 to 15 years you make tremendous gainz with little downside.

Not enough of the bears can paint a scenario with more than 20 to 30 downside... CG did a good job painting it down to 12 ish...

And CG was full of crap.

On returns and valuation, I think people miss the interplay.

Today, Burford earns ~40% ROE's, conservatively. Book value as of the last statement is 4.89GBP. It's worth noting that last year's 30% ROE was an abnormality:

"the FTSE 250 average) needs a word of explanation. Our ROE is of course affected not only by earnings, which increased materially, but also by the rate of growth in our net assets. Thus, because we deployed a record-breaking amount of new investment capital in 2018, we pushed down our ROE for the year".

If we get 40% ROE, then BV/Share at the end fo the year will be 6.85.

If next year returns compress to 25% ROE's (almost a 50% decline!), book value will  be 8.56.

If the year after that returns compress to 20% ROE's (which equates to ~15% ROIC's on their portfolio, down from 30% ROIC's today), then ending book value is 10.27.

Let's say BUR stops there and decides to pay out 100% of its earnings, reinvest nothing in the business, and has no asset management business generating any earnings. At 20% ROE's, and 10% WACC the justified P/B of this company is, with 0 growth (because they pay out 100% of earnings): (ROE - g)/(r - g). 20%/10% = 2x.

This gives us on 10.27 of book value x 2 = 20.54/share. This is with 0 value given to the fee stream from an asset management business, it assumes BUR pays out 100% of earnings in a dividend and does not grow. Were BUR to reinvest 10% of its earnings @ 20% ROE's, that gives you 2% growth, which means the justified P/B would be 2.25x (18%/8%). Even a little growth gets you to over 23GBP even if returns compress almost 50% from today over a mere 3 year period. Good for mid teens returns.

Now, what happens if returns DON'T compress?

If BUR compounds at 40% for 3 years, BV/S will be 13.41 share. What's the valuation of a business that can earn 40% ROE's, reinvest significant parts of their earnings and grow? Well, lets say you assume 30% ROE's is more normal, and they reinvest only 10% of earnings (growth is 3%): justified P/BV @ 10% WACC = 2.7x. That gives you 36 GBP price target on just book value, leaving alone any asset management business they have.

For the AM business, if you manage $3bn @ 1.5%/20% carry with an 8% hurdle and returns are 20%/year, you get a fee stream of $60mn in mgmt fees @ a ~50% operating margin, maybe 40% after tax (note that margins are high because BUR bears much of the costs of investing already, so there are a lot of synergies to doing your own BS investing and having a fund management business). At a 12x multiple, that's worth $288mn.

Your carry is another ~$70mn a year, say at another 50% margin. Capitalize that at 5x, another $180mn in value. So the AM business gives you another ~$470mn or so in value (~1.70GBP per share).

So if this goes poorly, you're looking at maybe 37GBP, 32% annualized.

For you to be a bear at today's prices, you need to prove that returns will compress immediately, and that Burford will be able to reinvest very little back into the business and that the asset management business will not do well.

I think you will do well in Burford.  But I think you are missing the point.  People aren't saying that ROIs aren't high, our argument is you can't look backwards in terms of ROI as they compounded capital in enviroments with less competition.  If they maintain 40% ROIs no way you can lose money.  The question is with so much money flowing in, everyone is IPOing, everyone is starting funds, and everyone is evaluating if paying an external fund to finance your litigation at 40% ROIs for them is worth it when you have the money yourself.  Just on the back of how much assets they are raising by themselves, at some point they are going to run out of things to finance. 

If you invest 3 billion in your fund and 3 billion of your own capital, maybe the market is 60 billion dollars and 50% of that you can't invest in because its 1 million dollar cases, then you are already 20% of your TAM.  Being such a large percentage of TAM unless you have some really compelling value add, which litigation finance sort of does even at that scale due to public company accounting advantages for example, maybe you can make money.  But most of the companies you finance aren't going to have liquidity issues.  At some point many are going to get better deals for themselves and ROI will go down (and it has again compared to companies that are much smaller). 

To @deserelts, I think the bigger size more diversification argument is more marketing than actual substance for the company.  In the public markets there is little return to diversification after the 20th asset.  This is with assets that are correlated.  With legal financing, the assets are not only uncorrelated, but IRRs are in the 50+% range.  If you have a portfolio of 10 to 20 million dollars, no one is even close to a permanent loss of capital even at that size.   Cream of corp may be more valid, but this is asset management.  If I have a lawsuit, I don't care that a big name is financing me or not (as long as they aren't going insolvent), I just want the best deal I can get. 

To @peterHK Again nothing suggests Burford is unnaturally good at underwriting.  Everyone earns IRRs in 30% of higher.  They just perfected the financial engineering side before anyone else. 

my edit: @spartan to address one of your points, although Burford has a large North American presence, many other firms (which were all started in Australia and often listed in London) focus on markets with less regulatory risk and so you can always avoid that risk by picking firms. 
Title: Re: BUR.L - Burford Capital
Post by: Gregmal on July 05, 2019, 10:49:06 AM
One look at the man, and Gregmal declares “he is fat”!

This is a great business, at the very least, as a short term investment. Potentially, it’s a long term compounder. No need to get caught up on obscure nuances. I was once told something by a mentor that has resonated ever since. The ideal combination for an investor is to be smart enough to see what’s relevant, while being dumb enough not to see or get hung up on every little arcane detail.
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 05, 2019, 11:27:46 AM
At this valuation you can safely put the onneous of TAM size on the bear not the bull.

It's at least as large as the current year plus a good chunk larger than GDP given its really only operating in a few countries for the last few years... It's safe to say that it is highly likely to be significantly larger.

Why do some asset managers earn good returns while others don't?

Infinite money can flood into equities and there will always be someone that generates alpha. If that's BUR you make tremendous gains. If they just get their share of fund flows at market ROIs but the market is structurally attractive for 10 to 15 years you make tremendous gainz with little downside.

Not enough of the bears can paint a scenario with more than 20 to 30 downside... CG did a good job painting it down to 12 ish...

And CG was full of crap.

On returns and valuation, I think people miss the interplay.

Today, Burford earns ~40% ROE's, conservatively. Book value as of the last statement is 4.89GBP. It's worth noting that last year's 30% ROE was an abnormality:

"the FTSE 250 average) needs a word of explanation. Our ROE is of course affected not only by earnings, which increased materially, but also by the rate of growth in our net assets. Thus, because we deployed a record-breaking amount of new investment capital in 2018, we pushed down our ROE for the year".

If we get 40% ROE, then BV/Share at the end fo the year will be 6.85.

If next year returns compress to 25% ROE's (almost a 50% decline!), book value will  be 8.56.

If the year after that returns compress to 20% ROE's (which equates to ~15% ROIC's on their portfolio, down from 30% ROIC's today), then ending book value is 10.27.

Let's say BUR stops there and decides to pay out 100% of its earnings, reinvest nothing in the business, and has no asset management business generating any earnings. At 20% ROE's, and 10% WACC the justified P/B of this company is, with 0 growth (because they pay out 100% of earnings): (ROE - g)/(r - g). 20%/10% = 2x.

This gives us on 10.27 of book value x 2 = 20.54/share. This is with 0 value given to the fee stream from an asset management business, it assumes BUR pays out 100% of earnings in a dividend and does not grow. Were BUR to reinvest 10% of its earnings @ 20% ROE's, that gives you 2% growth, which means the justified P/B would be 2.25x (18%/8%). Even a little growth gets you to over 23GBP even if returns compress almost 50% from today over a mere 3 year period. Good for mid teens returns.

Now, what happens if returns DON'T compress?

If BUR compounds at 40% for 3 years, BV/S will be 13.41 share. What's the valuation of a business that can earn 40% ROE's, reinvest significant parts of their earnings and grow? Well, lets say you assume 30% ROE's is more normal, and they reinvest only 10% of earnings (growth is 3%): justified P/BV @ 10% WACC = 2.7x. That gives you 36 GBP price target on just book value, leaving alone any asset management business they have.

For the AM business, if you manage $3bn @ 1.5%/20% carry with an 8% hurdle and returns are 20%/year, you get a fee stream of $60mn in mgmt fees @ a ~50% operating margin, maybe 40% after tax (note that margins are high because BUR bears much of the costs of investing already, so there are a lot of synergies to doing your own BS investing and having a fund management business). At a 12x multiple, that's worth $288mn.

Your carry is another ~$70mn a year, say at another 50% margin. Capitalize that at 5x, another $180mn in value. So the AM business gives you another ~$470mn or so in value (~1.70GBP per share).

So if this goes poorly, you're looking at maybe 37GBP, 32% annualized.

For you to be a bear at today's prices, you need to prove that returns will compress immediately, and that Burford will be able to reinvest very little back into the business and that the asset management business will not do well.

I think you will do well in Burford.  But I think you are missing the point.  People aren't saying that ROIs aren't high, our argument is you can't look backwards in terms of ROI as they compounded capital in enviroments with less competition.  If they maintain 40% ROIs no way you can lose money.  The question is with so much money flowing in, everyone is IPOing, everyone is starting funds, and everyone is evaluating if paying an external fund to finance your litigation at 40% ROIs for them is worth it when you have the money yourself.  Just on the back of how much assets they are raising by themselves, at some point they are going to run out of things to finance. 

If you invest 3 billion in your fund and 3 billion of your own capital, maybe the market is 60 billion dollars and 50% of that you can't invest in because its 1 million dollar cases, then you are already 20% of your TAM.  Being such a large percentage of TAM unless you have some really compelling value add, which litigation finance sort of does even at that scale due to public company accounting advantages for example, maybe you can make money.  But most of the companies you finance aren't going to have liquidity issues.  At some point many are going to get better deals for themselves and ROI will go down (and it has again compared to companies that are much smaller). 

To @deserelts, I think the bigger size more diversification argument is more marketing than actual substance for the company.  In the public markets there is little return to diversification after the 20th asset.  This is with assets that are correlated.  With legal financing, the assets are not only uncorrelated, but IRRs are in the 50+% range.  If you have a portfolio of 10 to 20 million dollars, no one is even close to a permanent loss of capital even at that size.   Cream of corp may be more valid, but this is asset management.  If I have a lawsuit, I don't care that a big name is financing me or not (as long as they aren't going insolvent), I just want the best deal I can get. 

To @peterHK Again nothing suggests Burford is unnaturally good at underwriting.  Everyone earns IRRs in 30% of higher.  They just perfected the financial engineering side before anyone else. 

my edit: @spartan to address one of your points, although Burford has a large North American presence, many other firms (which were all started in Australia and often listed in London) focus on markets with less regulatory risk and so you can always avoid that risk by picking firms.

Look at IMF Bentham. I feel like Burford has shown its underwriting is better.

My argument is not that returns won't decline, it's that the rate of decline priced in by the market today is, in my opinion, far too fast. I don't believe the argument that just because there's more competition, returns must decline immediately. As I said before, there are trillions of dollars chasing various private assets, yet some firms are continually able to eke out good returns from a combination of factors. Similarly, there are mutual fund firms who's only advantage is they interpret filings better than other people, yet that is enough to keep them compounding in the teens for many years. Increased competition is a necessary, but insufficient condition for a very rapid decline in returns.

It's also worth noting that as BUR takes on different types of investments, their returns will fall naturally, as they indicated at a number of investor days. For example, if you have an investment in a mediated case that settles quickly with lower IRR's, but you can increase asset turns, then your "returns" fall, but you can compound capital at comparable rates because of increased asset turns.

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.

This is why I think returns will be sustainably fairly high here. The equilibrium point at which this is no longer profitable yields massive returns with tiny adjustments in probability of success, meaning that those firms that can gain even tiny edges due to culture/data etc. will reap far higher returns than firms that can't.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 05, 2019, 11:38:26 AM
The diversification point re 20 companies is not relevant to the outcomes in binary litigation finance.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 05, 2019, 12:53:59 PM
At this valuation you can safely put the onneous of TAM size on the bear not the bull.

It's at least as large as the current year plus a good chunk larger than GDP given its really only operating in a few countries for the last few years... It's safe to say that it is highly likely to be significantly larger.

Why do some asset managers earn good returns while others don't?

Infinite money can flood into equities and there will always be someone that generates alpha. If that's BUR you make tremendous gains. If they just get their share of fund flows at market ROIs but the market is structurally attractive for 10 to 15 years you make tremendous gainz with little downside.

Not enough of the bears can paint a scenario with more than 20 to 30 downside... CG did a good job painting it down to 12 ish...

And CG was full of crap.

On returns and valuation, I think people miss the interplay.

Today, Burford earns ~40% ROE's, conservatively. Book value as of the last statement is 4.89GBP. It's worth noting that last year's 30% ROE was an abnormality:

"the FTSE 250 average) needs a word of explanation. Our ROE is of course affected not only by earnings, which increased materially, but also by the rate of growth in our net assets. Thus, because we deployed a record-breaking amount of new investment capital in 2018, we pushed down our ROE for the year".

If we get 40% ROE, then BV/Share at the end fo the year will be 6.85.

If next year returns compress to 25% ROE's (almost a 50% decline!), book value will  be 8.56.

If the year after that returns compress to 20% ROE's (which equates to ~15% ROIC's on their portfolio, down from 30% ROIC's today), then ending book value is 10.27.

Let's say BUR stops there and decides to pay out 100% of its earnings, reinvest nothing in the business, and has no asset management business generating any earnings. At 20% ROE's, and 10% WACC the justified P/B of this company is, with 0 growth (because they pay out 100% of earnings): (ROE - g)/(r - g). 20%/10% = 2x.

This gives us on 10.27 of book value x 2 = 20.54/share. This is with 0 value given to the fee stream from an asset management business, it assumes BUR pays out 100% of earnings in a dividend and does not grow. Were BUR to reinvest 10% of its earnings @ 20% ROE's, that gives you 2% growth, which means the justified P/B would be 2.25x (18%/8%). Even a little growth gets you to over 23GBP even if returns compress almost 50% from today over a mere 3 year period. Good for mid teens returns.

Now, what happens if returns DON'T compress?

If BUR compounds at 40% for 3 years, BV/S will be 13.41 share. What's the valuation of a business that can earn 40% ROE's, reinvest significant parts of their earnings and grow? Well, lets say you assume 30% ROE's is more normal, and they reinvest only 10% of earnings (growth is 3%): justified P/BV @ 10% WACC = 2.7x. That gives you 36 GBP price target on just book value, leaving alone any asset management business they have.

For the AM business, if you manage $3bn @ 1.5%/20% carry with an 8% hurdle and returns are 20%/year, you get a fee stream of $60mn in mgmt fees @ a ~50% operating margin, maybe 40% after tax (note that margins are high because BUR bears much of the costs of investing already, so there are a lot of synergies to doing your own BS investing and having a fund management business). At a 12x multiple, that's worth $288mn.

Your carry is another ~$70mn a year, say at another 50% margin. Capitalize that at 5x, another $180mn in value. So the AM business gives you another ~$470mn or so in value (~1.70GBP per share).

So if this goes poorly, you're looking at maybe 37GBP, 32% annualized.

For you to be a bear at today's prices, you need to prove that returns will compress immediately, and that Burford will be able to reinvest very little back into the business and that the asset management business will not do well.

I think you will do well in Burford.  But I think you are missing the point.  People aren't saying that ROIs aren't high, our argument is you can't look backwards in terms of ROI as they compounded capital in enviroments with less competition.  If they maintain 40% ROIs no way you can lose money.  The question is with so much money flowing in, everyone is IPOing, everyone is starting funds, and everyone is evaluating if paying an external fund to finance your litigation at 40% ROIs for them is worth it when you have the money yourself.  Just on the back of how much assets they are raising by themselves, at some point they are going to run out of things to finance. 

If you invest 3 billion in your fund and 3 billion of your own capital, maybe the market is 60 billion dollars and 50% of that you can't invest in because its 1 million dollar cases, then you are already 20% of your TAM.  Being such a large percentage of TAM unless you have some really compelling value add, which litigation finance sort of does even at that scale due to public company accounting advantages for example, maybe you can make money.  But most of the companies you finance aren't going to have liquidity issues.  At some point many are going to get better deals for themselves and ROI will go down (and it has again compared to companies that are much smaller). 

To @deserelts, I think the bigger size more diversification argument is more marketing than actual substance for the company.  In the public markets there is little return to diversification after the 20th asset.  This is with assets that are correlated.  With legal financing, the assets are not only uncorrelated, but IRRs are in the 50+% range.  If you have a portfolio of 10 to 20 million dollars, no one is even close to a permanent loss of capital even at that size.   Cream of corp may be more valid, but this is asset management.  If I have a lawsuit, I don't care that a big name is financing me or not (as long as they aren't going insolvent), I just want the best deal I can get. 

To @peterHK Again nothing suggests Burford is unnaturally good at underwriting.  Everyone earns IRRs in 30% of higher.  They just perfected the financial engineering side before anyone else. 

my edit: @spartan to address one of your points, although Burford has a large North American presence, many other firms (which were all started in Australia and often listed in London) focus on markets with less regulatory risk and so you can always avoid that risk by picking firms.

Look at IMF Bentham. I feel like Burford has shown its underwriting is better.

My argument is not that returns won't decline, it's that the rate of decline priced in by the market today is, in my opinion, far too fast. I don't believe the argument that just because there's more competition, returns must decline immediately. As I said before, there are trillions of dollars chasing various private assets, yet some firms are continually able to eke out good returns from a combination of factors. Similarly, there are mutual fund firms who's only advantage is they interpret filings better than other people, yet that is enough to keep them compounding in the teens for many years. Increased competition is a necessary, but insufficient condition for a very rapid decline in returns.

It's also worth noting that as BUR takes on different types of investments, their returns will fall naturally, as they indicated at a number of investor days. For example, if you have an investment in a mediated case that settles quickly with lower IRR's, but you can increase asset turns, then your "returns" fall, but you can compound capital at comparable rates because of increased asset turns.

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.

This is why I think returns will be sustainably fairly high here. The equilibrium point at which this is no longer profitable yields massive returns with tiny adjustments in probability of success, meaning that those firms that can gain even tiny edges due to culture/data etc. will reap far higher returns than firms that can't.

So yes.  I may invest in Burford to diversfy my portfolio in this space, but lets discuss this point.  This is a result of a misunderstanding of how financial litigation firms report IRRs.  The problem with IMF Bentham is not that they cannot generate IRRs, their IRRs are great, but when companies report IRRs they report it gross of DD costs.  So the only costs that go into IRRs is calculated only by the amount of money put in as direct investment (and money returned) and not overhead.  With IMF Bentham, historical returns are even negative because they have such a small asset base even though they generate IRRs of 75%, overhead turns these IRRs into negative earnings.  The way to make more money is to have a larger asset base. 

You can calculate this. LIT.L has overhead costs of 4 million pounds this year.  The eaked out maybe 2-3 million in profit (I'm not sure).  However, their equity jumped from something like 12 million to 40 million.  If you assume a return of 75% IRR on the capital, the return is 30 million pounds.  Assume overhead increase by 50% to 6 million pounds and now you have an ROE of 50-60% (net of taxes).  Again this is very conservative, as Burford has what 100 or 200 odd people at a 3 billion market cap, and LIT has 20 at a 100 million MC and so to manage more capital you don't need many more people.  The problem with IMF Bentham, is that historically they were too small.  Even though their IRRs are at the same level as Burford, because they are small, they cannot earn much money.  When a company raises money in the public markets, it can scale up so overhead is moderately spread out. 

To address your diversification questions you don't invest your entire portfolio in one case.  With a portfolio of 20 cases, you invest in 20 cases evenly distributed so each case gets 5% of your assets.  Just doing math.  You have a random variable which has prob 2/3 of being 3 and 1/3 being zero.  You invest 1 and the expected return is 100% (as 2/3*3 +1/3*0 = 2) for simple math.  This is 3 times a Bernoulli random variable with p=2/3.  The standard deviation of Bernoulli rv is sqrt(p*(1-p)) = \sqrt(2)/3, multiply by 3 to get \sqrt(2).  Thus your standard deviation of the mean of 20 3*Bernoulli RV is 1/\sqrt(10) = approx 1/3.  Thus it would require a 3 standard deviation event just to lose money which using the normal approximation has a .13% chance of happening.  So mathematically speaking, with a portfolio of 20 cases, has only a .13% chance of losing money, not to mention the astronomically small chance of going bankrupt.  I understand that more diversification = better.  But my point is after 20 or so cases, the benefits are astronomically small. 

edit: The other thing to think about especially in the case of IMF Bentham, is when you are expanding your portfolio, you tend to show losses as your overhead has to increase first in the DD phase, and then 1 or 2 years later the return rolls forward.  So all the little players who look like they are losing money and terrible businesses, are just being masked by the fact that a.) they have small overhead, and b.) they are rapidly expanding. 
Title: Re: BUR.L - Burford Capital
Post by: SHDL on July 05, 2019, 01:10:07 PM
Regarding diversification, don’t forget about the role of leverage.  One key benefit of greater diversification in businesses like this is that it enables you to earn greater returns on equity via leverage without taking on excessive risk.

Thanks for the idea by the way.  This certainly merits investigation. 
Title: Re: BUR.L - Burford Capital
Post by: Liberty on July 05, 2019, 04:08:11 PM
https://drive.google.com/file/d/1oYQy8AEF0f-3nDk5VV1O8HogxnIJCGy1/view

Via https://twitter.com/austinvalue/status/1147175197683982336?s=21
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 05, 2019, 04:22:40 PM
https://drive.google.com/file/d/1oYQy8AEF0f-3nDk5VV1O8HogxnIJCGy1/view

Via https://twitter.com/austinvalue/status/1147175197683982336?s=21

Worth reading the Artem Fokin piece on Sumzero as well.
Title: Re: BUR.L - Burford Capital
Post by: no_free_lunch on July 06, 2019, 07:29:53 AM
Burford has a link on their site with detailed investment returns.  I recommend that anyone planning to invest take the time to have them send you the results and have a look.  The link is here:

https://www.burfordcapital.com/investors/investor-information/burford-capital-investment-data/

Based on that document, it becomes clear that calculating their investment returns is quite complicated.  There are essentially 3 categories of returns: completed / partially realized / ongoing.   In order to calculate the returns you need to consider the amount in each bucket and use some type of multiplier for the ongoing and part realized.  It will make more sense if I just give some examples.

2011

$123.5m committed capital, $95.4m deployed, $86.7m recovered. 

Based on this information alone, 2011 is a loss.  However, they still have $15m partially realized and $20m ongoing cases.  How much value do you assign to these on-going investments?  It is still possible that they hit it out of the park with some of these but for now they are actually running a loss for the year and perhaps these cases will require additional capital deployed to complete them.  It is interesting that they are 8 years in and they still have almost 40% in progress.

2012

$63.5m committed, $57m deployed, $119.3m recovered.

This was a straight-forward year and it shows what they are capable of.  There is only $0.5m deployed to ongoing cases so this might be it.   Roughly double their total investments, I don't have a summary ROIC but the results seem robust.


2015

$326.1m committed, $243.9m deployed, $274.1m recovered.

They have $95m partially realized and $74m ongoing.   They are already in the black and 2/3 of their cases aren't concluded.  This year looks ok.  It starts to give you a sense of the length of investments, 4 years in and only 1/3 of the way through.


2017

$776.2m committed, $410.6m deployed, $77.4 recovered.

The document only lists $32m of cases as concluded.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 06, 2019, 08:06:22 AM
The longer a case goes on the higher the probability that it becomes a win, so factor that into your calculation.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 06, 2019, 09:17:28 AM
Also:

"When matters settle, they typically conclude more rapidly, and for less than total damages – so IRRs are higher
than the portfolio overall and ROIC is lower. Matters that proceed to adjudication are more profitable but take
longer and thus generate somewhat lower IRRs"
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 06, 2019, 09:24:59 AM
Burford has a link on their site with detailed investment returns.  I recommend that anyone planning to invest take the time to have them send you the results and have a look.  The link is here:

https://www.burfordcapital.com/investors/investor-information/burford-capital-investment-data/

Based on that document, it becomes clear that calculating their investment returns is quite complicated.  There are essentially 3 categories of returns: completed / partially realized / ongoing.   In order to calculate the returns you need to consider the amount in each bucket and use some type of multiplier for the ongoing and part realized.  It will make more sense if I just give some examples.

2011

$123.5m committed capital, $95.4m deployed, $86.7m recovered. 

Based on this information alone, 2011 is a loss.  However, they still have $15m partially realized and $20m ongoing cases.  How much value do you assign to these on-going investments?  It is still possible that they hit it out of the park with some of these but for now they are actually running a loss for the year and perhaps these cases will require additional capital deployed to complete them.  It is interesting that they are 8 years in and they still have almost 40% in progress.

2012

$63.5m committed, $57m deployed, $119.3m recovered.

This was a straight-forward year and it shows what they are capable of.  There is only $0.5m deployed to ongoing cases so this might be it.   Roughly double their total investments, I don't have a summary ROIC but the results seem robust.


2015

$326.1m committed, $243.9m deployed, $274.1m recovered.

They have $95m partially realized and $74m ongoing.   They are already in the black and 2/3 of their cases aren't concluded.  This year looks ok.  It starts to give you a sense of the length of investments, 4 years in and only 1/3 of the way through.


2017

$776.2m committed, $410.6m deployed, $77.4 recovered.

The document only lists $32m of cases as concluded.

What we do know is that they have never written down a case they have marked up, and they generally don't write up a case until it's very obvious it's moving in their favor. They have gone to great great pains to talk about how conservative they are in their accounting.

Can't comment on 2011, but IIRC it was a lower IRR year and they had some issues with a case there: https://fortune.com/2013/01/10/investment-fund-we-were-defrauded-in-suit-against-chevron/

For 2017, it's so early it's fairly meaningless to look at realizations because it's so early.

ALso worth considering some years have cases like Petersen where they invested $17 million, have realized $230-something million in proceeds AND at the last mark to market have a 60%+ stake remaining worth $600 million AND the case is not concluded. Some estimate it would be worth $2.5bn if Burford wins, so it's a case of tails, Burford has made multiples of its money, and heads, their 60% stake is worth almost 1/2 the market cap today. THey don't carry it on the balance sheet anywhere close to what it's worth (which is one reason that BV is understated, so using P/B is a conservative measure if anything for valuing BUR.).
Title: Re: BUR.L - Burford Capital
Post by: Spekulatius on July 06, 2019, 10:27:16 AM
Burford has a link on their site with detailed investment returns.  I recommend that anyone planning to invest take the time to have them send you the results and have a look.  The link is here:

https://www.burfordcapital.com/investors/investor-information/burford-capital-investment-data/

Based on that document, it becomes clear that calculating their investment returns is quite complicated.  There are essentially 3 categories of returns: completed / partially realized / ongoing.   In order to calculate the returns you need to consider the amount in each bucket and use some type of multiplier for the ongoing and part realized.  It will make more sense if I just give some examples.

2011

$123.5m committed capital, $95.4m deployed, $86.7m recovered. 

Based on this information alone, 2011 is a loss.  However, they still have $15m partially realized and $20m ongoing cases.  How much value do you assign to these on-going investments?  It is still possible that they hit it out of the park with some of these but for now they are actually running a loss for the year and perhaps these cases will require additional capital deployed to complete them.  It is interesting that they are 8 years in and they still have almost 40% in progress.

2012

$63.5m committed, $57m deployed, $119.3m recovered.

This was a straight-forward year and it shows what they are capable of.  There is only $0.5m deployed to ongoing cases so this might be it.   Roughly double their total investments, I don't have a summary ROIC but the results seem robust.


2015

$326.1m committed, $243.9m deployed, $274.1m recovered.

They have $95m partially realized and $74m ongoing.   They are already in the black and 2/3 of their cases aren't concluded.  This year looks ok.  It starts to give you a sense of the length of investments, 4 years in and only 1/3 of the way through.


2017

$776.2m committed, $410.6m deployed, $77.4 recovered.

The document only lists $32m of cases as concluded.

It’s interesting they several years into this, some vintages are still cash negative. A lot depends on the residuals being correctly market. As the balance sheet mushroomed, it may just be too convenient to cover bad vintages with new business. That’s what kept me from investing after I looked at it a while ago
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 06, 2019, 12:56:53 PM
Burford has a link on their site with detailed investment returns.  I recommend that anyone planning to invest take the time to have them send you the results and have a look.  The link is here:

https://www.burfordcapital.com/investors/investor-information/burford-capital-investment-data/

Based on that document, it becomes clear that calculating their investment returns is quite complicated.  There are essentially 3 categories of returns: completed / partially realized / ongoing.   In order to calculate the returns you need to consider the amount in each bucket and use some type of multiplier for the ongoing and part realized.  It will make more sense if I just give some examples.

2011

$123.5m committed capital, $95.4m deployed, $86.7m recovered. 

Based on this information alone, 2011 is a loss.  However, they still have $15m partially realized and $20m ongoing cases.  How much value do you assign to these on-going investments?  It is still possible that they hit it out of the park with some of these but for now they are actually running a loss for the year and perhaps these cases will require additional capital deployed to complete them.  It is interesting that they are 8 years in and they still have almost 40% in progress.

2012

$63.5m committed, $57m deployed, $119.3m recovered.

This was a straight-forward year and it shows what they are capable of.  There is only $0.5m deployed to ongoing cases so this might be it.   Roughly double their total investments, I don't have a summary ROIC but the results seem robust.


2015

$326.1m committed, $243.9m deployed, $274.1m recovered.

They have $95m partially realized and $74m ongoing.   They are already in the black and 2/3 of their cases aren't concluded.  This year looks ok.  It starts to give you a sense of the length of investments, 4 years in and only 1/3 of the way through.


2017

$776.2m committed, $410.6m deployed, $77.4 recovered.

The document only lists $32m of cases as concluded.

It’s interesting they several years into this, some vintages are still cash negative. A lot depends on the residuals being correctly market. As the balance sheet mushroomed, it may just be too convenient to cover bad vintages with new business. That’s what kept me from investing after I looked at it a while ago

I'd look at the numbers differently.

Of completed cases: $59.7mn of investment, realizations were $85.3mn.

Of cases partially realized: $15mn funded, $1.4mn realized.

Ongoing: $20mn funded, $0 realized.

So of the completed investments, that's a 42% return. Even if the remaining investments are 0's, the loss isn't material.

Think of this like any other firm: it's not over till it's over. PE firms with 7 year lock ups/fund lives often go to 10 before seeing end of realizations or sales. Same here.
Title: Re: BUR.L - Burford Capital
Post by: Packer16 on July 06, 2019, 02:17:32 PM
Given the location of the internal portfolio (Guersey) is this considered a PFIC for US stockholders or are the any other non-standard tax issues?

Packer
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 06, 2019, 08:39:46 PM
Burford has a link on their site with detailed investment returns.  I recommend that anyone planning to invest take the time to have them send you the results and have a look.  The link is here:

https://www.burfordcapital.com/investors/investor-information/burford-capital-investment-data/

Based on that document, it becomes clear that calculating their investment returns is quite complicated.  There are essentially 3 categories of returns: completed / partially realized / ongoing.   In order to calculate the returns you need to consider the amount in each bucket and use some type of multiplier for the ongoing and part realized.  It will make more sense if I just give some examples.

2011

$123.5m committed capital, $95.4m deployed, $86.7m recovered. 

Based on this information alone, 2011 is a loss.  However, they still have $15m partially realized and $20m ongoing cases.  How much value do you assign to these on-going investments?  It is still possible that they hit it out of the park with some of these but for now they are actually running a loss for the year and perhaps these cases will require additional capital deployed to complete them.  It is interesting that they are 8 years in and they still have almost 40% in progress.

2012

$63.5m committed, $57m deployed, $119.3m recovered.

This was a straight-forward year and it shows what they are capable of.  There is only $0.5m deployed to ongoing cases so this might be it.   Roughly double their total investments, I don't have a summary ROIC but the results seem robust.


2015

$326.1m committed, $243.9m deployed, $274.1m recovered.

They have $95m partially realized and $74m ongoing.   They are already in the black and 2/3 of their cases aren't concluded.  This year looks ok.  It starts to give you a sense of the length of investments, 4 years in and only 1/3 of the way through.


2017

$776.2m committed, $410.6m deployed, $77.4 recovered.

The document only lists $32m of cases as concluded.

It’s interesting they several years into this, some vintages are still cash negative. A lot depends on the residuals being correctly market. As the balance sheet mushroomed, it may just be too convenient to cover bad vintages with new business. That’s what kept me from investing after I looked at it a while ago

I'd look at the numbers differently.

Of completed cases: $59.7mn of investment, realizations were $85.3mn.

Of cases partially realized: $15mn funded, $1.4mn realized.

Ongoing: $20mn funded, $0 realized.

So of the completed investments, that's a 42% return. Even if the remaining investments are 0's, the loss isn't material.

Think of this like any other firm: it's not over till it's over. PE firms with 7 year lock ups/fund lives often go to 10 before seeing end of realizations or sales. Same here.

This is the way I would look at it too. 
Title: Re: BUR.L - Burford Capital
Post by: gokou3 on July 07, 2019, 12:58:39 AM
Aside from lack of liquidity, any risk in buying BRFRF (grey market ADR) instead of the AIM-listed stock (BUR)?
Title: Re: BUR.L - Burford Capital
Post by: no_free_lunch on July 07, 2019, 06:30:00 AM
Peter,. I am just questioning the high roe they claim. These investment results don't look that impressive and I think there's a bit of smoke and mirrors to calculate roe.

Without a high roe it is harder to justify 3x book.
Title: Re: BUR.L - Burford Capital
Post by: tol1 on July 07, 2019, 07:49:25 AM
How do bulls feels comfortable with the following? Just a few points that I have not liked so far.

- Founders having sold a chunk of their holding at the peak
- Mark-to-market accounting
- Difficulty of estimating future cash flows (simply applying a return on capital is as vague as it gets)
- Management being a married couple
- AIM listing

I have not looked into it in detail, but has the accounting become way more aggressive over time? Anyone who has looked into this?
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 07, 2019, 08:18:02 AM
Founders and directors own about 10% of the company (CEO CIO own about 3% each now). Originally Burford outsourced management to the CEO (Bogart) and CIO (Molot) the reorganization a few years back gave them 12% (6% each) in turn for no longer getting a a management fee, that was the start of the evolution from a fund that should trade at a discount to NAV to an operating entity that should be valued on FCF. The founders sold 1/3 of their 6% positions and still have a large majority of their net worth tied to the company. I would be more concerned with another reduction of 1/3, but taking some off the table after a 10 year 15 bagger is something I personally would do as well...

Mark to market accounting or not, what matters is the economic reality of their earnings. If you don't think it makes sense to mark up the Peterson case when they have sold on secondary market multiple times not marking to market would be MORE questionable. I'm not sure they would have a choice in some of these material matters.


It's not more aggressive it's a natural progression of their business.

How to you estimate the future cash flows for any firm? Why is this any different? They will win some, lose some, settle some, and if they do something similar to the last (just like a asset manager) they will create value.

Hopefully they don't get divorced?

AIM: they have a bond prospectus on the main market which requires them to have the more detailed audit that is required (my understanding), they will move up eventually I'd imagine.


Title: Re: BUR.L - Burford Capital
Post by: tol1 on July 07, 2019, 08:29:53 AM
Founders and directors own about 10% of the company (CEO CIO own about 3% each now). Originally Burford outsourced management to the CEO (Bogart) and CIO (Molot) the reorganization a few years back gave them 12% (6% each) in turn for no longer getting a a management fee, that was the start of the evolution from a fund that should trade at a discount to NAV to an operating entity that should be valued on FCF. The founders sold 1/3 of their 6% positions and still have a large majority of their net worth tied to the company. I would be more concerned with another reduction of 1/3, but taking some off the table after a 10 year 15 bagger is something I personally would do as well...

Mark to market accounting or not, what matters is the economic reality of their earnings. If you don't think it makes sense to mark up the Peterson case when they have sold on secondary market multiple times not marking to market would be MORE questionable. I'm not sure they would have a choice in some of these material matters.


It's not more aggressive it's a natural progression of their business.

How to you estimate the future cash flows for any firm? Why is this any different? They will win some, lose some, settle some, and if they do something similar to the last (just like a asset manager) they will create value.

Hopefully they don't get divorced?

AIM: they have a bond prospectus on the main market which requires them to have the more detailed audit that is required (my understanding), they will move up eventually I'd imagine.


I assume you have looked at the accounting change over time. How has it materially changed, if at all?

Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out.

Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR.

Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 07, 2019, 08:38:04 AM
Given the location of the internal portfolio (Guersey) is this considered a PFIC for US stockholders or are the any other non-standard tax issues?

Packer

Great question Packer. I’m surprised Burford hasn’t addressed this in their Investor FAQ section. KKR, which you can argue falls into a similar category, has openly addressed this issue. I’ve emailed the company but I suspect the response will be “talk to your own tax consultant”.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 07, 2019, 08:57:44 AM
Founders and directors own about 10% of the company (CEO CIO own about 3% each now). Originally Burford outsourced management to the CEO (Bogart) and CIO (Molot) the reorganization a few years back gave them 12% (6% each) in turn for no longer getting a a management fee, that was the start of the evolution from a fund that should trade at a discount to NAV to an operating entity that should be valued on FCF. The founders sold 1/3 of their 6% positions and still have a large majority of their net worth tied to the company. I would be more concerned with another reduction of 1/3, but taking some off the table after a 10 year 15 bagger is something I personally would do as well...

Mark to market accounting or not, what matters is the economic reality of their earnings. If you don't think it makes sense to mark up the Peterson case when they have sold on secondary market multiple times not marking to market would be MORE questionable. I'm not sure they would have a choice in some of these material matters.


It's not more aggressive it's a natural progression of their business.

How to you estimate the future cash flows for any firm? Why is this any different? They will win some, lose some, settle some, and if they do something similar to the last (just like a asset manager) they will create value.

Hopefully they don't get divorced?

AIM: they have a bond prospectus on the main market which requires them to have the more detailed audit that is required (my understanding), they will move up eventually I'd imagine.


I assume you have looked at the accounting change over time. How has it materially changed, if at all?

Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out.

Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR.

The way I became comfortable buying the stock at this price is to consider the downside. I think it is fairly certain in 5 years the book value will get to the current market cap. Consider the Petersen case, and consider the momentum of the industry. Also consider Burford didn’t raise capital for 8 years between 2010 and 2018. The book increase in between was due to internal cash generation. If this industry turns to a 7~10% return on equity after 5 years, which I think is a fairly aggressive and pessimistic assumption, AND it stops growing, what kind of multiple will people pay for a dividend stream that is 100% uncorrelated with the market? I think we as value investor tends to disregard what the rest of the world thinks but keep in mind we are only 5% of world. How many assets are out there in the world that is uncorrelated with the market that institutional investor can get their hands on?

Also I think the management is very important. Bentham IMF actually started way earlier than Burford and they are nowhere as successful as Burford. Why?

I wouldn’t say the management knows the industry prospect inside out so their selling 1/3 stake is a negative sign. I would say nobody knows the exact prospect of the industry 5-10 years out. The only way to you can get a sense of where this is going is to talk to the partners at Amlaw 100 firms. I don’t have access to those people unless I got to events such as litigation dispute week London 2019. However, consider the institutional investor who are giving tons of money to Burford. They do have access to those partners. Why are they putting so much money into these funds? Is it soely for diversification?


Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 09:08:50 AM
Founders and directors own about 10% of the company (CEO CIO own about 3% each now). Originally Burford outsourced management to the CEO (Bogart) and CIO (Molot) the reorganization a few years back gave them 12% (6% each) in turn for no longer getting a a management fee, that was the start of the evolution from a fund that should trade at a discount to NAV to an operating entity that should be valued on FCF. The founders sold 1/3 of their 6% positions and still have a large majority of their net worth tied to the company. I would be more concerned with another reduction of 1/3, but taking some off the table after a 10 year 15 bagger is something I personally would do as well...

Mark to market accounting or not, what matters is the economic reality of their earnings. If you don't think it makes sense to mark up the Peterson case when they have sold on secondary market multiple times not marking to market would be MORE questionable. I'm not sure they would have a choice in some of these material matters.


It's not more aggressive it's a natural progression of their business.

How to you estimate the future cash flows for any firm? Why is this any different? They will win some, lose some, settle some, and if they do something similar to the last (just like a asset manager) they will create value.

Hopefully they don't get divorced?

AIM: they have a bond prospectus on the main market which requires them to have the more detailed audit that is required (my understanding), they will move up eventually I'd imagine.


I assume you have looked at the accounting change over time. How has it materially changed, if at all?

Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out.

Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR.

The way I became comfortable buying the stock at this price is to consider the downside. I think it is fairly certain in 5 years the book value will get to the current market cap. Consider the Petersen case, and consider the momentum of the industry. Also consider Burford didn’t raise capital for 8 years between 2010 and 2018. The book increase in between was due to internal cash generation. If this industry turns to a 7~10% return on equity after 5 years, which I think is a fairly aggressive and pessimistic assumption, AND it stops growing, what kind of multiple will people pay for a dividend stream that is 100% uncorrelated with the market? I think we as value investor tends to disregard what the rest of the world thinks but keep in mind we are only 5% of world. How many assets are out there in the world that is uncorrelated with the market that institutional investor can get their hands on?

Also I think the management is very important. Bentham IMF actually started way earlier than Burford and they are nowhere as successful as Burford. Why?

I wouldn’t say the management knows the industry prospect inside out so their selling 1/3 stake is a negative sign. I would say nobody knows the exact prospect of the industry 5-10 years out. The only way to you can get a sense of where this is going is to talk to the partners at Amlaw 100 firms. I don’t have access to those people unless I got to events such as litigation dispute week London 2019. However, consider the institutional investor who are giving tons of money to Burford. They do have access to those partners. Why are they putting so much money into these funds? Is it soely for diversification?

Again the reason Burford is bigger than everyone else is mainly due to figuring out the profitabilty of the whole raise a lot of capital when your trading significantly above book value strategy and not because they are more skilled underwriters than anyone else. Bentham IRRs are in the 80-90% range.  It is untrue that Burford didn't raise capital between 2010 and 2018.  In fact they rasied capital very ofter during that time (750m usd worth of capital actually during that time).  Raising capital is also the smart move in Burford's situation anyways.  You can go to the news section of their site and search "capital raises": https://www.burfordcapital.com/newsroom/?q=capital+raises&type=all .  Burford will be a profitable investment I think, but they don't have any magic that everyone else doesn't have.
 
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 07, 2019, 09:26:09 AM
"Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out"

It may be a signal, or it may not be a signal. I guess we will know in the future if their sales were foreshadowing something. Do you think it was foreshadowing two of their major cases being revaluated upward in the last two months? Burfords CEO and CIO DO NOT KNOW THE PROSPECTS of specific cases, or the timing and because of this they dont give guidance. What they do know is the EXPECTED VALUE of their bets after multiple trials (like the amount of times a fair coin should land on "heads" versus "tails").

Their business is extremely lumpy throughout the two year average duration of their each portfolio. They would not know a good time to sell in any given month or even year, but have better insights looking further out into the future, with prudent underwriting of their bets.

"Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR."

This does not make any sense. Valuing Burford is the same as valuing any other cash generating business. You estimate the potential future free cash flows with a wide range of possibiliites, you apply your probablistic judgement to the infinite decision tree and then you decided if you are paying a reasonble valuation given the quality of the business and the growth potential. For some reason because this business is just slightly different than most businesses that people evaluate many are simply saying this company doesnt smell right, or something is off.

Well of course something is off and doesnt smell right... IT IS DIFFERENT. The fundamentals of finance do not disappear because of a smell...

I may lose money on Burford, and to be honest I kind of expect this to be an underperforming asset, but the expected value IMO is very high looking out five to 10 years. Size the position accordingly for the prospect of 30ish % downside with a multi-bagger potential.


Title: Re: BUR.L - Burford Capital
Post by: tol1 on July 07, 2019, 09:31:17 AM
"Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out"

It may be a signal, or it may not be a signal. I guess we will know in the future if their sales were foreshadowing something. Do you think it was foreshadowing two of their major cases being revaluated upward in the last two months? Burfords CEO and CIO DO NOT KNOW THE PROSPECTS of specific cases, or the timing and because of this they dont give guidance. What they do know is the EXPECTED VALUE of their bets after multiple trials (like the amount of times a fair coin should land on "heads" versus "tails").

Their business is extremely lumpy throughout the two year average duration of their each portfolio. They would not know a good time to sell in any given month or even year, but have better insights looking further out into the future, with prudent underwriting of their bets.

"Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR."

This does not make any sense. Valuing Burford is the same as valuing any other cash generating business. You estimate the potential future free cash flows with a wide range of possibiliites, you apply your probablistic judgement to the infinite decision tree and then you decided if you are paying a reasonble valuation given the quality of the business and the growth potential. For some reason because this business is just slightly different than most businesses that people evaluate many are simply saying this company doesnt smell right, or something is off.

Well of course something is off and doesnt smell right... IT IS DIFFERENT. The fundamentals of finance do not disappear because of a smell...

I may lose money on Burford, and to be honest I kind of expect this to be an underperforming asset, but the expected value IMO is very high looking out five to 10 years. Size the position accordingly for the prospect of 30ish % downside with a multi-bagger potential.


Burford's cash generation cannot be estimated reliably by any means; how do you justify whether the forward IRR will be 10%, 20% etc? 

Again my question, as you stated the accounting has changed over time: how has it changed and what do the changes imply? Have you noticed the revenue recognition wording has changed? Why is that?


Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 09:48:10 AM
Burford's cash generation cannot be estimated reliably by any means; how do you justify whether the forward IRR will be 10%, 20% etc? 

Again my question, as you stated the accounting has changed over time and this seems to be they key argument of bears: how has it changed and what do the changes imply? Have you noticed the revenue recognition has changed? Why is that?

Can you explain what you mean by accounting changes?  How has revenue recognition changed?  I couldn't find that up thread, and I must have missed that looking at Burford. 
Title: Re: BUR.L - Burford Capital
Post by: tol1 on July 07, 2019, 10:00:20 AM
Burford's cash generation cannot be estimated reliably by any means; how do you justify whether the forward IRR will be 10%, 20% etc? 

Again my question, as you stated the accounting has changed over time and this seems to be they key argument of bears: how has it changed and what do the changes imply? Have you noticed the revenue recognition has changed? Why is that?

Can you explain what you mean by accounting changes?  How has revenue recognition changed?  I couldn't find that up thread, and I must have missed that looking at Burford.


Reading financial reports including the footnotes. I have not done the in-depth work, so DYOR please.

 
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 07, 2019, 10:09:04 AM
I believe the "bear" point re "Accounting" is about more of current earnings being unrealized gains flowing through the PnL... This is a natural progression as the business grows, which you can think through yourself.

The main takeaway with unrealized gains isn't that all unrealized gains are aggressive non cash earnings. Sometimes unrelized gains don't represent economic reality, sometimes they do.

They could sell all the Peterson case right now and they would have massive current year cash earnings, but they want to hold onto that asset to maturity, not optimize for short term cash flow smoothing.
 
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 10:21:51 AM
Burford's cash generation cannot be estimated reliably by any means; how do you justify whether the forward IRR will be 10%, 20% etc? 

Again my question, as you stated the accounting has changed over time and this seems to be they key argument of bears: how has it changed and what do the changes imply? Have you noticed the revenue recognition has changed? Why is that?

Can you explain what you mean by accounting changes?  How has revenue recognition changed?  I couldn't find that up thread, and I must have missed that looking at Burford.


Reading financial reports including the footnotes. I have not done the in-depth work, so DYOR please.

I feel like that was unnecessarily snarky, but maybe that was unintentional.  You were the one who brought up revenue recognition changes and I'm curious what the facts are.  If you feel uncomfortable providing analysis that's fine.  Yes I can look it up and I will, but I figured since you brought it up to you, it would be nice if you explained what the revenue recognition changes have occurred. 
Title: Re: BUR.L - Burford Capital
Post by: tol1 on July 07, 2019, 10:24:31 AM
Burford's cash generation cannot be estimated reliably by any means; how do you justify whether the forward IRR will be 10%, 20% etc? 

Again my question, as you stated the accounting has changed over time and this seems to be they key argument of bears: how has it changed and what do the changes imply? Have you noticed the revenue recognition has changed? Why is that?

Can you explain what you mean by accounting changes?  How has revenue recognition changed?  I couldn't find that up thread, and I must have missed that looking at Burford.


Reading financial reports including the footnotes. I have not done the in-depth work, so DYOR please.

Right but you were the one who brought up revenue recognition changes.  So could you explain at least what you mean by that?


Read the financial reports across years, including the footnotes. You said that you looked at the company - without reading the reports? Maybe standards have changed over time, and hence the amendment.


Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 10:30:11 AM
Burford's cash generation cannot be estimated reliably by any means; how do you justify whether the forward IRR will be 10%, 20% etc? 

Again my question, as you stated the accounting has changed over time and this seems to be they key argument of bears: how has it changed and what do the changes imply? Have you noticed the revenue recognition has changed? Why is that?

Can you explain what you mean by accounting changes?  How has revenue recognition changed?  I couldn't find that up thread, and I must have missed that looking at Burford.


Reading financial reports including the footnotes. I have not done the in-depth work, so DYOR please.

Right but you were the one who brought up revenue recognition changes.  So could you explain at least what you mean by that?


Read the financial reports across years, including the footnotes. You said that you looked at the company - without reading the reports? Maybe standards have changed over time, and hence the amendment.

Yes ok.  I've looked at the company 6 months ago.  I don't remember every footnote I read.  I'm not long the company and long something else.  If anything, when I come across the footnote I want to make sure I am reading the same thing you are reading and not seeing one revenue change when you saw another. 
Title: Re: BUR.L - Burford Capital
Post by: writser on July 07, 2019, 10:39:26 AM
Reading financial reports including the footnotes. I have not done the in-depth work, so DYOR please.

Lol, what the fuck. Cameronfen is actually posting some useful insights in this thread. For free. And here comes the guy constantly opening shit topics with zero content, who is always begging for jobs and other people's analyis, asking some arbitrary questions after cursory research and when he is asked to clarify he has the guts to be snarky and say DYOR? Get the fuck outta here. "DYOR" is pretty much the only correct reply to _EVERY_ _SINGLE_ _POST_ you made here.

Quote
If anyone has come across useful industry or other reports on the railroad industry in Northern America, please let me know.

Thanks

Quote
Good afternoon,

Does anyone have information on GMT and or Adelphi Capital? In particular, culture / strategy / track record.

Thanks

Quote
Would be keen to hear about key metrics /drivers and how the current high NTM valuation can be justified accordingly.

Quote
Gents -

Please are there old issues of OID anywhere? Would be very keen to read the first editions. Was told the quality deteriorated in the end.

Thank you

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/wing-us/
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/key-financials-for-private-european-companies/
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/making-the-most-out-of-conferences-whom-to-meet-and-what-to-ask/
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/old-issues-of-outstanding-investor-digest/
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/forensic-accounting-checklist/
http://www.cornerofberkshireandfairfax.ca/forum/events/networking-london/
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ptec-ln-playtech/
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shp-ln-shire/
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aa-aalondon/
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/railroads-in-na-industry-reports/
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/gmt-capital-and-adelphi-capital/

I could go on and on. It's all shit. Your post history here is a disgrace to this forum. Up to a level I'm fine with you adding zero value to this board, but at least you could try to be a bit nicer to people who actually contribute something and are even trying to help you despite you being obnoxious and despite that the fact that you are obviously only leeching on this forum when it helps you with your job. If I was your manager and I saw you behaving like this on this forum I'd fire you instantly.

End of rant, please continue discussing this interesting company 8) .
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 07, 2019, 11:09:57 AM
Founders and directors own about 10% of the company (CEO CIO own about 3% each now). Originally Burford outsourced management to the CEO (Bogart) and CIO (Molot) the reorganization a few years back gave them 12% (6% each) in turn for no longer getting a a management fee, that was the start of the evolution from a fund that should trade at a discount to NAV to an operating entity that should be valued on FCF. The founders sold 1/3 of their 6% positions and still have a large majority of their net worth tied to the company. I would be more concerned with another reduction of 1/3, but taking some off the table after a 10 year 15 bagger is something I personally would do as well...

Mark to market accounting or not, what matters is the economic reality of their earnings. If you don't think it makes sense to mark up the Peterson case when they have sold on secondary market multiple times not marking to market would be MORE questionable. I'm not sure they would have a choice in some of these material matters.


It's not more aggressive it's a natural progression of their business.

How to you estimate the future cash flows for any firm? Why is this any different? They will win some, lose some, settle some, and if they do something similar to the last (just like a asset manager) they will create value.

Hopefully they don't get divorced?

AIM: they have a bond prospectus on the main market which requires them to have the more detailed audit that is required (my understanding), they will move up eventually I'd imagine.


I assume you have looked at the accounting change over time. How has it materially changed, if at all?

Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out.

Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR.

The way I became comfortable buying the stock at this price is to consider the downside. I think it is fairly certain in 5 years the book value will get to the current market cap. Consider the Petersen case, and consider the momentum of the industry. Also consider Burford didn’t raise capital for 8 years between 2010 and 2018. The book increase in between was due to internal cash generation. If this industry turns to a 7~10% return on equity after 5 years, which I think is a fairly aggressive and pessimistic assumption, AND it stops growing, what kind of multiple will people pay for a dividend stream that is 100% uncorrelated with the market? I think we as value investor tends to disregard what the rest of the world thinks but keep in mind we are only 5% of world. How many assets are out there in the world that is uncorrelated with the market that institutional investor can get their hands on?

Also I think the management is very important. Bentham IMF actually started way earlier than Burford and they are nowhere as successful as Burford. Why?

I wouldn’t say the management knows the industry prospect inside out so their selling 1/3 stake is a negative sign. I would say nobody knows the exact prospect of the industry 5-10 years out. The only way to you can get a sense of where this is going is to talk to the partners at Amlaw 100 firms. I don’t have access to those people unless I got to events such as litigation dispute week London 2019. However, consider the institutional investor who are giving tons of money to Burford. They do have access to those partners. Why are they putting so much money into these funds? Is it soely for diversification?

Again the reason Burford is bigger than everyone else is mainly due to figuring out the profitabilty of the whole raise a lot of capital when your trading significantly above book value strategy and not because they are more skilled underwriters than anyone else. Bentham IRRs are in the 80-90% range.  It is untrue that Burford didn't raise capital between 2010 and 2018.  In fact they rasied capital very ofter during that time (750m usd worth of capital actually during that time).  Raising capital is also the smart move in Burford's situation anyways.  You can go to the news section of their site and search "capital raises": https://www.burfordcapital.com/newsroom/?q=capital+raises&type=all .  Burford will be a profitable investment I think, but they don't have any magic that everyone else doesn't have.
 
Capital raise by issuing bond, yes. No equity raise after 2010, the the point that you are trying to make that they raised equity selling stocks at a premium to book isn’t valid. I believe for a while they traded at discount to book because they were paying management fees. But you are right they are ahead of others on the financial engineering side, but wouldn’t that be the reason to own the stock? The two guys running Burford just seem to be so much more than great litigation lawyers. They have the vision while other people are followers. I think in a nascent expanding industry investing alongside the visionaries would be the way to go.

The issue I have with Benthem and LIT is that they were pretty much Australian class action lawsuit funder until recently. I believe LIT hired a guy from Burford to go into commercial litigation. They just don’t have the track record in what they are going into to warrant me purchasing their stock. Also I believe LIT is going with a capital light model that profits from management fees while Burford has significant performance fee structure. I think Burford alignment of interest with their fund investor makes me sleep better.
Title: Re: BUR.L - Burford Capital
Post by: Gregmal on July 07, 2019, 11:11:53 AM
Glorious last post lol(writser). Very true though. Part of being a member of a community, especially a free one, is to chip in, even if only once in a while.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 07, 2019, 11:31:37 AM
Even though I’m long Burdford I have read all the BENTHEM reports going way back. I can’t even figure out who is running the company now. They’ve changed management team and direction so much that I can’t remember who’s actually in charge during what period. LIT delisted their stock from Australia to relist in London. These dynamics reminds me of the Japanese ramen shops run by Japanese  who take it as a religion vs the rest of the shops that sells ramen, Thai noodle , pho, and Taiwanese noodle at the same time. All shops sell ramen at 12-15 dollar but who’s here for the long haul? I’m saying this because all these companies trade on multiples of earnings.  What if they decide to liquidate? Im just not convinced LIT.L is here for the long term.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 11:43:37 AM
Even though I’m long Burdford I have read all the BENTHEM reports going way back. I can’t even figure out who is running the company now. They’ve changed management team and direction so much that I can’t remember who’s actually in charge during what period. LIT delisted their stock from Australia to relist in London. These dynamics reminds me of the Japanese ramen shops run by Japanese  who take it as a religion vs the rest of the shops that sells ramen, Thai noodle , pho, and Taiwanese noodle at the same time. All shops sell ramen at 12-15 dollar but who’s here for the long haul? I’m saying this because all these companies trade on multiples of earnings.  What if they decide to liquidate? Im just not convinced LIT.L is here for the long term.

I don't know if LIT.L is in it for the long haul, the only thing I do know is the economics of stock issuance invest at 70% irr is a winning strategy, and uplisting to a more liquid exchange and issuing shares is exactly what you want to do if you are following that strategy. 
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 11:47:33 AM
Founders and directors own about 10% of the company (CEO CIO own about 3% each now). Originally Burford outsourced management to the CEO (Bogart) and CIO (Molot) the reorganization a few years back gave them 12% (6% each) in turn for no longer getting a a management fee, that was the start of the evolution from a fund that should trade at a discount to NAV to an operating entity that should be valued on FCF. The founders sold 1/3 of their 6% positions and still have a large majority of their net worth tied to the company. I would be more concerned with another reduction of 1/3, but taking some off the table after a 10 year 15 bagger is something I personally would do as well...

Mark to market accounting or not, what matters is the economic reality of their earnings. If you don't think it makes sense to mark up the Peterson case when they have sold on secondary market multiple times not marking to market would be MORE questionable. I'm not sure they would have a choice in some of these material matters.


It's not more aggressive it's a natural progression of their business.

How to you estimate the future cash flows for any firm? Why is this any different? They will win some, lose some, settle some, and if they do something similar to the last (just like a asset manager) they will create value.

Hopefully they don't get divorced?

AIM: they have a bond prospectus on the main market which requires them to have the more detailed audit that is required (my understanding), they will move up eventually I'd imagine.


I assume you have looked at the accounting change over time. How has it materially changed, if at all?

Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out.

Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR.

The way I became comfortable buying the stock at this price is to consider the downside. I think it is fairly certain in 5 years the book value will get to the current market cap. Consider the Petersen case, and consider the momentum of the industry. Also consider Burford didn’t raise capital for 8 years between 2010 and 2018. The book increase in between was due to internal cash generation. If this industry turns to a 7~10% return on equity after 5 years, which I think is a fairly aggressive and pessimistic assumption, AND it stops growing, what kind of multiple will people pay for a dividend stream that is 100% uncorrelated with the market? I think we as value investor tends to disregard what the rest of the world thinks but keep in mind we are only 5% of world. How many assets are out there in the world that is uncorrelated with the market that institutional investor can get their hands on?

Also I think the management is very important. Bentham IMF actually started way earlier than Burford and they are nowhere as successful as Burford. Why?

I wouldn’t say the management knows the industry prospect inside out so their selling 1/3 stake is a negative sign. I would say nobody knows the exact prospect of the industry 5-10 years out. The only way to you can get a sense of where this is going is to talk to the partners at Amlaw 100 firms. I don’t have access to those people unless I got to events such as litigation dispute week London 2019. However, consider the institutional investor who are giving tons of money to Burford. They do have access to those partners. Why are they putting so much money into these funds? Is it soely for diversification?

Again the reason Burford is bigger than everyone else is mainly due to figuring out the profitabilty of the whole raise a lot of capital when your trading significantly above book value strategy and not because they are more skilled underwriters than anyone else. Bentham IRRs are in the 80-90% range.  It is untrue that Burford didn't raise capital between 2010 and 2018.  In fact they rasied capital very ofter during that time (750m usd worth of capital actually during that time).  Raising capital is also the smart move in Burford's situation anyways.  You can go to the news section of their site and search "capital raises": https://www.burfordcapital.com/newsroom/?q=capital+raises&type=all .  Burford will be a profitable investment I think, but they don't have any magic that everyone else doesn't have.
 
Capital raise by issuing bond, yes. No equity raise after 2010, the the point that you are trying to make that they raised equity selling stocks at a premium to book isn’t valid. I believe for a while they traded at discount to book because they were paying management fees. But you are right they are ahead of others on the financial engineering side, but wouldn’t that be the reason to own the stock? The two guys running Burford just seem to be so much more than great litigation lawyers. They have the vision while other people are followers. I think in a nascent expanding industry investing alongside the visionaries would be the way to go.

The issue I have with Benthem and LIT is that they were pretty much Australian class action lawsuit funder until recently. I believe LIT hired a guy from Burford to go into commercial litigation. They just don’t have the track record in what they are going into to warrant me purchasing their stock. Also I believe LIT is going with a capital light model that profits from management fees while Burford has significant performance fee structure. I think Burford alignment of interest with their fund investor makes me sleep better.

Yes you are right I stand corrected.  However they did issue shares in the purchase of then number 2 player gretchen keller. This was the purchase that really cemented them as the number 1 player.  The purchase seems to have been an excellent one though.

Edits: Also as you alluded to I think issuing bonds and executing this playbook basically has the same effect as issuing stock.  Its just now the stock is at 3x book value and not book. 

edit: As far as track record it is true this industry arose out of Australian class action, which is why so many players are Australian.  That being said now Bentham has a record for outside Australia that is quite good on their annual reports.  Its a chart that has ROIC for 10 or so years and US is at 80% and Rest of World amd is at 150% There US record is less impressive but still decent and on par with Burford.  I can't say anything for LIT.L other than whenever anybody goes into the US or Singapore or Canada they generate outsized returns.  I mainly think about the private firms like parabellum, pravati and vannin, in addition to firms like Bentham.  While I don't have returns and irrs for the private firms, basically everyone (like vannin which pulled an ipo) is asking for funding to expand in these markets due to outsized returns.  The point is valid though and I will think more closely on LIT. 
Title: Re: BUR.L - Burford Capital
Post by: reader on July 07, 2019, 11:54:38 AM
Founders and directors own about 10% of the company (CEO CIO own about 3% each now). Originally Burford outsourced management to the CEO (Bogart) and CIO (Molot) the reorganization a few years back gave them 12% (6% each) in turn for no longer getting a a management fee, that was the start of the evolution from a fund that should trade at a discount to NAV to an operating entity that should be valued on FCF. The founders sold 1/3 of their 6% positions and still have a large majority of their net worth tied to the company. I would be more concerned with another reduction of 1/3, but taking some off the table after a 10 year 15 bagger is something I personally would do as well...

Mark to market accounting or not, what matters is the economic reality of their earnings. If you don't think it makes sense to mark up the Peterson case when they have sold on secondary market multiple times not marking to market would be MORE questionable. I'm not sure they would have a choice in some of these material matters.


It's not more aggressive it's a natural progression of their business.

How to you estimate the future cash flows for any firm? Why is this any different? They will win some, lose some, settle some, and if they do something similar to the last (just like a asset manager) they will create value.

Hopefully they don't get divorced?

AIM: they have a bond prospectus on the main market which requires them to have the more detailed audit that is required (my understanding), they will move up eventually I'd imagine.


I assume you have looked at the accounting change over time. How has it materially changed, if at all?

Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out.

Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR.

The way I became comfortable buying the stock at this price is to consider the downside. I think it is fairly certain in 5 years the book value will get to the current market cap. Consider the Petersen case, and consider the momentum of the industry. Also consider Burford didn’t raise capital for 8 years between 2010 and 2018. The book increase in between was due to internal cash generation. If this industry turns to a 7~10% return on equity after 5 years, which I think is a fairly aggressive and pessimistic assumption, AND it stops growing, what kind of multiple will people pay for a dividend stream that is 100% uncorrelated with the market? I think we as value investor tends to disregard what the rest of the world thinks but keep in mind we are only 5% of world. How many assets are out there in the world that is uncorrelated with the market that institutional investor can get their hands on?

Also I think the management is very important. Bentham IMF actually started way earlier than Burford and they are nowhere as successful as Burford. Why?

I wouldn’t say the management knows the industry prospect inside out so their selling 1/3 stake is a negative sign. I would say nobody knows the exact prospect of the industry 5-10 years out. The only way to you can get a sense of where this is going is to talk to the partners at Amlaw 100 firms. I don’t have access to those people unless I got to events such as litigation dispute week London 2019. However, consider the institutional investor who are giving tons of money to Burford. They do have access to those partners. Why are they putting so much money into these funds? Is it soely for diversification?

Again the reason Burford is bigger than everyone else is mainly due to figuring out the profitabilty of the whole raise a lot of capital when your trading significantly above book value strategy and not because they are more skilled underwriters than anyone else. Bentham IRRs are in the 80-90% range.  It is untrue that Burford didn't raise capital between 2010 and 2018.  In fact they rasied capital very ofter during that time (750m usd worth of capital actually during that time).  Raising capital is also the smart move in Burford's situation anyways.  You can go to the news section of their site and search "capital raises": https://www.burfordcapital.com/newsroom/?q=capital+raises&type=all .  Burford will be a profitable investment I think, but they don't have any magic that everyone else doesn't have.
 
Capital raise by issuing bond, yes. No equity raise after 2010, the the point that you are trying to make that they raised equity selling stocks at a premium to book isn’t valid. I believe for a while they traded at discount to book because they were paying management fees. But you are right they are ahead of others on the financial engineering side, but wouldn’t that be the reason to own the stock? The two guys running Burford just seem to be so much more than great litigation lawyers. They have the vision while other people are followers. I think in a nascent expanding industry investing alongside the visionaries would be the way to go.

The issue I have with Benthem and LIT is that they were pretty much Australian class action lawsuit funder until recently. I believe LIT hired a guy from Burford to go into commercial litigation. They just don’t have the track record in what they are going into to warrant me purchasing their stock. Also I believe LIT is going with a capital light model that profits from management fees while Burford has significant performance fee structure. I think Burford alignment of interest with their fund investor makes me sleep better.

Pondside47,
They last raised equity on October 2, 2018

https://www.burfordcapital.com/newsroom/burford-capital-raises-more-than-250-million-for-continuing-expansion/

"Successful equity placing of 10,411,898 new ordinary shares in Burford Capital achieved"
"Burford Capital Limited (“Burford” or the “Company”), the leading global finance and investment management firm focused on law, is pleased to announce that 10,411,898 new Ordinary Shares (the “Placing Shares”) have been placed with existing and new institutional investors and were placed at a price of 1850 pence per share via an accelerated bookbuild (the “Placing”). The Placing raised approximately £192.6 million (US$251.2 million) before expenses and the Placing Shares represent approximately 5 per cent. of the issued ordinary share capital of the Company prior to the Placing. The Placing was well oversubscribed and was priced at a discount of 2.86% to Burford’s volume-weighted average share price since the release of its interim results."
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 07, 2019, 05:12:01 PM
Founders and directors own about 10% of the company (CEO CIO own about 3% each now). Originally Burford outsourced management to the CEO (Bogart) and CIO (Molot) the reorganization a few years back gave them 12% (6% each) in turn for no longer getting a a management fee, that was the start of the evolution from a fund that should trade at a discount to NAV to an operating entity that should be valued on FCF. The founders sold 1/3 of their 6% positions and still have a large majority of their net worth tied to the company. I would be more concerned with another reduction of 1/3, but taking some off the table after a 10 year 15 bagger is something I personally would do as well...

Mark to market accounting or not, what matters is the economic reality of their earnings. If you don't think it makes sense to mark up the Peterson case when they have sold on secondary market multiple times not marking to market would be MORE questionable. I'm not sure they would have a choice in some of these material matters.


It's not more aggressive it's a natural progression of their business.

How to you estimate the future cash flows for any firm? Why is this any different? They will win some, lose some, settle some, and if they do something similar to the last (just like a asset manager) they will create value.

Hopefully they don't get divorced?

AIM: they have a bond prospectus on the main market which requires them to have the more detailed audit that is required (my understanding), they will move up eventually I'd imagine.


I assume you have looked at the accounting change over time. How has it materially changed, if at all?

Taking money off the table is fine, but the timing is a signal to investors as they know the business' prospects (hopefully) inside out.

Regarding valuation: valuing Burford is certainly different than valuing most businesses. One essentially has to assume a forward IRR and the capital that generates the return. I.e., there is no way as an outsider/investor to triangulate the forward IRR.

The way I became comfortable buying the stock at this price is to consider the downside. I think it is fairly certain in 5 years the book value will get to the current market cap. Consider the Petersen case, and consider the momentum of the industry. Also consider Burford didn’t raise capital for 8 years between 2010 and 2018. The book increase in between was due to internal cash generation. If this industry turns to a 7~10% return on equity after 5 years, which I think is a fairly aggressive and pessimistic assumption, AND it stops growing, what kind of multiple will people pay for a dividend stream that is 100% uncorrelated with the market? I think we as value investor tends to disregard what the rest of the world thinks but keep in mind we are only 5% of world. How many assets are out there in the world that is uncorrelated with the market that institutional investor can get their hands on?

Also I think the management is very important. Bentham IMF actually started way earlier than Burford and they are nowhere as successful as Burford. Why?

I wouldn’t say the management knows the industry prospect inside out so their selling 1/3 stake is a negative sign. I would say nobody knows the exact prospect of the industry 5-10 years out. The only way to you can get a sense of where this is going is to talk to the partners at Amlaw 100 firms. I don’t have access to those people unless I got to events such as litigation dispute week London 2019. However, consider the institutional investor who are giving tons of money to Burford. They do have access to those partners. Why are they putting so much money into these funds? Is it soely for diversification?

Again the reason Burford is bigger than everyone else is mainly due to figuring out the profitabilty of the whole raise a lot of capital when your trading significantly above book value strategy and not because they are more skilled underwriters than anyone else. Bentham IRRs are in the 80-90% range.  It is untrue that Burford didn't raise capital between 2010 and 2018.  In fact they rasied capital very ofter during that time (750m usd worth of capital actually during that time).  Raising capital is also the smart move in Burford's situation anyways.  You can go to the news section of their site and search "capital raises": https://www.burfordcapital.com/newsroom/?q=capital+raises&type=all .  Burford will be a profitable investment I think, but they don't have any magic that everyone else doesn't have.
 
Capital raise by issuing bond, yes. No equity raise after 2010, the the point that you are trying to make that they raised equity selling stocks at a premium to book isn’t valid. I believe for a while they traded at discount to book because they were paying management fees. But you are right they are ahead of others on the financial engineering side, but wouldn’t that be the reason to own the stock? The two guys running Burford just seem to be so much more than great litigation lawyers. They have the vision while other people are followers. I think in a nascent expanding industry investing alongside the visionaries would be the way to go.

The issue I have with Benthem and LIT is that they were pretty much Australian class action lawsuit funder until recently. I believe LIT hired a guy from Burford to go into commercial litigation. They just don’t have the track record in what they are going into to warrant me purchasing their stock. Also I believe LIT is going with a capital light model that profits from management fees while Burford has significant performance fee structure. I think Burford alignment of interest with their fund investor makes me sleep better.

Yes you are right I stand corrected.  However they did issue shares in the purchase of then number 2 player gretchen keller. This was the purchase that really cemented them as the number 1 player.  The purchase seems to have been an excellent one though.

Edits: Also as you alluded to I think issuing bonds and executing this playbook basically has the same effect as issuing stock.  Its just now the stock is at 3x book value and not book. 

edit: As far as track record it is true this industry arose out of Australian class action, which is why so many players are Australian.  That being said now Bentham has a record for outside Australia that is quite good on their annual reports.  Its a chart that has ROIC for 10 or so years and US is at 80% and Rest of World amd is at 150% There US record is less impressive but still decent and on par with Burford.  I can't say anything for LIT.L other than whenever anybody goes into the US or Singapore or Canada they generate outsized returns.  I mainly think about the private firms like parabellum, pravati and vannin, in addition to firms like Bentham.  While I don't have returns and irrs for the private firms, basically everyone (like vannin which pulled an ipo) is asking for funding to expand in these markets due to outsized returns.  The point is valid though and I will think more closely on LIT.

Let's think about that logically. IMF Bentham's stock has really not done very much for a few years. Why? They lose money. Revenues have sunk 50% at times. They pay irregular dividends. Clearly their 150% IRR's are NOT translating into business value or stock performance. IMF Bentham BV/Share has gone nowhere in 5 years.

Now let's look at Burford: they've grown consistently, they've generated cash as one can figure out very simply by looking at BV less any stock issuance: in the last 5 years they've issued $250mn in stock and $744 million in debt, and their portfolio has gone from $200mn to $1.6bn (implying $600mn of value created). tangible BV per share has increased every year. Burfords returns are translating into increasing economic value of the firm through a wide variety of measures: cash, growth in portfolio value, BV/Share etc. 

CLEARLY Burford is doing something very very very differently from IMF Bentham, so maybe let's stop using them as comps now? Maybe instead of pointing to IMF as what Burford is going to turn into, lets focus on what Burford is doing differently to make it such a vastly superior business over the last 5 years?

Just a thought.

Title: Re: BUR.L - Burford Capital
Post by: Foreign Tuffett on July 07, 2019, 06:22:46 PM
Interesting conversation about this name on Twitter:

https://twitter.com/_inpractise/status/1148005049961975809 (https://twitter.com/_inpractise/status/1148005049961975809)

I agree with writser that cameronfen has posted some very well-informed thoughts in this thread. I'm not sure what tol1's malfunction is.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 06:41:44 PM
Interesting conversation about this name on Twitter:

https://twitter.com/_inpractise/status/1148005049961975809 (https://twitter.com/_inpractise/status/1148005049961975809)

I agree with writser that cameronfen has posted some very well-informed thoughts in this thread. I'm not sure what tol1's malfunction is.
Thanks for this.  I noticed they mentioned TAM, which they were unsure of.  Bentham has a good chart detailing the TAM penetrated and not in the big markets (UK, Australia, US, Canada):  https://www.imf.com.au/docs/default-source/site-documents/investor-presentation-fy2018-full-year-results (pg 6 for those that don't want to DYOD)
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 07, 2019, 07:06:34 PM
Interesting conversation about this name on Twitter:

https://twitter.com/_inpractise/status/1148005049961975809 (https://twitter.com/_inpractise/status/1148005049961975809)

I agree with writser that cameronfen has posted some very well-informed thoughts in this thread. I'm not sure what tol1's malfunction is.
Thanks for this.  I noticed they mentioned TAM, which they were unsure of.  Bentham has a good chart detailing the TAM penetrated and not in the big markets (UK, Australia, US, Canada):  https://www.imf.com.au/docs/default-source/site-documents/investor-presentation-fy2018-full-year-results (pg 6 for those that don't want to DYOD)

I get ~$75bn in TAM there based on TAM as a % of total legal spend based on their figures.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 07, 2019, 07:14:01 PM
May I add that world legal spend is only part of the TAM? The Peterson case is an example of them buying a stake in the actually reward asset. The annual legal reward is way more than the legal spent.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 07:50:53 PM
May I add that world legal spend is only part of the TAM? The Peterson case is an example of them buying a stake in the actually reward asset. The annual legal reward is way more than the legal spent.

I think when Bentham talks about TAM they are talking about the cost of financing the asset not the total reward.  So in this case, the Peterson case only counts as 17m in the TAM, which is good news. 
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 07, 2019, 07:57:21 PM
May I add that world legal spend is only part of the TAM? The Peterson case is an example of them buying a stake in the actually reward asset. The annual legal reward is way more than the legal spent.

I think when Bentham talks about TAM they are talking about the cost of financing the asset not the total reward.  So in this case, the Peterson case only counts as 17m in the TAM, which is good news.

That's a great point.

Should note that Petersen is like a 10 sigma outlier; I wouldn't be modeling one of those coming along often at all (I would tbh never count on one again).
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 07, 2019, 08:21:33 PM
May I add that world legal spend is only part of the TAM? The Peterson case is an example of them buying a stake in the actually reward asset. The annual legal reward is way more than the legal spent.

I think when Bentham talks about TAM they are talking about the cost of financing the asset not the total reward.  So in this case, the Peterson case only counts as 17m in the TAM, which is good news.

This is running the risk of being too nuanced but I want to discuss this to further my understanding of the legal industry. In my opinion, what Burford paid for the Peterson case is actually not part of the pie on page 6 of the Benthem presentation. Benthem is talking about total legal fees spend on page 6. That is just fees paid to the lawyers that litigation funders can finance and say pay me a 2x multiple if the case is a win. The 17mm paid is an outright purchase of the reward asset. Think about the hedge fund who bought a stake of the Peteson case from Burford. They paid 100mm for 10%. To them, is the Peterson portion of the TAM 17mm or 100mm?

And I agree modeling future Peterson like case would be silly.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 07, 2019, 08:25:57 PM
May I add that world legal spend is only part of the TAM? The Peterson case is an example of them buying a stake in the actually reward asset. The annual legal reward is way more than the legal spent.

I think when Bentham talks about TAM they are talking about the cost of financing the asset not the total reward.  So in this case, the Peterson case only counts as 17m in the TAM, which is good news.

This is running the risk of being too nuanced but I want to discuss this to further my understanding of the legal industry. In my opinion, what Burford paid for the Peterson case is actually not part of the pie on page 6 of the Benthem presentation. Benthem is talking about total legal fees spend on page 6. That is just fees paid to the lawyers that litigation funders can finance and say pay me a 2x multiple if the case is a win. The 17mm paid is an outright purchase of the reward asset. Think about the hedge fund who bought a stake of the Peteson case from Burford. They paid 100mm for 10%. To them, is the Peterson portion of the TAM 17mm or 100mm?

And I agree modeling future Peterson like case would be silly.
So part of legal spend is money that goes to hiring expert witnesses and the like. This is what gets financed by someone like Burford or Bentham.  That's why its depicted as a share of total legal fees as when the asset is originated, it is to pay a law firm the money on behalf of the client.  Although I admit I don't understand exactly what you are getting at. 
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 07, 2019, 08:44:44 PM
May I add that world legal spend is only part of the TAM? The Peterson case is an example of them buying a stake in the actually reward asset. The annual legal reward is way more than the legal spent.

I think when Bentham talks about TAM they are talking about the cost of financing the asset not the total reward.  So in this case, the Peterson case only counts as 17m in the TAM, which is good news.

This is running the risk of being too nuanced but I want to discuss this to further my understanding of the legal industry. In my opinion, what Burford paid for the Peterson case is actually not part of the pie on page 6 of the Benthem presentation. Benthem is talking about total legal fees spend on page 6. That is just fees paid to the lawyers that litigation funders can finance and say pay me a 2x multiple if the case is a win. The 17mm paid is an outright purchase of the reward asset. Think about the hedge fund who bought a stake of the Peteson case from Burford. They paid 100mm for 10%. To them, is the Peterson portion of the TAM 17mm or 100mm?

And I agree modeling future Peterson like case would be silly.
So part of legal spend is money that goes to hiring expert witnesses and the like. This is what gets financed by someone like Burford or Bentham.  That's why its depicted as a share of total legal fees as when the asset is originated, it is to pay a law firm the money on behalf of the client.  Although I admit I don't understand exactly what you are getting at.

I got confused and thought Petersen case was a direct purchase rather than a financing of the legal process. I was trying to get at page 13 and 14 of this presentation

https://www.burfordcapital.com/wp-content/uploads/2019/03/Burford-FY2018-Investor-Presentation.pdf (https://www.burfordcapital.com/wp-content/uploads/2019/03/Burford-FY2018-Investor-Presentation.pdf)

I was trying to make the point that Burford is very innovative in terms of coming up with new ways to monetize their skills. See "Burford's ongoing evolution" on page 5 of https://www.burfordcapital.com/wp-content/uploads/2019/04/BUR-31172-Annual-Report-2018-Web.pdf (https://www.burfordcapital.com/wp-content/uploads/2019/04/BUR-31172-Annual-Report-2018-Web.pdf)

Anyway I think steering the discussion back to downside potential is probably more helpful.
 
Title: Re: BUR.L - Burford Capital
Post by: no_free_lunch on July 07, 2019, 08:55:12 PM
Regarding the downside.

Burford traded at a discount to NAV for the first 5 or 6 years.  It is currently trading at around 3x NAV.  So you could lose 2/3 (or more) of your capital if it reverted to those pricing levels.

You are paying for growth.

However, maybe it is a high quality GARP candidate?  Or at least a high quality growth company. 
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 08, 2019, 04:00:18 AM
You have to adjust book value for Peterson (whcoh could end up being half of the current market value of the company).

Also it traded at a discount to NAV when they paid management fees to CEO and CIO (the reorganization, giving them shares and in sourcing the management to Burford meant in no longer made sense to trade at a discount to NAV).
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 08, 2019, 06:19:37 AM
Regarding the downside.

Burford traded at a discount to NAV for the first 5 or 6 years.  It is currently trading at around 3x NAV.  So you could lose 2/3 (or more) of your capital if it reverted to those pricing levels.

You are paying for growth.

However, maybe it is a high quality GARP candidate?  Or at least a high quality growth company.

I would hesitate to call BV NAV because BUR tends to be slow to mark things up.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 08, 2019, 06:41:24 AM
The implied valuation of Petersen on BUR's BV is $800m as of 12/31/2018. We'll see another ~$200m in income in 1H 2019 due to the latest Petersen sale. BV + USD $200m is fairly accurate.
Title: Re: BUR.L - Burford Capital
Post by: _JJ_ on July 08, 2019, 07:41:43 AM
The implied valuation of Petersen on BUR's BV is $800m as of 12/31/2018. We'll see another ~$200m in income in 1H 2019 due to the latest Petersen sale. BV + USD $200m is fairly accurate.

Burford owns 61.25% of the Petersen entitlement after the 10% sale. So Petersen income in H1 2019 would be closer to $200m*71.25% = $142.5m.



Title: Re: BUR.L - Burford Capital
Post by: no_free_lunch on July 08, 2019, 07:58:57 AM
I would hesitate to call BV NAV because BUR tends to be slow to mark things up.

Yes, but that was true back in 2015 and they traded at or below BV.

I guess the one difference I see is their AM business is much larger and could justify some of the valuation premium.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 08, 2019, 08:32:38 AM
The implied valuation of Petersen on BUR's BV is $800m as of 12/31/2018. We'll see another ~$200m in income in 1H 2019 due to the latest Petersen sale. BV + USD $200m is fairly accurate.

I came up with a different number. Since Burford just sold 10% of its entitlement for 100m, it’s original stake is valued as 1000m on secondary market. However this happened last month so as of year end 2018 it was valued at 800mm on open market. However we know and Burford stressed that they don’t mark it all the way up to 2nd transaction value it is fair to assume it is valued at 600mm x 71.5% = 420mm. The gap from 420m to the full potential reward entitled by Burford has two components.

1) Burford is entitled to a bit more than 50% of the Petersen recovery. Based on the Respol case, the formula works out to 1300m to Burford. 71% of that is 923m
2) the Eton Park stake which is directly related to Petersen case result is worth potentially 210m

So the gap between full recovery and what’s on the book at the end of 2018 is 700m
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 08, 2019, 10:12:39 AM
Thanks for correcting, JJ.


Burford says they consider, but don't necessarily mark to secondary transactions. The implied $800m valuation from the 3.75% sale almost certainly needs to be relied upon to mark their 71.25% interest, as of 12/31/2018. I don't get the assumption that they'd mark for anything less than $800m valuation for Petersen. It was literally their sale. I could imagine cases where Burford considered but did not rely on secondary market transactions they weren't involved in.

In each period there was a direct sale of some partial interest of Petersen, it's probably reasonable to assume the value of Petersen was stepped up and both realized and unrealized gains were recognized. Consider p.30 of the 2018 annual report. It is followed by the unrealized gains as a percentage of income chart, where the increase in unrealized gains as a % matches with when Petersen sales begun. It is surprising for this value to have increased in 2016, considering BUR increased their portfolio by so much and the life cycle of claims, if the Petersen value was not stepped up at this point.

Quote
We have written extensively in the past about how we account for our investments under IFRS and will not repeat our prior comments here. In short, we hold litigation investments at invested cost until there is some objective event in the underlying litigation that would cause a change in value, whereupon we are required under IFRS to attempt to reflect the market impact (up or down) of that objective event



As to Eton Park, that's possible. I don't have enough information to accurately assume anything about Eton and I haven't read the $210m value anywhere.

Quote
"There is no active secondary market for litigation risk, and thus there is generally no market-based approach to assessing fair value; to the extent that a secondary market transaction does take place with respect to an investment, the implied value of that transaction is a relevant valuation input."
p.48 of BUR's 2018 annual report


If you are truly going to go down the path of determining NAV, then I think we should looked at adjusted income statements, ex-Petersen as indicative of what the average year for BUR looks like. Going off memory, There was $270m of revenue in 2018 related to Petersen, $30m of which was realized (due to the 3.75% sale).

That implies that BUR had $45m of EBT in 2018. 2017 adjusted BV (ex-Petersen) was roughly $370m. BUR's adjusted ROE for 2018 is approximately 12%, which is more in line with what BUR reported prior to Petersen step-ups, what IMF reports in non-extraordinary years, and a reasonable rate of return for a financier.

Just something to consider when reviewing BUR's 30%+ ROE.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 08, 2019, 10:15:28 AM
Schwab711 this is simply not how they mark their investments, that would be way to aggressive.

Jefferies estimates its on the books at about $200 million.

Thanks

Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 08, 2019, 10:21:15 AM
See page 22 and 23 of the full year 2017. You will see at least they claim to not mark it all the way up to the valuation based on small parcel sales. 
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 08, 2019, 10:31:06 AM
See page 22 and 23 of the full year 2017. You will see at least they claim to not mark it all the way up to the valuation based on small parcel sales.

In that passage, they are saying that the interests they sold at $400m and $440m implied valuations were re-trading in the secondary market at a $660m valuation. BUR is saying that they consider but may not rely on secondary market transactions. I am assuming that BUR does not rely on any secondary transactions that they did not participate in. Knowing what I do about fair value accounting and some I've read about FV accounting for IFRS, I find it hard to believe that BUR can sell a partial interest at one price and mark their remaining interest at any other price.


Quote
In late 2016 and the first half of 2017, Burford sold 25% of its interest in the Petersen outcome into a secondary market we are working to build. The sale price of that interest was $106 million; Burford’s investment to date was approximately $17 million.

Thus, Burford has no risk of principal loss in the matter and continues to hold 75% of its entitlement. Since the secondary sales, there has been trading activity in the secondary market throughout the year at varying price levels, with the weighted average price in 2017 implying a value of around $660 million for Burford’s total original investment – in other words, the value placed on Petersen by third party investors has continued to climb from the $440 million valuation implied by our final tranche of sales
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 08, 2019, 10:31:16 AM
Schwab711 it does not make sense with the inherent return distrbution in Litigation Finance to ignore the winners. It is like saying Benchmark is bad at VC without Uber.
The whole idea is many losers give one massive outsized gain. Saying that outsized gain doesnt count ignores literally what they are trying to do (capture mispriced massive call options). Another parrarel would be saying 90% of options expire worthless so buying options is a bad idea (that misses the point in a similar way). What matters is expected value not the number of winners.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 08, 2019, 10:37:33 AM
Schwab711 it does not make sense with the inherent return distrbution in Litigation Finance to ignore the winners. It is like saying Benchmark is bad at VC without Uber.
The whole idea is many losers give one massive outsized gain. Saying that outsized gain doesnt count ignores literally what they are trying to do (capture mispriced massive call options). Another parrarel would be saying 90% of options expire worthless so buying options is a bad idea (that misses the point in a similar way). What matters is expected value not the number of winners.

They are pointing this out to show you how conservative their marks are... You can look at the totla fair value adjustments on their books and see that it is nowhere close to your estimates + your estimates would imply that none of their other investments have been written up. Does that make sense? Thanks
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 08, 2019, 10:39:14 AM
Schwab711 it does not make sense with the inherent return distrbution in Litigation Finance to ignore the winners. It is like saying Benchmark is bad at VC without Uber.
The whole idea is many losers give one massive outsized gain. Saying that outsized gain doesnt count ignores literally what they are trying to do (capture mispriced massive call options). Another parrarel would be saying 90% of options expire worthless so buying options is a bad idea (that misses the point in a similar way). What matters is expected value not the number of winners.

That's fine. But to earn a P/B valuation of 3x+, BUR needs to earn 30% returns. BUR's recent returns are almost certainly based on one case that is not repeatable (BUR will not have a 50x+ investment with $1b+ in proceeds every few years). Backing out this outlier (which we only can because BUR provided enough info to be able to) gives a better sense of what an average year may look like. The Petersen-like homeruns are a bonus that can be handled in boosting the multiples in such a way, if you prefer. We can't capitalize Petersen though.



I suppose we can agree to disagree on the accounting. Unless someone knows a standard that I don't, I'm fairly sure they need to mark up their values to their personal sales. What better number could there possibly be?
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 08, 2019, 10:42:50 AM
You can look at the totla fair value adjustments on their books and see that it is nowhere close to your estimates + your estimates would imply that none of their other investments have been written up.

What balance are you looking at? The fact that taxes are negative despite large reported gains suggests that reported EBT is primarily unrealized gains. Further, the suggestion that few, if any, other investment have been written up also seems consistent since BUR seems to hold most interests to maturity. They have stated they are handling Petersen differently for risk management purposes. Few other claims have moved the needle like Petersen. This is all consistent with what I'm saying.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 08, 2019, 10:45:27 AM
I give up
Title: Re: BUR.L - Burford Capital
Post by: spartan on July 08, 2019, 10:57:46 AM
This is probably a stupid question, but if litigation and finance have both been around for centuries, why have they suddenly partnered? Specifically, Burford has exploded post-GFC. Doesn't the timing of their rise seem strangely coincidental to anyone? Surely, the rise of litigation finance is not due to recent technological innovation, regulatory changes, etc.

Isn't this just a hidden macro play? (i.e. reach for yield) I've read so much of Burford's material and can't find a competitive advantage (other than data...potentially).
Title: Re: BUR.L - Burford Capital
Post by: cherzeca on July 08, 2019, 11:28:12 AM
lawyer and private investor, here.  litigation finance is a virginal field and there are pricing inefficiencies in favor of the supplier of capital.  having said that, litigation is famously unpredictable and I am watching this from sidelines. not correlated with markets generally so there is a certain hedge play there too.  to me, it is still alt-alt though
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 08, 2019, 11:37:27 AM
If the figures I'm using are wrong feel free to correct me. Maybe I made a mistake somewhere. If you really think Jeffries stated what Petersen is on the books for can you show me a quote or something? It just contradicts what I know about fair value accounting so it's hard to believe as is. I can tell you how I looked at taxes but there's only so much we can read in book taxes, given the corporate structure. It looks like unrealized gains represents most of EBT in the last 3 years.

Just looking at the table on p.30 (2018 AR). Unrealized gains were 36% and 39% of investments in 2017 and 2018, respectively. That's $387m and $621m. That implies $234m of unrealized gains reported in 2018 revenue. That is pretty darn close to the calculated number for Petersen in 2018. If we repeat this for 2016 and 2017, we get $214m in unrealized gains reported as revenue in 2017. In 2016, unrealized gains represented $87m.

From the 2016 AR, Petersen was written up some, but no where near all the way to a $400m valuation. Perfect, we can see that. In 2017, BUR says they are aware of the $660m valuation trades but did not rely on them. If they went to $440m valuation at this point (the second direct sale at this price and conservative to secondary trading), that roughly fits what we measure (~$300m total unrealized gains + $106m proceeds on $440m valuation). If in 2018 they went to $800m (again, 3rd direct sale now and conservative to secondary trading), that again fits what we can calculate.

All of this fit the situation of negative book taxes with high reported income. Taxable income would be much lower with these unrealized gains. This all fits the cash flow statements. If there's issues with breaking out Petersen like this I'm open to hearing them but this seems all seems consistent with everything I've read from BUR. That means Petersen represents the majority of earnings between 2016-2018.

As to the quality of the business, I agree with you and others that it's a nice business. I may disagree on how to value it but it's a business I'd like to own. I like the trends in lit finance, I like that cash flows are generally uncorrelated, and so on. Packer brought up a great point about PFIC that I can't find a specific answer to, but it sure seems like it would be classified as such. I don't know much about all of that so that's a bit concerning. I don't know what I'd pay for BUR yet but I think it's worth getting comfortable with them since I would own them at some price.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 08, 2019, 12:01:32 PM
If the figures I'm using are wrong feel free to correct me. Maybe I made a mistake somewhere. If you really think Jeffries stated what Petersen is on the books for can you show me a quote or something? It just contradicts what I know about fair value accounting so it's hard to believe as is. I can tell you how I looked at taxes but there's only so much we can read in book taxes, given the corporate structure. It looks like unrealized gains represents most of EBT in the last 3 years.

Just looking at the table on p.30 (2018 AR). Unrealized gains were 36% and 39% of investments in 2017 and 2018, respectively. That's $387m and $621m. That implies $234m of unrealized gains reported in 2018 revenue. That is pretty darn close to the calculated number for Petersen in 2018. If we repeat this for 2016 and 2017, we get $214m in unrealized gains reported as revenue in 2017. In 2016, unrealized gains represented $87m.

From the 2016 AR, Petersen was written up some, but no where near all the way to a $400m valuation. Perfect, we can see that. In 2017, BUR says they are aware of the $660m valuation trades but did not rely on them. If they went to $440m valuation at this point (the second direct sale at this price and conservative to secondary trading), that roughly fits what we measure (~$300m total unrealized gains + $106m proceeds on $440m valuation). If in 2018 they went to $800m (again, 3rd direct sale now and conservative to secondary trading), that again fits what we can calculate.

All of this fit the situation of negative book taxes with high reported income. Taxable income would be much lower with these unrealized gains. This all fits the cash flow statements. If there's issues with breaking out Petersen like this I'm open to hearing them but this seems all seems consistent with everything I've read from BUR. That means Petersen represents the majority of earnings between 2016-2018.

As to the quality of the business, I agree with you and others that it's a nice business. I may disagree on how to value it but it's a business I'd like to own. I like the trends in lit finance, I like that cash flows are generally uncorrelated, and so on. Packer brought up a great point about PFIC that I can't find a specific answer to, but it sure seems like it would be classified as such. I don't know much about all of that so that's a bit concerning. I don't know what I'd pay for BUR yet but I think it's worth getting comfortable with them since I would own them at some price.

As far as more bearish arguments from me I got nothing.  Schwab's point about Peterson accounting for almost all of earnings is a better point than anything I could come up with. 

I will say, even though Peterson is will not occur every other year or even once every three years, but if you probably shouldn't necessarily model it as a one-off either.  LIT had one 56x and one 39x in a period of 7.5 years.  I couldn't find individual claims data for anyone else, but judging by everyone's reported ROIC of 1.6x or higher, I wouldn't be surprised if these occurred in some frequency in other players as well. 
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 08, 2019, 12:08:37 PM
If the figures I'm using are wrong feel free to correct me. Maybe I made a mistake somewhere. If you really think Jeffries stated what Petersen is on the books for can you show me a quote or something? It just contradicts what I know about fair value accounting so it's hard to believe as is. I can tell you how I looked at taxes but there's only so much we can read in book taxes, given the corporate structure. It looks like unrealized gains represents most of EBT in the last 3 years.

Just looking at the table on p.30 (2018 AR). Unrealized gains were 36% and 39% of investments in 2017 and 2018, respectively. That's $387m and $621m. That implies $234m of unrealized gains reported in 2018 revenue. That is pretty darn close to the calculated number for Petersen in 2018. If we repeat this for 2016 and 2017, we get $214m in unrealized gains reported as revenue in 2017. In 2016, unrealized gains represented $87m.

From the 2016 AR, Petersen was written up some, but no where near all the way to a $400m valuation. Perfect, we can see that. In 2017, BUR says they are aware of the $660m valuation trades but did not rely on them. If they went to $440m valuation at this point (the second direct sale at this price and conservative to secondary trading), that roughly fits what we measure (~$300m total unrealized gains + $106m proceeds on $440m valuation). If in 2018 they went to $800m (again, 3rd direct sale now and conservative to secondary trading), that again fits what we can calculate.

All of this fit the situation of negative book taxes with high reported income. Taxable income would be much lower with these unrealized gains. This all fits the cash flow statements. If there's issues with breaking out Petersen like this I'm open to hearing them but this seems all seems consistent with everything I've read from BUR. That means Petersen represents the majority of earnings between 2016-2018.

As to the quality of the business, I agree with you and others that it's a nice business. I may disagree on how to value it but it's a business I'd like to own. I like the trends in lit finance, I like that cash flows are generally uncorrelated, and so on. Packer brought up a great point about PFIC that I can't find a specific answer to, but it sure seems like it would be classified as such. I don't know much about all of that so that's a bit concerning. I don't know what I'd pay for BUR yet but I think it's worth getting comfortable with them since I would own them at some price.

You're right unrealized gains are over 50%  of EBT. That's fine.

But I think you're placing too much weight on Petersen. Yes, the numbers line up but lets say they made an average of $80mn of unrealized gains on all their dozens of other investments, that then reduces how much Petersen was marked up by. I mean I find it highly unlikely given the fact they release their returns by vintage for everyone to see that Petersen is 100% or close to 100% of unrealized gains for the last 3 years.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 08, 2019, 01:56:20 PM
If the figures I'm using are wrong feel free to correct me. Maybe I made a mistake somewhere. If you really think Jeffries stated what Petersen is on the books for can you show me a quote or something? It just contradicts what I know about fair value accounting so it's hard to believe as is. I can tell you how I looked at taxes but there's only so much we can read in book taxes, given the corporate structure. It looks like unrealized gains represents most of EBT in the last 3 years.

Just looking at the table on p.30 (2018 AR). Unrealized gains were 36% and 39% of investments in 2017 and 2018, respectively. That's $387m and $621m. That implies $234m of unrealized gains reported in 2018 revenue. That is pretty darn close to the calculated number for Petersen in 2018. If we repeat this for 2016 and 2017, we get $214m in unrealized gains reported as revenue in 2017. In 2016, unrealized gains represented $87m.

From the 2016 AR, Petersen was written up some, but no where near all the way to a $400m valuation. Perfect, we can see that. In 2017, BUR says they are aware of the $660m valuation trades but did not rely on them. If they went to $440m valuation at this point (the second direct sale at this price and conservative to secondary trading), that roughly fits what we measure (~$300m total unrealized gains + $106m proceeds on $440m valuation). If in 2018 they went to $800m (again, 3rd direct sale now and conservative to secondary trading), that again fits what we can calculate.

All of this fit the situation of negative book taxes with high reported income. Taxable income would be much lower with these unrealized gains. This all fits the cash flow statements. If there's issues with breaking out Petersen like this I'm open to hearing them but this seems all seems consistent with everything I've read from BUR. That means Petersen represents the majority of earnings between 2016-2018.

As to the quality of the business, I agree with you and others that it's a nice business. I may disagree on how to value it but it's a business I'd like to own. I like the trends in lit finance, I like that cash flows are generally uncorrelated, and so on. Packer brought up a great point about PFIC that I can't find a specific answer to, but it sure seems like it would be classified as such. I don't know much about all of that so that's a bit concerning. I don't know what I'd pay for BUR yet but I think it's worth getting comfortable with them since I would own them at some price.

Schwab711, it seems the way you justify the claim that most of the unrealized gains from 2017 and 2018 was related to Petersen, at least the way you laid it out in the quoted paragraphs, is by assuming Burford is guilty first and go out look for pieces that fit your theory.

It seems that the one piece of support to your claim is that your understanding of FV accounting. But people who has a different view understands accounting two. I would say FV accounting is already grey and FV accounting for litigation funders is even worse. Here, previous good behaviors of Burford mean more to me than rigid accounting rules.

Could what you are claiming be right? Absolutely! But the way the reasoning was presented is not enough to convince me. There are evidence out there that support the opposite. Burford rarely has written down an investment that was written up and it would be imprudent to mark up to 800m valuation based on a 3.75% stake sale. I read all the Burford reports several times from the 2009 one, and I get the sense that the managements are rather forthcoming and transparent. They laid things out so that it is easy to understand despite of them being a bunch of lawyers. I found Benthem reports very hard to follow.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 08, 2019, 02:56:10 PM
What do you mean by good behavior?


People questioned why I thought BUR was using market pricing to conclude unrealized values so I showed. I can further show why I think Petersen in particular is the subject but at some point my point is not to convince you. I can't short BUR and I'm not going long at these prices so I have nothing to gain right now. I'm just walking you through some of the DD steps I took. Do what you want with it.

One thing I'd note about the "conservative" accounting angle is the knock-on effects. We know exactly when BUR adjusts the FV of its investments. They state that they will update if there is a court granted summary judgement. Along the way, they must mark investments to FV, so they favor looking at settlement offers or market transactions like sales of an interest and secondary trades. They state they are conservative. That's fine but if they are too conservative then the opposite side of "BUR BV is undervalued" is "BUR has cookie jar accounting". Cookie jar accounting is a loaded term and I'm not suggesting funny business has occurred. What I'm saying is if BUR is as conservative as you are saying then we also have a problem. We have a problem because the nature of BUR's return distribution and the lack of similar Petersen like homeruns raises the question of where are all the unrealized gains coming from? Is cash generation too low if the unrealized gains are not Petersen related? Various other accounting questions are raised if we assume Petersen accounting is too conservative. I haven't finished tackling this outcome (I also don't think it's probable) but it's something to consider if you don't agree with my previous posts.
Title: Re: BUR.L - Burford Capital
Post by: writser on July 08, 2019, 03:01:57 PM
Page 23 of the 2018 AR they say:

Quote
Very large and widely diversified investment
portfolio comprised of $1.9 billion in traditional
litigation finance investments (and $3.2 billion
when including principal strategies and fund
investments)
■ 1,110 individual litigation claims underlying
investment portfolio
■ No concentration – no defendant represents
even 5% of total commitments, no single case
capital loss would amount to more than 3%
of total commitments and our largest law firm
relationship accounts for 17% of investments
across more than 50 different partners

That seems hard to square with a $800m valuation for the Petersen case, or not? Though how a lawyer defines 'defendant', 'total commitments' or 'single case capital loss' and if this includes 'principal strategies' or 'fund investments', I don't know.
Title: Re: BUR.L - Burford Capital
Post by: bizaro86 on July 08, 2019, 03:08:30 PM
Page 23 of the 2018 AR they say:

Quote
Very large and widely diversified investment
portfolio comprised of $1.9 billion in traditional
litigation finance investments (and $3.2 billion
when including principal strategies and fund
investments)
■ 1,110 individual litigation claims underlying
investment portfolio
■ No concentration – no defendant represents
even 5% of total commitments, no single case
capital loss would amount to more than 3%
of total commitments and our largest law firm
relationship accounts for 17% of investments
across more than 50 different partners

That seems hard to square with a $800m valuation for the Petersen case, or not? Though how a lawyer defines 'defendant', 'total commitments' or 'single case capital loss' and if this includes 'principal strategies' or 'fund investments', I don't know.

I imagine "commitments" is measured based on the money they committed to fund cases, not their current book value. So a single home run could be a significant portion of book without being a significant portion of commitments, if that now have it valued at many times what they originally committed to pay for the interest.
Title: Re: BUR.L - Burford Capital
Post by: writser on July 08, 2019, 03:25:47 PM
Yeah I think you are correct. Bit of a cheeky way to promote your portfolio diversification in that case ("yes we are very diversified but if the Petersen case implodes worst case we lose 1/3 of our assets"). Also on page 14 they show a chart for "Balance sheet commitments" though by the same reasoning that chart has nothing to do with the balance sheet.

Bit like WEB saying his personal portfolio is very diversified .. When looking at cost basis.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 08, 2019, 03:43:26 PM
Page 23 of the 2018 AR they say:

Quote
Very large and widely diversified investment
portfolio comprised of $1.9 billion in traditional
litigation finance investments (and $3.2 billion
when including principal strategies and fund
investments)
■ 1,110 individual litigation claims underlying
investment portfolio
■ No concentration – no defendant represents
even 5% of total commitments, no single case
capital loss would amount to more than 3%
of total commitments and our largest law firm
relationship accounts for 17% of investments
across more than 50 different partners

That seems hard to square with a $800m valuation for the Petersen case, or not? Though how a lawyer defines 'defendant', 'total commitments' or 'single case capital loss' and if this includes 'principal strategies' or 'fund investments', I don't know.

I imagine "commitments" is measured based on the money they committed to fund cases, not their current book value. So a single home run could be a significant portion of book without being a significant portion of commitments, if that now have it valued at many times what they originally committed to pay for the interest.

It's exactly that. It has only a moderate relationship with balance sheet value.

I tried to consider if 17% of investments meant the balance sheet item but I think it's investment count (17% of 1,110).
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 08, 2019, 09:39:42 PM
This is speculation, but the thought occurred to me.  Maybe this was mentioned already.  For the intial sale, why do you sell a 3.75% stake in Peterson?  If you are derisking, it makes sense to sell 20% or 30% of an asset worth 50% of your book value, but 4%, why so little?   If they need the money, they can easily tap the liquidity in the capital markets, compared to selling Peterson at valuations outside observers consider low.  I think the reason you sell such a small sliver is so they can write up the valuation.
Title: Re: BUR.L - Burford Capital
Post by: no_free_lunch on July 08, 2019, 09:40:31 PM
Regarding the Petersen case.  This is all from the 2017 annual report.

Quote
In late 2016 and the first half of 2017, Burford sold 25% of its interest in the Petersen outcome into a secondary market we are working to build. The sale price of that interest was $106 million; Burford’s investment to date was approximately $17 million. Thus, Burford has no risk of principal loss in the matter and continues to hold 75% of its entitlement.

Since the secondary sales, there has been trading activity in the secondary market throughout the year at varying price levels, with the weighted average price in 2017 implying a value of around $660 million for Burford’s total original investment – in other words, the value placed on Petersen by third party investors has continued to climb from the $440 million valuation implied by our final tranche of sales

We have thus increased the carrying value of  our remaining investment in Petersen. We do  not release individual investment carrying values for reasons of client confidentiality and litigation strategy but we can say that we have acted conservatively with respect to Petersen as is  our general practice. In the end, we altered  the carrying value of 15 investments in 2017  and the net increase in value across all of those investments was $181 million, so it is clear that  we have not increased the carrying value of Petersen to anything approaching its secondary market trading level, which we do not regard as determinative of our own carrying value.
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 09, 2019, 06:48:58 AM
Look at Teinver as an example of how Burford marks cases.

Teinver was a $140 million payout, and we know that it was held at far less than $100mn even after a favorable judgment. As per the 2017 annual report:

"We invested approximately $13 million in the matter, and the carrying value subsequently increased to $30 million several years ago following a mid-case success on an important
jurisdictional matter."

Burford won the case in July 2017, the above statement was as of December 2017. The case was sold in March of 2018, meaning the realized gain would show up in the mid year report.

Burford realized almost 200mn in income from gains in H1 2018, 62% of that is realized or ~$124mn. The more of this that Teinver accounts for, the lower the original mark, so let's say Teinver is 1/2 of this gain: that means it accounted for $64 million of realized gain. Teinver sale of $107 less the $13mn cost, means $94mn of gain, less $64mn means this was still held at $30 million on the balance sheet until the sale.

We can also corroborate this with the chart that Burford provides on page 6 of it's 2018 interim report showing that of the concluded portfolio, 4% of valuation changes occurred 4 years to conclusion, 7% 3 years; 12% 2 years; and only 35% by 1 year to conclusion. This means that 65% of their investment profit has never been taken before investment conclusion. This is why it is rare for investments to swing to a loss after incurring a write up: they do not write up cases significantly until they are concluded.

I seriously don't understand how, if you've done the work, you can't get comfortable with this stuff. Burford goes to such great pains to explain and provide data about what they do.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 09, 2019, 08:18:36 AM
I seriously don't understand how, if you've done the work, you can't get comfortable with this stuff. Burford goes to such great pains to explain and provide data about what they do.

I appreciate you clarifying what you meant. Nothing you said contradicts what I've wrote so far. I agree with you that what I've wrote is not conclusive. I don't know it to be true, I only said that it is consistent with everything BUR has provided us (which is also consistent with what you have wrote). That's the issue, right? There is not enough information to know where the money is coming from. That's fine, but it is that ambiguity that is causing our disagreement over what the financial picture is because there are many possible realities.

One correction. The table on p.6 of the 1H2018 report implies that 42% of investment profit is taken at conclusion (1 - 4% - 7% - 12% - 35% = 42%). That's kind of my point. BUR provides a lot of data, but it's not always straightforward how to apply it.


There are plenty of things BUR could do to reduce uncertainty over what their historical financials actually mean:
BUR could obviously just provide the marks of their 10 interests.
They could breakout the realized and unrealized gains and losses each reporting period instead of providing approximate figures on a net basis.
They could provide a table that shows the valuation technique used for non-cost based FVs.
They could disclose the mark for interests representing more than 10% of total investments.
They could just disclose the mark for Petersen, which is obviously material to the valuation of BUR at the moment.

I don't understand why it bothers you so much that I'm providing earnest push-back. That's the point of an investing forum. It goes without saying that knowing the mark used for Petersen or any of the large interests would obviously make it easier to value BUR. Why give BUR credit for better disclosure than they actually provide just because of their prior returns? On one hand, everyone acknowledges they are a blackbox. On the other hand, not just you but many point to the amount of data BUR provides and their conservative accounting. So what gives? So are they a blackbox or is there great disclosure? If there was great disclosure then we wouldn't be trying to figure out what gains were taken when and to what magnitude.
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 09, 2019, 10:11:04 AM
I seriously don't understand how, if you've done the work, you can't get comfortable with this stuff. Burford goes to such great pains to explain and provide data about what they do.

I appreciate you clarifying what you meant. Nothing you said contradicts what I've wrote so far. I agree with you that what I've wrote is not conclusive. I don't know it to be true, I only said that it is consistent with everything BUR has provided us (which is also consistent with what you have wrote). That's the issue, right? There is not enough information to know where the money is coming from. That's fine, but it is that ambiguity that is causing our disagreement over what the financial picture is because there are many possible realities.

One correction. The table on p.6 of the 1H2018 report implies that 42% of investment profit is taken at conclusion (1 - 4% - 7% - 12% - 35% = 42%). That's kind of my point. BUR provides a lot of data, but it's not always straightforward how to apply it.


There are plenty of things BUR could do to reduce uncertainty over what their historical financials actually mean:
BUR could obviously just provide the marks of their 10 interests.
They could breakout the realized and unrealized gains and losses each reporting period instead of providing approximate figures on a net basis.
They could provide a table that shows the valuation technique used for non-cost based FVs.
They could disclose the mark for interests representing more than 10% of total investments.
They could just disclose the mark for Petersen, which is obviously material to the valuation of BUR at the moment.

I don't understand why it bothers you so much that I'm providing earnest push-back. That's the point of an investing forum. It goes without saying that knowing the mark used for Petersen or any of the large interests would obviously make it easier to value BUR. Why give BUR credit for better disclosure than they actually provide just because of their prior returns? On one hand, everyone acknowledges they are a blackbox. On the other hand, not just you but many point to the amount of data BUR provides and their conservative accounting. So what gives? So are they a blackbox or is there great disclosure? If there was great disclosure then we wouldn't be trying to figure out what gains were taken when and to what magnitude.

I think you're reading that table wrong. It is cumulative not incremental. So that final number is that cumulatively over 4 years 35% of profit is booked, not that an additional 35% of profit is booked in year 4.

This is their language:

"So, across our total portfolio, only 7% of our
ultimate investment profit was ever recognised in
investments three years prior to their conclusion,
rising to 12% two years prior to conclusion and to
35% one year prior to conclusion."

I read that as investments are marked to 35% one year prior to conclusion, implying that 35% of gains are realized by year 4, not IN year 4. I don't think the language is that confusing.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 09, 2019, 10:43:43 AM
Given the location of the internal portfolio (Guersey) is this considered a PFIC for US stockholders or are the any other non-standard tax issues?

Packer

I have heard back from their IR person It’s pretty much what I expected that Burford cannot comment on the issue. FWIW, the IR person’s personal opinion is that Burford is not a PFIC.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 09, 2019, 10:48:47 AM
You are right, it clearly says cumulative and I missed it. Stupid mistake on my part.


If anyone has the 2017 investment data pdf and would be willing to share it, I'd appreciate it.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 09, 2019, 11:49:05 AM
It's on their website you just need to put in your email
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 09, 2019, 12:01:22 PM
It's on their website you just need to put in your email

They give you 2018. i'm asking for prior years.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 09, 2019, 12:51:06 PM
Burford case files attached
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 09, 2019, 12:54:24 PM
I appreciate you attaching this. I was asking if anyone had this same file as of 12/31/2017 (or any other prior dates). Thank you for the effort though.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 09, 2019, 12:55:46 PM
2018 is the first year they released the file.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 09, 2019, 01:00:03 PM
My pleasure Schwab.

Curious, were you looking if there was potentially inconsistencies between the two? becuase the file they released this year has every case they have ever done.

Thanks
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 09, 2019, 01:23:36 PM
My pleasure Schwab.

Curious, were you looking if there was potentially inconsistencies between the two? becuase the file they released this year has every case they have ever done.

Thanks

I would've checked for inconsistencies but I wouldn't have done it expecting to find any. After AZ_Value and VRX, I'm paranoid.


Assuming everything is fine as it has been, the main goal would be to recreate one year of revenue. With the 2017 table, we could track recoveries in 2018, movements from Ongoing -> Partially Realized or Concluded (and Partially Realized -> Concluded). We could look at all the tables BUR has provided to make guesses on various recognized balances. Depending how viable this idea was, we could even begin to make an estimate of how BUR estimates costs or what rulings led to what FV adjustment changes. That would probably take a lot of work and would probably be fruitless but anything to predict future PRs or financial results would be very valuable info.

BUR says we can't use this table to reconcile to the BS (which is fair) but it's a decent benchmark to figure out movements.

Outside of that, without knowing what the prior year looks like, I'm not sure what I'd find interesting so I'm not sure what I'd focus on. Maybe we could decipher what specific case some of these line items refer to and figure out how to search for these cases BUR is involved in preemptively in PACER. That might allow you to better predict future financial results or PRs. Maybe we can do this with a static look, I don't know.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 10, 2019, 02:16:30 PM
If the figures I'm using are wrong feel free to correct me. Maybe I made a mistake somewhere. If you really think Jeffries stated what Petersen is on the books for can you show me a quote or something? It just contradicts what I know about fair value accounting so it's hard to believe as is. I can tell you how I looked at taxes but there's only so much we can read in book taxes, given the corporate structure. It looks like unrealized gains represents most of EBT in the last 3 years.

Just looking at the table on p.30 (2018 AR). Unrealized gains were 36% and 39% of investments in 2017 and 2018, respectively. That's $387m and $621m. That implies $234m of unrealized gains reported in 2018 revenue. That is pretty darn close to the calculated number for Petersen in 2018. If we repeat this for 2016 and 2017, we get $214m in unrealized gains reported as revenue in 2017. In 2016, unrealized gains represented $87m.

From the 2016 AR, Petersen was written up some, but no where near all the way to a $400m valuation. Perfect, we can see that. In 2017, BUR says they are aware of the $660m valuation trades but did not rely on them. If they went to $440m valuation at this point (the second direct sale at this price and conservative to secondary trading), that roughly fits what we measure (~$300m total unrealized gains + $106m proceeds on $440m valuation). If in 2018 they went to $800m (again, 3rd direct sale now and conservative to secondary trading), that again fits what we can calculate.

All of this fit the situation of negative book taxes with high reported income. Taxable income would be much lower with these unrealized gains. This all fits the cash flow statements. If there's issues with breaking out Petersen like this I'm open to hearing them but this seems all seems consistent with everything I've read from BUR. That means Petersen represents the majority of earnings between 2016-2018.

As to the quality of the business, I agree with you and others that it's a nice business. I may disagree on how to value it but it's a business I'd like to own. I like the trends in lit finance, I like that cash flows are generally uncorrelated, and so on. Packer brought up a great point about PFIC that I can't find a specific answer to, but it sure seems like it would be classified as such. I don't know much about all of that so that's a bit concerning. I don't know what I'd pay for BUR yet but I think it's worth getting comfortable with them since I would own them at some price.

So if you look at the Burford Capital Investment Data (as of December 2018) that was linked by Jerry Capital before, you can actually find the Petersen case. The Teinver case is 2010 Partially realized Single Case 111065 $13mm deployed $107 recovered. The Petersen case is 2015 partially Realized Portfolio 143539 Contract Energy NA $18.2 deployed, $136 Recovered. You could argue what's shown in the spread sheet is not what's used to calculate the revenue, it's possible.

On a negative note, I found several significant typos in the spreadsheet such as 2013 Concluded Portolio 178742 Antitrust Mixed NA $3.9 deployed $10.3 recovered, but the ROIC is shown as 346%. Also I couldn't get to the advertised 41% ROIC and 15% IRR (Page 21 2018 AR) for the period prior to 2016 if you write down everything ongoing (very aggressive assumption since ongoing deployed is 50% of the total deployed) to 0  from the numbers in the PDF file. However, I think what's shown in the PDF file is quite conservative.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 10, 2019, 03:35:08 PM
If the figures I'm using are wrong feel free to correct me. Maybe I made a mistake somewhere. If you really think Jeffries stated what Petersen is on the books for can you show me a quote or something? It just contradicts what I know about fair value accounting so it's hard to believe as is. I can tell you how I looked at taxes but there's only so much we can read in book taxes, given the corporate structure. It looks like unrealized gains represents most of EBT in the last 3 years.

Just looking at the table on p.30 (2018 AR). Unrealized gains were 36% and 39% of investments in 2017 and 2018, respectively. That's $387m and $621m. That implies $234m of unrealized gains reported in 2018 revenue. That is pretty darn close to the calculated number for Petersen in 2018. If we repeat this for 2016 and 2017, we get $214m in unrealized gains reported as revenue in 2017. In 2016, unrealized gains represented $87m.

From the 2016 AR, Petersen was written up some, but no where near all the way to a $400m valuation. Perfect, we can see that. In 2017, BUR says they are aware of the $660m valuation trades but did not rely on them. If they went to $440m valuation at this point (the second direct sale at this price and conservative to secondary trading), that roughly fits what we measure (~$300m total unrealized gains + $106m proceeds on $440m valuation). If in 2018 they went to $800m (again, 3rd direct sale now and conservative to secondary trading), that again fits what we can calculate.

All of this fit the situation of negative book taxes with high reported income. Taxable income would be much lower with these unrealized gains. This all fits the cash flow statements. If there's issues with breaking out Petersen like this I'm open to hearing them but this seems all seems consistent with everything I've read from BUR. That means Petersen represents the majority of earnings between 2016-2018.

As to the quality of the business, I agree with you and others that it's a nice business. I may disagree on how to value it but it's a business I'd like to own. I like the trends in lit finance, I like that cash flows are generally uncorrelated, and so on. Packer brought up a great point about PFIC that I can't find a specific answer to, but it sure seems like it would be classified as such. I don't know much about all of that so that's a bit concerning. I don't know what I'd pay for BUR yet but I think it's worth getting comfortable with them since I would own them at some price.

So if you look at the Burford Capital Investment Data (as of December 2018) that was linked by Jerry Capital before, you can actually find the Petersen case. The Teinver case is 2010 Partially realized Single Case 111065 $13mm deployed $107 recovered. The Petersen case is 2015 partially Realized Portfolio 143539 Contract Energy NA $18.2 deployed, $136 Recovered. You could argue what's shown in the spread sheet is not what's used to calculate the revenue, it's possible.

On a negative note, I found several significant typos in the spreadsheet such as 2013 Concluded Portolio 178742 Antitrust Mixed NA $3.9 deployed $10.3 recovered, but the ROIC is shown as 346%. Also I couldn't get to the advertised 41% ROIC and 15% IRR (Page 21 2018 AR) for the period prior to 2016 if you write down everything ongoing (very aggressive assumption since ongoing deployed is 50% of the total deployed) to 0  from the numbers in the PDF file. However, I think what's shown in the PDF file is quite conservative.

It's explained in the document that it's not reconcilable to the annual report.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 10, 2019, 04:16:50 PM
My pleasure Schwab.

Curious, were you looking if there was potentially inconsistencies between the two? becuase the file they released this year has every case they have ever done.

Thanks

I would've checked for inconsistencies but I wouldn't have done it expecting to find any. After AZ_Value and VRX, I'm paranoid.


Assuming everything is fine as it has been, the main goal would be to recreate one year of revenue. With the 2017 table, we could track recoveries in 2018, movements from Ongoing -> Partially Realized or Concluded (and Partially Realized -> Concluded). We could look at all the tables BUR has provided to make guesses on various recognized balances. Depending how viable this idea was, we could even begin to make an estimate of how BUR estimates costs or what rulings led to what FV adjustment changes. That would probably take a lot of work and would probably be fruitless but anything to predict future PRs or financial results would be very valuable info.

BUR says we can't use this table to reconcile to the BS (which is fair) but it's a decent benchmark to figure out movements.

Outside of that, without knowing what the prior year looks like, I'm not sure what I'd find interesting so I'm not sure what I'd focus on. Maybe we could decipher what specific case some of these line items refer to and figure out how to search for these cases BUR is involved in preemptively in PACER. That might allow you to better predict future financial results or PRs. Maybe we can do this with a static look, I don't know.

Because they give the weighted average duration along with the IRR it's possible to reverse engineer what years the cash flows came in without reports from other years, though it would take quite a while to do each individual deal. Not sure if its even worth it though as you said.
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 11, 2019, 06:14:18 AM
Maybe I'm not paranoid enough, but it seems to me that this is best treated as an investment fund. One can't forensically audit absolutely everything, and IMO the time spent on doing such falls in the 80% of the work delivering 20% of the value.

Time is far better spent here looking at management and figuring out the character of who is running Burford at a variety of levels from compliance to the CEO/CFO/CIO levels.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 11, 2019, 06:28:21 AM
Maybe I'm not paranoid enough, but it seems to me that this is best treated as an investment fund. One can't forensically audit absolutely everything, and IMO the time spent on doing such falls in the 80% of the work delivering 20% of the value.

Time is far better spent here looking at management and figuring out the character of who is running Burford at a variety of levels from compliance to the CEO/CFO/CIO levels.

I'd rather just look at the numbers and figure out if they are accurate and represent the reality of the business, since they gave all the info that would be needed to track the cash flows from recoveries from the document, over not doing the work and crossing my fingers and hoping management is ethical.

Currently converting the PDF to excel and replicating the cash flows by year based on the IRR's and weighted duration's that they gave, I'll post it whenever its finished for those that would want to toy with it.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 11, 2019, 07:12:23 AM
FCF less than earnings is usually a bad thing.

"Low Quality Earnings"

If you understand the company and the flow of funds it makes perfect sense that cash doesn't track earnings. In fact they could juice near-term cash flow by selling all of Peterson (in which case FCF would be greater than NI), but they want to realize the higher cash payout I a few years down the road because they think it's worth more than the current secondary market.

I Beleive they would sell the entire case if the secondary market discounted at a 20 to 30% cost of capital, which is probabaly their hurdle rate...

This lowers the compounding effect and reduces the companies ability to gear its balance sheet.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 11, 2019, 07:15:58 AM
I don't know of any other company that operates in the FIG sector with 77% after tax margins, but maybe I'm not looking hard enough. The whole thing screams to good to be true.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 11, 2019, 07:24:02 AM
There is usually a lot of alpha in situations where you can't quite "box" it into a typical sector, industry, coverage list.

This is something new and evolving. If you are right and your implication is... This is a fraud? Or you are implying what they are doing is not sustainable? (don't want to put words in your mouth!

If you have more evidence than your hunch I would be interested.

For what it is worth I tend to have that same feeling, that it's "smelly".

I am pushing against that "intuition" because I think I can see downside protection not to far away, with a really great story.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 11, 2019, 07:26:02 AM
There is usually a lot of alpha in situations where you can't quite "box" it into a typical sector, industry, coverage list.

This is something new and evolving. If you are right and your implication is... This is a fraud? Or you are implying what they are doing is not sustainable? (don't want to put words in your mouth!

If you have more evidence than your hunch I would be interested.

For what it is worth I tend to have that same feeling, that it's "smelly".

I am pushing against that "intuition" because I think I can see downside protection not to far away, with a really great story.

I'm implying that its not sustainable. If I thought it was a fraud I would have said that and provided evidence, that is a big accusation to lob.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 11, 2019, 07:33:43 AM
Of course.

I just again, I don't want to put words in your mouth.

May I ask what specifically do you think is not sustainable here?
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 11, 2019, 07:49:36 AM
Petersen.

This entire investment is Petersen, the current accounting of it and the frequency of cases of its magnitude. As BUR grows, they will soon need a Petersen every year to support the current valuation. If BUR grows larger based on speculated TAM, they'll need to average more than one Petersen a year.

If we assume Petersen is a one-off that cannot be repeated in magnitude then BUR's LT ROE probably maxes out at 15%-ish and true LT ROE is probably something less than 12%. That supports a much smaller P/BV than 3+.


Ex-Petersen, BUR's cumulative ROIC is ~1.6x on completions and ROIC has been falling over time. Obviously settlements have lower ROIC than trial cases, so near term should be lower. With that said, ex-Petersen, ROICs for 2015-2017 are 14%, 27%, and 26%. If that covers overhead (~8% annually at present) it's not by much considering the average life of a claim.

Two cases account for ~50% of cumulative recoveries for BUR. I get concerns about eliminating the best cases but it only points to the fact that we should expect lumpy financial results. The smooth 30% returns are not indicative of the future, even if you expect LT 30% ROE.

Edit: I think an unmentioned risk is future claims may have capped gains. If Petersen-like outcomes (relative and absolute return) are expected to be somewhat frequent then law firms or clients may argue that claims be capped at 10x return or so (as an arbitrary example). Outside negotiating leverage to extract a cap, various states are discussing regulating a cap on contingent returns as they consider litigation financing to be similar to payday loans.

See p.13/24
https://www.aciclaw.org/system/files/events/attachments/2017/2017-12-07_acic_presentation_litigation_finance.pdf

https://hireanesquire.com/blog/2018/8/27/legal-marketing-trend-litigation-portfolio-funding
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 11, 2019, 07:58:34 AM
Petersen.

This entire investment is Petersen, the current accounting of it and the frequency of cases of its magnitude. As BUR grows, they will soon need a Petersen every year to support the current valuation. If BUR grows as larger based on speculated TAM, they'll need to average more than one Petersen a year.

If we assume Petersen is a one-off that cannot be repeated in magnitude then BUR's LT ROE probably maxes out at 15%-ish and true LT ROE is probably something less than 12%. That supports a much smaller P/BV than 3+.


Ex-Petersen, BUR's cumulative ROIC is ~1.6x on completions and ROIC has been falling over time. Obviously settlements have lower ROIC than trial cases, so near term should be lower. With that said, ex-Petersen, ROICs for 2015-2017 are 14%, 27%, and 26%. If that covers overhead (~8% annually at present) it's not by much considering the average life of a claim.

Two cases account for ~50% of cumulative recoveries for BUR. I get concerns about eliminating the best cases but it only points to the fact that we should expect lumpy financial results. The smooth 30% returns are not indicative of the future, even if you expect LT 30% ROE.

I was going to point my finger at Petersen and unrealized gains as well, but you could even take a top-down approach we can assume they find a Petersen every year. I'm of the opinion that banking/lending/finance is a commodity business with very little secrets, if this is scale-able with the margins they have nothing stops those with big pockets from just throwing money at it, its not like they couldn't find the best lawyers in the world. Though an acquisition argument could be made.
Title: Re: BUR.L - Burford Capital
Post by: Happy on July 11, 2019, 08:26:58 AM
So far this has been a high ROE, strong growth business that can reinvest all its earnings at high rates and even raises additional capital like the sovereign wealth fund because they claim they find more good opportunities that they can invest in on their own. The management seems to have done great moves so far like their acquisitions, which quickly paid for themselves (and then some). I feel like this is priced as if the returns on capital will deteriorate rapidly and the growth will come way down. I can't say that this is impossible, but it seems far from a sure thing and if they can keep returns up for longer than many think and/or just keep growing as they have by entering Australia, Asia, Germany etc, then it could prove to still be very cheap here. Probabilistically Iike the risk/reward here.

I'm sure people thought that the returns of Constellation Software or Credit Acceptance were too good to be true or sustainable as well and yet they just kept going. They don't have uncrossable moats either, but some advantages and great execution/management. What gives me some comfort that their numbers are real and that this might go on longer is that the big US law firms have had around 40% net profit margins for a long time and other litigation finance players show even higher IRRs than Burford. Law seems to be a very lucrative field in general, like software etc.

If the price goes significantly higher with no news, then it becomes a tough decision how long they are likely to keep the returns up etc. But at this price it seems like you are paying a price that assumes they go down fast and all scenarios where they go down much slower or they keep growing for a long time are pure upside.

Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 11, 2019, 08:35:46 AM
Petersen.

This entire investment is Petersen, the current accounting of it and the frequency of cases of its magnitude. As BUR grows, they will soon need a Petersen every year to support the current valuation. If BUR grows as larger based on speculated TAM, they'll need to average more than one Petersen a year.

If we assume Petersen is a one-off that cannot be repeated in magnitude then BUR's LT ROE probably maxes out at 15%-ish and true LT ROE is probably something less than 12%. That supports a much smaller P/BV than 3+.


Ex-Petersen, BUR's cumulative ROIC is ~1.6x on completions and ROIC has been falling over time. Obviously settlements have lower ROIC than trial cases, so near term should be lower. With that said, ex-Petersen, ROICs for 2015-2017 are 14%, 27%, and 26%. If that covers overhead (~8% annually at present) it's not by much considering the average life of a claim.

Two cases account for ~50% of cumulative recoveries for BUR. I get concerns about eliminating the best cases but it only points to the fact that we should expect lumpy financial results. The smooth 30% returns are not indicative of the future, even if you expect LT 30% ROE.

I was going to point my finger at Petersen and unrealized gains as well, but you could even take a top-down approach we can assume they find a Petersen every year. I'm of the opinion that banking/lending/finance is a commodity business with very little secrets, if this is scale-able with the margins they have nothing stops those with big pockets from just throwing money at it, its not like they couldn't find the best lawyers in the world. Though an acquisition argument could be made.

I don’t think this is banking or lending where assets are homogeneous. I have a hard time comparing this to reinsurance either at least not property reinsurance. If this is a 10-12% roe no growth business in the long term but the earnings are uncorrelated to the market and they have a good track record, I think this will trade at a much higher multiple than 1.5.

Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 11, 2019, 08:39:05 AM
It is impossible to predict if they will have another Peterson, it is unlikely for sure. Again it is similar to a VC fund, I would invest in the next round of Gurleys investments and he is operating in the frothiest of markets (see Softbank), yet I believe he will continue to generate significant alpha over time. But I think its important to point out that EVEN if funds came into litigation finance like they are now, if that accelerated and it became completed saturated, there is still a probability that they underwrite good investments.
 
That said, I believe it is more likely that the industry will remain structurally inefficient for a vareity of reasons that will continue for the foreseeable future. The leader in a structurally inefficiient market certainly will take their share of 1) fund flows, 2) attractive investments.

I also think that it is important to note that management is trying to shift this business away from "needing another peterson" and more towards a company that should be valued on actual cash flows, the asset management arm, the portfolio financing (lower ROIC but revenues and cash flows become more stable overtime = multiple of FCF not multiple of BV). This is the right thing to be doing. We will probably look back in a couple of years at they will not have completed this transition, the stock will have underperformed, maybe even a permenant loss of capital. But I have a hard time seeing it being much more than 30% from $15 per share (50%? OK size your position accordingly, this is not supposed to be in your portfolio at 20% weight!). Even CG has a $12.5 price target (or close to that) and they pretty much laid out the most bearish case possible on the company.

The other side of the coin, albeit a lower probability, is a lot of things work out for them, and alot of things work out for them when the S&P 500 goes through a bear market, the economy goes through a recession, etc. If Burford can show that they are recession resistant, that they transition to a FCF valued firm with semi recurring revenues, the jsutified mutliple will be insanely high, you will make A LOT of money.

At the right size, this is an interesting stock to put in your portfolio to get convexity and a lot of potential alpha should we hit a ugly bear market.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 11, 2019, 08:45:03 AM
So far this has been a high ROE, strong growth business that can reinvest all its earnings at high rates and even raises additional capital like the sovereign wealth fund because they claim they find more good opportunities that they can invest in on their own. The management seems to have done great moves so far like their acquisitions, which quickly paid for themselves (and then some). I feel like this is priced as if the returns on capital will deteriorate rapidly and the growth will come way down. I can't say that this is impossible, but it seems far from a sure thing and if they can keep returns up for longer than many think and/or just keep growing as they have by entering Australia, Asia, Germany etc, then it could prove to still be very cheap here. Probabilistically Iike the risk/reward here.

I'm sure people thought that the returns of Constellation Software or Credit Acceptance were too good to be true or sustainable as well and yet they just kept going. They don't have uncrossable moats either, but some advantages and great execution/management. What gives me some comfort that their numbers are real and that this might go on longer is that the big US law firms have had around 40% net profit margins for a long time and other litigation finance players show even higher IRRs than Burford. Law seems to be a very lucrative field in general, like software etc.

If the price goes significantly higher with no news, then it becomes a tough decision how long they are likely to keep the returns up etc. But at this price it seems like you are paying a price that assumes they go down fast and all scenarios where they go down much slower or they keep growing for a long time are pure upside.

The two companies you mentioned didn't have to rely on a single customer/event to provide them their out sized returns, neither had 75-85% of their before taxes earning being made up of unrealized gains, but I understand the point.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 11, 2019, 09:12:18 AM
Petersen.

This entire investment is Petersen, the current accounting of it and the frequency of cases of its magnitude. As BUR grows, they will soon need a Petersen every year to support the current valuation. If BUR grows as larger based on speculated TAM, they'll need to average more than one Petersen a year.

If we assume Petersen is a one-off that cannot be repeated in magnitude then BUR's LT ROE probably maxes out at 15%-ish and true LT ROE is probably something less than 12%. That supports a much smaller P/BV than 3+.


Ex-Petersen, BUR's cumulative ROIC is ~1.6x on completions and ROIC has been falling over time. Obviously settlements have lower ROIC than trial cases, so near term should be lower. With that said, ex-Petersen, ROICs for 2015-2017 are 14%, 27%, and 26%. If that covers overhead (~8% annually at present) it's not by much considering the average life of a claim.

Two cases account for ~50% of cumulative recoveries for BUR. I get concerns about eliminating the best cases but it only points to the fact that we should expect lumpy financial results. The smooth 30% returns are not indicative of the future, even if you expect LT 30% ROE.

I was going to point my finger at Petersen and unrealized gains as well, but you could even take a top-down approach we can assume they find a Petersen every year. I'm of the opinion that banking/lending/finance is a commodity business with very little secrets, if this is scale-able with the margins they have nothing stops those with big pockets from just throwing money at it, its not like they couldn't find the best lawyers in the world. Though an acquisition argument could be made.

I don’t think this is banking or lending where assets are homogeneous. I have a hard time comparing this to reinsurance either at least not property reinsurance. If this is a 10-12% roe no growth business in the long term but the earnings are uncorrelated to the market and they have a good track record, I think this will trade at a much higher multiple than 1.5.

So maybe something to compare this to is catastrophe bonds.  Cat bonds used to be a high returning asset that was uncorrelated with the markets and then a lot of capital flowed in and returns began to normalize.  It might be interesting to have a guidepost about at what % of TAM did ROEs begin to normalize. 
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 11, 2019, 09:13:00 AM
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.
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 11, 2019, 09:14:23 AM
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
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 11, 2019, 09:26:28 AM
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.
Title: Re: BUR.L - Burford Capital
Post by: writser on July 11, 2019, 09:33:49 AM
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.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 11, 2019, 09:59:53 AM
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. 
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 11, 2019, 10:23:31 AM
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 $...
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 11, 2019, 01:46:19 PM
Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?
Title: Re: BUR.L - Burford Capital
Post by: Pondside47 on July 11, 2019, 02:28:10 PM
https://youtu.be/kBvQ3kln1W0

Discussion on litigation funding returns and competitions
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 11, 2019, 02:46:56 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.

Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 11, 2019, 03:55:23 PM
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.
Title: Re: BUR.L - Burford Capital
Post by: cameronfen on July 11, 2019, 05:57:20 PM
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. 
Title: Re: BUR.L - Burford Capital
Post by: racemize on July 11, 2019, 08:01:50 PM
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).
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 11, 2019, 08:32:30 PM
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).
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 12, 2019, 07:40:39 AM
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

Quote
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

Quote
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.
Title: Re: BUR.L - Burford Capital
Post by: peterHK 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.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital 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/
Title: Re: BUR.L - Burford Capital
Post by: Normax59 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

Title: Re: BUR.L - Burford Capital
Post by: Pondside47 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.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 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.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 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.

Title: Re: BUR.L - Burford Capital
Post by: Liberty on July 15, 2019, 04:39:06 PM
Some commentary on the company in this letter:

https://static1.squarespace.com/static/58f7798829687f53ff30baf8/t/5d2cb4770f60db0001b4a56c/1563210872722/Upslope+-+2019Q2+Letter.pdf
Title: Re: BUR.L - Burford Capital
Post by: peterHK 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.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital 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.

Title: Re: BUR.L - Burford Capital
Post by: Schwab711 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.
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 16, 2019, 12:51:51 PM
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.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 16, 2019, 01:49:35 PM
I meant VRX in the sense that no matter how times it was written that inconsistent numbers, misleading narratives, ect are not a good sign, there was always an excuse for the inconsistencies to explain why it was fine. I didn't mean to say that BUR is VRX (or that it is a fraud or anything like that). The investment thesis seems as unbreakable as VRX's was from my point-of-view (which was correct in the case of UBNT and I was wrong on the importance of the issues I saw).

I guess to change gears, how are folks valuing BUR? What's the thesis that doesn't rely on P/E multiple? Has anyone taken a stab at a DCF?
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 16, 2019, 02:18:36 PM
I meant VRX in the sense that no matter how times it was written that inconsistent numbers, misleading narratives, ect are not a good sign, there was always an excuse for the inconsistencies to explain why it was fine. I didn't mean to say that BUR is VRX (or that it is a fraud or anything like that). The investment thesis seems as unbreakable as VRX's was from my point-of-view (which was correct in the case of UBNT and I was wrong on the importance of the issues I saw).

I guess to change gears, how are folks valuing BUR? What's the thesis that doesn't rely on P/E multiple? Has anyone taken a stab at a DCF?

Not really sure how we would find FCF given their cash flow statement. IMF has their own FCF calculation in their annual report that could be applied though.

Net Profit After Tax
+ Litigation Contract Expenses (would need to determine the equivalent for BUR)
+ Depreciation
+ Change in WC
+ Net Investments (New investments - receipts)
- Capex
= Free cash flow
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 16, 2019, 02:31:25 PM
You can't think of it like that.

You have to be more creative.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 16, 2019, 02:44:17 PM
You can't think of it like that.

You have to be more creative.

What's the point of being cryptic? You are long. What formula/process did you use?
Title: Re: BUR.L - Burford Capital
Post by: Jerry Capital on July 16, 2019, 02:53:06 PM
It's not cryptic.

I don't have a formula or calculation.

It's more about looking out a long time horizon, and thinking, can they take what might have been a lucky win with Peterson and build some sort of moat, shift to a more recurring revenue model with an asset management arm and portfolio financing.

The multiple that a truly uncorrelated (not negative but zero correlation) equity with stable earnings would be incredibly high (think $V $MA type mutliple)...

You have decent downside protection IMO and a very interesting bull case.

It's more of a Bill Miller style investment for me, and that is reflected in the weighting in my portfolio.

Does that make sense?
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 16, 2019, 03:27:43 PM
Here's as creative as I can get:

2018

Net Profit before Tax: 305,114
+Adjustments For Non-Cash: 16,709
+Proceeds from Investments: 629,410
-Funding of Investments: 738,243
+Proceeds from new initiative investments: 8,757
- Funding of new initiative investments: 33,074
+ Proceeds from Financial Liabilities: 74,044
-Due from brokers and due to brokers: 75,566
- Change in Operating WC: 3,598
- Purchases of Fixed Assets: 650

== 182,636

2017

Net Profit before Tax: 249,181
+Adjustments For Non-Cash: 13,113
+Proceeds from Investments: 363,889
-Funding of Investments: 569,564
+Proceeds from new initiative investments: 2,623
- Funding of new initiative investments: 6,467
+ Proceeds from Financial Liabilities: 36,510
-Due from brokers and due to brokers: 41,678
+ Change in Operating WC: 4,988
- Purchases of Fixed Assets: 104

== 52,491

2016

Net Profit before Tax: 104,053
-Adjustments For Non-Cash: 46,971
+Proceeds from Investments: 180,772
-Funding of Investments: 275,698
+Proceeds from new initiative investments: 13,135
- Funding of new initiative investments: 4,274
+ Proceeds from Financial Liabilities: -
-Due from brokers and due to brokers: -
+ Change in Operating WC: 5,868
- Purchases of Fixed Assets: 1,570

== -24,557

2015

Net Profit before Tax: 67,877
-Adjustments For Non-Cash: 2,899
+Proceeds from Investments: 140,196
-Funding of Investments: 91,932
+Proceeds from new initiative investments: 6,196
- Funding of new initiative investments: 21,265
+ Proceeds from Financial Liabilities: -
-Due from brokers and due to brokers: -
+ Change in Operating WC: 6,829
- Purchases of Fixed Assets: 421

== 104,581

2014


Net Profit before Tax: 47,324
+Adjustments For Non-Cash: 4,615
+Proceeds from Investments: 63,010
-Funding of Investments: 91,022
+Proceeds from new initiative investments: 2,504
- Funding of new initiative investments: 2,821
+ Proceeds from Financial Liabilities: -
-Due from brokers and due to brokers: -
+ Change in Operating WC: 790
- Purchases of Fixed Assets: 100

== 24,300

I'm willing to hear suggestions for changes.
Title: Re: BUR.L - Burford Capital
Post by: Liberty on July 17, 2019, 06:38:17 AM
New post (part 1 of 2) on Burford by Scuttleblurb (subscription required):

https://www.scuttleblurb.com/bur1/
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 17, 2019, 07:01:11 AM
You can't think of it like that.

You have to be more creative.

What's the point of being cryptic? You are long. What formula/process did you use?

I don't actually think this is that hard. The key variables are what level returns stabilize at, and when. For that, you can run a sensitivity analysis on stabilized ROE vs. COE in however many years to get a P/BV multiple, and then work backwards: ROE x BV = $X of BV accretion per year etc.

E.g if ROE is 30% for 3 years and they reinvest all their earnings (yes a simplified assumption, but historically they have been able to reinvest OVER 100%), then 3 year out BV is $13.68/share.

If after that ROE drops to 15% vs. a COE of 10% and they never grow (again, an unreasonable assumption, but a conservative one), your justified P/B is 1.5. 1.5x 13.68 = $20.53/share.

Repeat the above with ROE at today's levels and dropping at various rates for 2,3,4,5 etc. years and you can get a pretty good idea of the range of outcomes.

Then ask yourself: how quickly will returns fall? Why might they NOT fall? How fast do they have to fall in order for me to lose money on this investment? Does it make sense that a business goes from earning 30% ROE's to 20% in 1 year? In 2 years? What competitive forces are going to make that happen in that short of a timeframe?

You cannot get the degree of accuracy with Burford that you can with many others; ROE can be lumpy, cash ROE is certainly lumpy depending on realizations. That doesn't mean you can't construct a range of outcomes, figure out which set (bull/bear/middle) look qualitatively more logical, and then construct the risk/reward on the investment.

My own view is that I find it very hard to believe that returns fall dramatically in the next 2-3 years, and because of that, the risk of a permanent loss of capital outside accounting fraud I feel is very low.



Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 17, 2019, 07:39:11 AM
Returns might not immediately fall if Petersen is successful. The implied odds of Petersen success is estimable based on secondary transactions made by sophisticated investors and Jeffries' estimate of the Petersen payoff, assuming success.

It is almost certain that one of the following is true: (1) BUR made a really bad decision selling their interest in Petersen (the true odds of success aren't so low); (2) the true expected outcome of Petersen, assuming success is much lower than $2.5b estimated by Jeffries; or (3) BUR is much riskier than you think.

Outcome #2 is probably closest to your "30% for a few years and falling". In that case, BUR will do fairly well. There are many outcomes where BUR will fall precipitously. I think the R/R skew for BUR is the reverse of what many assume. More Petersen-like cases is the only way to support 3x+ BV.
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 17, 2019, 07:52:53 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.

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.

I don't think CDS is the best analogue to litigation, but Euro calls are a good one. Burford doesn't mark their cases to $0, they mark them to where they feel is fair value, much as one would an undervalued euro call. How do you value a Euro call on a private asset that seldom trades, for instance? How do you measure the volatility input? All of these are assumptions that are part of valuing level 3 assets, which is what Burford's cases are. Again, they've said that sales ARE inputs, but not the only one. I am fine with this, I regularly aknowledge that my public market equity's intrinsic value does not move around as much as the share price. I'm 99% sure that the value of litigation does not move around as much as what the current market prices for it do.

I would see the issue with smoothing if they did not have a track record of cash realization. The issue with VRX was that the cash flows did not track in any sense to their "cash EPS" measure, and cash ROIC was consistently very low. They also shifted segments around all the time to obfuscate organic growth. IMO Burford is a mirror image of a lot of this: we can see they have cash realizations and what those are; we can see that cash ROIC on investments is high; and we can see they go to immense lengths to explain and give us information in their filings.

On claims being written down, the full quote was the following:

"What investors will note, however, is the reduction by a couple
of percentage points in the final two years before
conclusion (now 33% and 10% versus 35% and 12%
as reported in the 2018 interim report), which is
entirely due to the impact of a fair-sized investment
that ultimately lost and which we wrote down
partially two years before its conclusion and again
during the year of conclusion, which when netted
against valuation increases caused the numbers to
decline somewhat – but also proves the point that
we change valuations in both directions"

I feel like owning up to this when the facts changed, and adjusting their numbers is not disingenuous or misleading, it's good disclosure. You also have to separate writing down on cost and writing down after writing up. Burford's claim is that it doesn't tend to write down cases it has first written up, as evidence of their conservative valuation. Again, the above case was a change to that fact, which they owned up to, disclosed and explained.  What Burford does not claim is that they don't write down cases held at cost. These result in the majority of their write downs.

I know you're not picking on me, but perhaps I'm biased in this, it seems like you're willingly picking at things rather than looking at what Burford does (e.g disclosing changes as per the above) right relative to peers in this industry. We can quibble on accounting all day long, but from the hundreds of reports I've read across industiries, I have seldom come across a management team that provides this much explanation and discussion in their reports. One view is that this is because they are good people trying to get us to understand the business; the other is that they are trying to explain away all the criticism. Which side you are on depends, I think, more on what type of person you are than the preponderance of evidence, because there is plenty of evidence supporting both sides.
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 17, 2019, 07:58:24 AM
You can't think of it like that.

You have to be more creative.

What's the point of being cryptic? You are long. What formula/process did you use?

I don't actually think this is that hard. The key variables are what level returns stabilize at, and when. For that, you can run a sensitivity analysis on stabilized ROE vs. COE in however many years to get a P/BV multiple, and then work backwards: ROE x BV = $X of BV accretion per year etc.

E.g if ROE is 30% for 3 years and they reinvest all their earnings (yes a simplified assumption, but historically they have been able to reinvest OVER 100%), then 3 year out BV is $13.68/share.

If after that ROE drops to 15% vs. a COE of 10% and they never grow (again, an unreasonable assumption, but a conservative one), your justified P/B is 1.5. 1.5x 13.68 = $20.53/share.

Repeat the above with ROE at today's levels and dropping at various rates for 2,3,4,5 etc. years and you can get a pretty good idea of the range of outcomes.

Then ask yourself: how quickly will returns fall? Why might they NOT fall? How fast do they have to fall in order for me to lose money on this investment? Does it make sense that a business goes from earning 30% ROE's to 20% in 1 year? In 2 years? What competitive forces are going to make that happen in that short of a timeframe?

You cannot get the degree of accuracy with Burford that you can with many others; ROE can be lumpy, cash ROE is certainly lumpy depending on realizations. That doesn't mean you can't construct a range of outcomes, figure out which set (bull/bear/middle) look qualitatively more logical, and then construct the risk/reward on the investment.

My own view is that I find it very hard to believe that returns fall dramatically in the next 2-3 years, and because of that, the risk of a permanent loss of capital outside accounting fraud I feel is very low.

The calculation without unrealised gains in the income statement or balance sheet.

EDIT:

The first two pictures was what was original displayed.

I did an awful job when first posting this and didn't even give any context to what I was showing and quite frankly didn't even use the right numbers.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

First - Unrealized gains for the last 4 years as reported on the balance sheet in tandem with equity ex. any unrealized gains along with the reported breakdown of income by realized and unrealized gains is shown below in the screenshot.

The average return ex unrealized gains over this period is 12.8%, without 2016 added in the mix this seems like a pretty stable number to project into the future. The large increase in total equity ex URG can be largely explained by the issuance of shares in the beginning of the year, removed the average increase y/y is 12.9%. BUR therefore needs to obtain a 14.68% return on previous years equity less URG's. BV less unrealized gains is shown over the next 3 years in screenshot 3 under the assumption BUR can continue to grow it at the rates they have over the last 4 years.

We can now make some conclusions on what the income statement and BV would need to be composed of at the end of 2019 if they were to report a 30% ROE on previous years equity based on your calculation. Net Income would come in at around 400-408MM composed of 108MM in realized gains and 300MM in unrealized gains. Given the recent Petersen sale in July this assumption doesn't seem outlandish and in fact might a very conservative estimate

The balance sheet would have 1.7BB in equity with 934MM in unrealized gains. Investments as a % of equity has settled around 110-130% of equity so we can estimate total investments between 1.87-2.21BB Y19. Similar conclusion's can be drawn from the rest of the screenshot.

All this is under the assumption that they will refrain from issuing equity, something that I feel they will need to continue to do in the future as it seems their high growth has been completely dependent on outside capital far more than investment proceeds.   

End of year 3 we get your fair value of $20.55 its also implied that BUR would have 1.9BB in unrealized gains that the market has valued at $12.87 a share or 63% of the fair value.

I'm leaving the spreadsheet as well at the bottom, if anyone wants to change the assumptions or give suggestions or that you hate it.
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 17, 2019, 07:59:11 AM
Returns might not immediately fall if Petersen is successful. The implied odds of Petersen success is estimable based on secondary transactions made by sophisticated investors and Jeffries' estimate of the Petersen payoff, assuming success.

It is almost certain that one of the following is true: (1) BUR made a really bad decision selling their interest in Petersen (the true odds of success aren't so low); (2) the true expected outcome of Petersen, assuming success is much lower than $2.5b estimated by Jeffries; or (3) BUR is much riskier than you think.

Outcome #2 is probably closest to your "30% for a few years and falling". In that case, BUR will do fairly well. There are many outcomes where BUR will fall precipitously. I think the R/R skew for BUR is the reverse of what many assume. More Petersen-like cases is the only way to support 3x+ BV.

I agree, the reason Burford likely sold is that Petersen expected value is less than $2.5bn. Nobody here is underwriting Burford using $2.5bn as the value for Petersen.

Nobody is arguing this will trade at 3x BV in 5 years. I underwrite it at 1.5x in 5 years just FYI. I think you haven't done the work if you think that Petersen repeats is the only way this business can work (hint hint $100+mn portfolio investments that generate mid 20 IRR's). You do not need 30% ROE's to continue indefinitely for this investment to work; in fact, you don't need 30% ROE's to continue for more than ~3 years for this investment to work if you look at the other lines of business Burford is in and what their TAM is.
C
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 17, 2019, 08:04:49 AM
You can't think of it like that.

You have to be more creative.

What's the point of being cryptic? You are long. What formula/process did you use?

I don't actually think this is that hard. The key variables are what level returns stabilize at, and when. For that, you can run a sensitivity analysis on stabilized ROE vs. COE in however many years to get a P/BV multiple, and then work backwards: ROE x BV = $X of BV accretion per year etc.

E.g if ROE is 30% for 3 years and they reinvest all their earnings (yes a simplified assumption, but historically they have been able to reinvest OVER 100%), then 3 year out BV is $13.68/share.

If after that ROE drops to 15% vs. a COE of 10% and they never grow (again, an unreasonable assumption, but a conservative one), your justified P/B is 1.5. 1.5x 13.68 = $20.53/share.

Repeat the above with ROE at today's levels and dropping at various rates for 2,3,4,5 etc. years and you can get a pretty good idea of the range of outcomes.

Then ask yourself: how quickly will returns fall? Why might they NOT fall? How fast do they have to fall in order for me to lose money on this investment? Does it make sense that a business goes from earning 30% ROE's to 20% in 1 year? In 2 years? What competitive forces are going to make that happen in that short of a timeframe?

You cannot get the degree of accuracy with Burford that you can with many others; ROE can be lumpy, cash ROE is certainly lumpy depending on realizations. That doesn't mean you can't construct a range of outcomes, figure out which set (bull/bear/middle) look qualitatively more logical, and then construct the risk/reward on the investment.

My own view is that I find it very hard to believe that returns fall dramatically in the next 2-3 years, and because of that, the risk of a permanent loss of capital outside accounting fraud I feel is very low.

The calculation without unrealised gains in the income statement or balance sheet.

So you don't see an issue with comparing realized gains from some cases to the equity in ALL cases, both concluded and unconcluded. 

If you don't see how this is wrong, then I can't help you.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 17, 2019, 08:31:22 AM
Returns might not immediately fall if Petersen is successful. The implied odds of Petersen success is estimable based on secondary transactions made by sophisticated investors and Jeffries' estimate of the Petersen payoff, assuming success.

It is almost certain that one of the following is true: (1) BUR made a really bad decision selling their interest in Petersen (the true odds of success aren't so low); (2) the true expected outcome of Petersen, assuming success is much lower than $2.5b estimated by Jeffries; or (3) BUR is much riskier than you think.

Outcome #2 is probably closest to your "30% for a few years and falling". In that case, BUR will do fairly well. There are many outcomes where BUR will fall precipitously. I think the R/R skew for BUR is the reverse of what many assume. More Petersen-like cases is the only way to support 3x+ BV.

I agree, the reason Burford likely sold is that Petersen expected value is less than $2.5bn. Nobody here is underwriting Burford using $2.5bn as the value for Petersen.

Nobody is arguing this will trade at 3x BV in 5 years. I underwrite it at 1.5x in 5 years just FYI. I think you haven't done the work if you think that Petersen repeats is the only way this business can work (hint hint $100+mn portfolio investments that generate mid 20 IRR's). You do not need 30% ROE's to continue indefinitely for this investment to work; in fact, you don't need 30% ROE's to continue for more than ~3 years for this investment to work if you look at the other lines of business Burford is in and what their TAM is.
C

You are misinterpreting the meaning of the tables. $2.5b isn't the expected value, it's the estimated proceeds if Petersen is successful. Petersen sold presumably because they think the odds of success are less than [see table], assuming X years to completion and Y% return hurdle.

https://twitter.com/JerryCap/status/1133719570856980480


My point in all of this is that all of the issues I'm raising are interconnected.

The accounting matters because we need to know if Petersen is reflected in BV/earnings or not and to what degree. Then we look at the implied odds of success for Petersen and we can see that there may be material downside risk to BUR's future earnings. Future above-normal returns are expected to be supported by the remaining Petersen recognition and cases related to the Petersen outcome not previously marked up, to our knowledge, but are expected to be material. If Petersen is not successful, BV and future earnings will decline. The accounting determines if this is a ST hit (BV decline) or LT hit (earnings not meeting expectations for many periods). Now that we agree that write-downs are common for cases held at cost, you can see why I think Petersen represents most of BUR's historical unrealized earnings.

If Petersen is not successful, it's possible BUR will no longer be the largest litigation finance entity since a new entity raised $2b in the last 2 years. That would change the thesis. Their lower returns may affect their ability to raise capital for future funds. The odds of such a monumental shift in financials and sentiment is not reflected in any of the investment pitches that I've seen.

There's potentially a 50% chance that BUR faces a 30%+ decline in BV and has materially lower prospects of high returns (basically similar to IMF after their 2008-2012 high-return period, which was buoyed by a particularly good investment). That's why I'm raising all these points. Is it a good bet to coin flip material permanent capital loss for outperformance? Maybe, I don't know. You may very well be correct on BUR and I really do hope you are (I can't and probably won't short BUR so what do I care). As I said, I like the industry.


I don't really know what the bull thesis looks like. No one has actually put numbers to the narrative. Jerry says it's 30x+ some number. You make a seemingly reasonable argument that we have clarity to the current price and then you like the industry as a whole. I disagree on the odds that BV reaches today's price in a few years but it's always easier to nitpick someone else's valuation. Said another way, every valuation has weaknesses.

I've once tried to write how I think BUR should be valued but I'm not sure how well I actually did explaining my thoughts. I would separate out extraordinary cases like Petersen and look at the remaining income stream. Depending on the returns on the more repeatable stream, I would probably arrive at a value of 1x-2x BV. Presumably the asset management income and the like increases the returns and increases BV. I would value Petersen or similar at their expected value (which may or may not be a multiple of their BV).
Title: Re: BUR.L - Burford Capital
Post by: Normax59 on July 17, 2019, 10:14:29 AM
You can't think of it like that.

You have to be more creative.

What's the point of being cryptic? You are long. What formula/process did you use?

I don't actually think this is that hard. The key variables are what level returns stabilize at, and when. For that, you can run a sensitivity analysis on stabilized ROE vs. COE in however many years to get a P/BV multiple, and then work backwards: ROE x BV = $X of BV accretion per year etc.

E.g if ROE is 30% for 3 years and they reinvest all their earnings (yes a simplified assumption, but historically they have been able to reinvest OVER 100%), then 3 year out BV is $13.68/share.

If after that ROE drops to 15% vs. a COE of 10% and they never grow (again, an unreasonable assumption, but a conservative one), your justified P/B is 1.5. 1.5x 13.68 = $20.53/share.

Repeat the above with ROE at today's levels and dropping at various rates for 2,3,4,5 etc. years and you can get a pretty good idea of the range of outcomes.

Then ask yourself: how quickly will returns fall? Why might they NOT fall? How fast do they have to fall in order for me to lose money on this investment? Does it make sense that a business goes from earning 30% ROE's to 20% in 1 year? In 2 years? What competitive forces are going to make that happen in that short of a timeframe?

You cannot get the degree of accuracy with Burford that you can with many others; ROE can be lumpy, cash ROE is certainly lumpy depending on realizations. That doesn't mean you can't construct a range of outcomes, figure out which set (bull/bear/middle) look qualitatively more logical, and then construct the risk/reward on the investment.

My own view is that I find it very hard to believe that returns fall dramatically in the next 2-3 years, and because of that, the risk of a permanent loss of capital outside accounting fraud I feel is very low.

The calculation without unrealised gains in the income statement or balance sheet.

So you don't see an issue with comparing realized gains from some cases to the equity in ALL cases, both concluded and unconcluded. 

If you don't see how this is wrong, then I can't help you.

Their investment weighted average duration is 1.8 years and you wanted me to exclude the ongoing investment equity that is going to produce the majority of realized NI gains in year 2 and 3?
Title: Re: BUR.L - Burford Capital
Post by: peterHK on July 17, 2019, 02:42:58 PM
Returns might not immediately fall if Petersen is successful. The implied odds of Petersen success is estimable based on secondary transactions made by sophisticated investors and Jeffries' estimate of the Petersen payoff, assuming success.

It is almost certain that one of the following is true: (1) BUR made a really bad decision selling their interest in Petersen (the true odds of success aren't so low); (2) the true expected outcome of Petersen, assuming success is much lower than $2.5b estimated by Jeffries; or (3) BUR is much riskier than you think.

Outcome #2 is probably closest to your "30% for a few years and falling". In that case, BUR will do fairly well. There are many outcomes where BUR will fall precipitously. I think the R/R skew for BUR is the reverse of what many assume. More Petersen-like cases is the only way to support 3x+ BV.

I agree, the reason Burford likely sold is that Petersen expected value is less than $2.5bn. Nobody here is underwriting Burford using $2.5bn as the value for Petersen.

Nobody is arguing this will trade at 3x BV in 5 years. I underwrite it at 1.5x in 5 years just FYI. I think you haven't done the work if you think that Petersen repeats is the only way this business can work (hint hint $100+mn portfolio investments that generate mid 20 IRR's). You do not need 30% ROE's to continue indefinitely for this investment to work; in fact, you don't need 30% ROE's to continue for more than ~3 years for this investment to work if you look at the other lines of business Burford is in and what their TAM is.
C

You are misinterpreting the meaning of the tables. $2.5b isn't the expected value, it's the estimated proceeds if Petersen is successful. Petersen sold presumably because they think the odds of success are less than [see table], assuming X years to completion and Y% return hurdle.

https://twitter.com/JerryCap/status/1133719570856980480


My point in all of this is that all of the issues I'm raising are interconnected.

The accounting matters because we need to know if Petersen is reflected in BV/earnings or not and to what degree. Then we look at the implied odds of success for Petersen and we can see that there may be material downside risk to BUR's future earnings. Future above-normal returns are expected to be supported by the remaining Petersen recognition and cases related to the Petersen outcome not previously marked up, to our knowledge, but are expected to be material. If Petersen is not successful, BV and future earnings will decline. The accounting determines if this is a ST hit (BV decline) or LT hit (earnings not meeting expectations for many periods). Now that we agree that write-downs are common for cases held at cost, you can see why I think Petersen represents most of BUR's historical unrealized earnings.

If Petersen is not successful, it's possible BUR will no longer be the largest litigation finance entity since a new entity raised $2b in the last 2 years. That would change the thesis. Their lower returns may affect their ability to raise capital for future funds. The odds of such a monumental shift in financials and sentiment is not reflected in any of the investment pitches that I've seen.

There's potentially a 50% chance that BUR faces a 30%+ decline in BV and has materially lower prospects of high returns (basically similar to IMF after their 2008-2012 high-return period, which was buoyed by a particularly good investment). That's why I'm raising all these points. Is it a good bet to coin flip material permanent capital loss for outperformance? Maybe, I don't know. You may very well be correct on BUR and I really do hope you are (I can't and probably won't short BUR so what do I care). As I said, I like the industry.


I don't really know what the bull thesis looks like. No one has actually put numbers to the narrative. Jerry says it's 30x+ some number. You make a seemingly reasonable argument that we have clarity to the current price and then you like the industry as a whole. I disagree on the odds that BV reaches today's price in a few years but it's always easier to nitpick someone else's valuation. Said another way, every valuation has weaknesses.

I've once tried to write how I think BUR should be valued but I'm not sure how well I actually did explaining my thoughts. I would separate out extraordinary cases like Petersen and look at the remaining income stream. Depending on the returns on the more repeatable stream, I would probably arrive at a value of 1x-2x BV. Presumably the asset management income and the like increases the returns and increases BV. I would value Petersen or similar at their expected value (which may or may not be a multiple of their BV).

1) Where you pulling 50% from?

2) Expected value: https://en.wikipedia.org/wiki/Expected_value

I give up.
Title: Re: BUR.L - Burford Capital
Post by: Schwab711 on July 17, 2019, 03:18:31 PM
50% is roughly the middle of the table I posted.

I would correct you on E(X) but it's obvious and I'm starting to like that you have no idea what you own.
Title: Re: BUR.L - Burford Capital
Post by: no_free_lunch on July 17, 2019, 08:34:28 PM
Well written, thorough investment thesis on Burford.

https://millonariosanonimos.com/burford-capital-ltd-investment-thesis/

The section on prestige and relationship as a moat is worth considering.  I think it was mentioned earlier in this thread as well.   Maybe a prospective corporation doesn't want to reveal it's litigation details to the whole world, so they will limit disclosure to law firms they trust.  However, there are also a lot lawyers out there so I am not sure how deep this moat is.

Quote
To get investments you must have a very good relationship with law firms and potential clients. To study an investment, you have to make a complete due diligence, and the customer has to grant you access to very critical and confidential information. As a result, the industry will never become an open auction in which everybody can get access to that information. That makes the relationship with Burford very sticky. Nobody has been fired for working with Burford, so why should someone make a change and risk his job?