Author Topic: BUR.L - Burford Capital  (Read 45718 times)

Happy

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Re: BUR.L - Burford Capital
« Reply #120 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.



Pondside47

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Re: BUR.L - Burford Capital
« Reply #121 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 donít 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.


Jerry Capital

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Re: BUR.L - Burford Capital
« Reply #122 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.
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Normax59

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Re: BUR.L - Burford Capital
« Reply #123 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.

cameronfen

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Re: BUR.L - Burford Capital
« Reply #124 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 donít 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. 

Pondside47

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Re: BUR.L - Burford Capital
« Reply #125 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.

Pondside47

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Re: BUR.L - Burford Capital
« Reply #126 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 doesnít have the same dynamics as CAT bonds
« Last Edit: July 11, 2019, 09:16:57 AM by Pondside47 »

Schwab711

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Re: BUR.L - Burford Capital
« Reply #127 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.

writser

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Re: BUR.L - Burford Capital
« Reply #128 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.
« Last Edit: July 11, 2019, 09:43:02 AM by writser »
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cameronfen

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Re: BUR.L - Burford Capital
« Reply #129 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.