Author Topic: BUR.L - Burford Capital  (Read 45719 times)

Jerry Capital

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Re: BUR.L - Burford Capital
« Reply #130 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 $...
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peterHK

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Re: BUR.L - Burford Capital
« Reply #131 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"?

Pondside47

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Re: BUR.L - Burford Capital
« Reply #132 on: July 11, 2019, 02:28:10 PM »
https://youtu.be/kBvQ3kln1W0

Discussion on litigation funding returns and competitions

Normax59

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Re: BUR.L - Burford Capital
« Reply #133 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.

« Last Edit: July 11, 2019, 02:55:28 PM by Normax59 »

Schwab711

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Re: BUR.L - Burford Capital
« Reply #134 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.

cameronfen

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Re: BUR.L - Burford Capital
« Reply #135 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. 

racemize

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Re: BUR.L - Burford Capital
« Reply #136 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).

Schwab711

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Re: BUR.L - Burford Capital
« Reply #137 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).
« Last Edit: July 12, 2019, 04:01:59 AM by Schwab711 »

Schwab711

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Re: BUR.L - Burford Capital
« Reply #138 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.

peterHK

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Re: BUR.L - Burford Capital
« Reply #139 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.