Author Topic: BUR.L - Burford Capital  (Read 35611 times)

Jerry Capital

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Re: BUR.L - Burford Capital
« Reply #140 on: July 12, 2019, 09:09:56 AM »
I think both sides have said enough of these specifics.

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

I'll start

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

https://litigationfinancejournal.com/top-judge-recommends-london-establish-special-fund-tackle-uks-access-justice-problem/
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Normax59

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Re: BUR.L - Burford Capital
« Reply #141 on: July 13, 2019, 02:36:37 PM »
It was mentioned that PACER could be used to track their cases and figure out when certain case recoveries came in. Companies located in the UK must submit annual accounts as well as other documents to the Companies House. Here is a link to one of Burfords' subsidaries you'll see on page 15 of the 2017 annual accounts that it lists some US based LLC's that they could be using to hide their dealings. 

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


Pondside47

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Re: BUR.L - Burford Capital
« Reply #142 on: July 14, 2019, 11:01:12 AM »
I did a reconciliation of the ROIC column vs my calculation. For CONCLUDED investments,ROIC = Total Recovered / Total Deploy -1. For the most part, the difference between what I get vs what's shown in the PDF file is between 10~5%. A lot of it due to rounding.

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

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

Normax59

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Re: BUR.L - Burford Capital
« Reply #143 on: July 14, 2019, 01:38:56 PM »
I did a reconciliation of the ROIC column vs my calculation. For CONCLUDED investments,ROIC = Total Recovered / Total Deploy -1. For the most part, the difference between what I get vs what's shown in the PDF file is between 10~5%. A lot of it due to rounding.

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

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

They don't base partially realized calculations on carry values, its based on the amount they have sold, try (18.2*.2875) = 5.2325 the number ties out to their IRR as well based on the payment dates they have given for Petersen.
« Last Edit: July 14, 2019, 01:49:27 PM by Normax59 »

Normax59

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Re: BUR.L - Burford Capital
« Reply #144 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.

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Liberty

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peterHK

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Re: BUR.L - Burford Capital
« Reply #146 on: July 15, 2019, 04:48:35 PM »
On the uplisting, the implication that them not uplisting is a problem because AIM names are subject to potentially less stringent accounting requirements. Burford has been over that: they have issued bonds on the main board, and so they are treated as an LSE company.

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

On the accounting, yes it's opaque.

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

Jerry Capital

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Re: BUR.L - Burford Capital
« Reply #147 on: July 15, 2019, 04:52:38 PM »
It should also be clear that at some point they probably will uplist. The reason they are on the AIM is because they did, indeed start there as a micro-cap, and specifically started in the UK because the UK is the standard for international contract law. This is why they as well as their competitors are there. You might say that lowers the level of "suspicion," it all flows naturally from the history of the business. 

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

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Schwab711

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Re: BUR.L - Burford Capital
« Reply #148 on: July 16, 2019, 12:35:39 PM »
Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

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

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



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

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


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


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

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

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



In other examples of 'conservative' being thrown around in potentially misleading ways, BUR said in the 11/12/18 investor day presentation that:
Quote
Only two investments that were written up, amounting to 0.2% of total write-ups by dollar value, have ever turned into a loss

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


On 7/25/2018, BUR noted in their 1H 2018 investor presentation regarding Petersen:
Quote
We sold 3.75% of our entitlement for an effective
cash price of $30 million, implying a valuation of
$800 million for the original total Petersen
entitlement.

We carry our Petersen investment at a
lower carrying value than that for the
reasons we have enunciated previously.

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


I'm not trying to pick on you, Peter. It just feels like the narrative of BUR doesn't match the financial picture so i'm trying to attack the narrative.
« Last Edit: July 16, 2019, 12:40:32 PM by Schwab711 »

Jerry Capital

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Re: BUR.L - Burford Capital
« Reply #149 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.
« Last Edit: July 16, 2019, 01:12:40 PM by Jerry Capital »
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