Burford Capital Share Discussion Threads

[williamcooper104] 22/7/2019 17:57

And therein lies the fun I would though love to invest in just a portfolio of claims - would thus get just the pure litigation outcome risk, with a predicated run off and no re-investment risk, no growth based PE. Just invest at NAV, pay Bur a promote and take the near zero beta returns

[sogoesit] 22/7/2019 17:49

thanks djderry. I agree, the debate is interesting.
And thanks all for it.
I've answered the questions in my mind with all the feedback so it has given me a better perception of others' views and therefore matching my own to "the market".
Cheers!

PS rar100: "I don't think anyone can put a true value on BUR". Agreed, there are far too many variables.

[jonwig] 22/7/2019 17:34

@ djd - I think I understand the point you're making ... but it suggests irrational behaviour on the part of the law firm. Both parties want to maximise their profits from the portfolio arrangement: Burford obviously does but law firms (as LLPs) can't afford to tie up capital which belongs to partners.

I don't know how a portfolio for financing is constructed, but if Burford can and will refuse individual stand-alone cases, it will surely vet a proposed portfolio for unattractive propositions within a portfolio?

[rar100] 22/7/2019 15:12

bestace, thank you for your in-depth reply, I concur with your thoughts in every detail, The last results were 'only' in line (but very good, most companies don't do as well) but not stratospheric as we all have come to expect. The Cannacord thing was a fly in the ointment, maybe still is as in my opinion the share price value should be a lot higher - but perhaps only in normal times, there doesn't seem much normality in any sphere of life right now let alone the markets, AIM in particular.
I agree with the long term approach, but I have held on and topped up over 3 odd years and now would like to reap a reward ideally, I'm old!!
I don't think anyone can put a true value on BUR, certainly not themselves as they state. I'll look forward to the finals...

[djderry] 22/7/2019 13:47

The issues that I would most like to discuss with management would be around portfolio financing and the pricing of risk for those portfolios.I understand how it is,in some ways,lower risk,as it avoids binary outcomes and they are set up so the company ,in the event of a case being lost,gets paid from the subsequent cases.But,in the portfolio,by it's very nature ,will contain cases of various merits.How is that priced? Also,let's say Burford hands over xmillion to a company.How tempted would that company be to fight less meritorious claims on the basis ' well,it's a non - recourse loan,we can use it to prolong/ stymie a case which might otherwise be settled.Perhaps it's not an issue,but I'd like to see a little deeper into the processes that govern portfolio financing and inwhat ways they mitigate risk.

[williamcooper104] 22/7/2019 13:30

The litigation pie is massive - the pie of low risk high return cases is much smaller - how much that matters we know not (yet)

[williamcooper104] 22/7/2019 13:26

Juridica was a v badly run fund, so wouldn't read across to Burford

[djderry] 22/7/2019 13:15

I'm enjoying the discussion.No one has a monopoly on wisdom and I welcome opposing views.Sogoesit,I'm getting a better understanding of your concerns.They are legitimate.But,you also seem to answer them to an extent.Firstly,the key has been ,and will continue to be,the quality of their due diligence.( There are other parts of the business but this is key.)As we have seen,as they scaled-up,a fifty million case will not take five times more 'due diligence'than a five million case.They both takes lots! Keeping a high hurdle to funding is crucial.Secondly,we have no idea how big the litigation 'pie' is,I've seen company and analyst suggestions.900 billion,a trillion,whatever you're having yourself.How much of that might go to third party funders ?A lot less ,maybe a measly few hundred billion,but you get the picture.Thirdly,Petersen is,as mentioned,an outlier and detracts,to an extent,from the usual run of the mill cases.How likely is there to be another? Again , nobody knows.But,if I were a CEO of a company that had a meritorious claim against some questionable state,I might be tempted to call the girls and boys at Burford!

[metis20] 22/7/2019 12:58

Opportunity for growth - from the 17 Oct 2018 RNS

LITIGATION FINANCE GROWING RAPIDLY, NEW BURFORD CAPITAL RESEARCH SHOWS
237% growth in use by lawyers since annual survey began
Understanding of litigation finance lags awareness,
pointing to opportunity ahead

Christopher Bogart, Burford's CEO, said of the research: "Burford's latest research confirms that even with the continued and dramatic growth of litigation finance in the last few years, there remains significant opportunity for further growth, most obviously among corporate legal teams that are still only partly aware of the utility of litigation finance, and who haven't yet fully grasped its benefits to their business."

He continued: "That's one reason why we're investing in reaching corporate legal teams directly. Law is an over $800 billion annual industry globally, and there is significantly more opportunity to provide capital to offset legal risk."

[alter ego] 22/7/2019 12:53

I think it's a mistake to focus on Petersen. It's an unusually large case in terms of possible outcome but does anyone know how much it is currently valued at by BUR? Since we don't know that, it may be that the returns earned thus far on many other cases are perfectly profitable enough to sustain the business model. For me, I would prefer that as it is more predictable than the odd massive case once in a blue moon.

Petersen may be icing on the cake but I don't think it representative of BUR's day to day typical workload. The important factor for me is the ratio of positive outcomes to cases concluded and the growth in funds invested year on year. With or without a Petersen, BUR makes profits and the demand for finance shows no signs of reaching capacity.

[sogoesit] 22/7/2019 12:12

Yes, alter ego... that is precisely the issue, the "depreciated point", that I am trying to question and get my mind around.

It is also dependent on the depth of the pool of cases (resources that BUR has to feed on) and on the make-up of the distribution of returns of the content of the pool. Ie once a Petersen case is resolved how likely is there to be another one round the corner (outliers or Black Swans)?

[alter ego] 22/7/2019 12:05

I think the analogy of a mine (or oil well perhaps) is mistaken. In those businesses extract all the value from the asset make a profit but end up with a worthless asset. BUR concludes a case which history shows is generally profitable and replaces the asset with cash which can be reinvested in another case or cases. This is a virtuous circle which obviously depends on identify and backing profitable cases.

If and when BUR lose their touch, then assets (cases) will depreciate.

[sogoesit] 22/7/2019 11:58

jonwig, djderry, thanks for feed-back.
The point I was trying to make, maybe not made very well, is that once a case, or cases, come(s) to fruition there is no further "fuel" to propel growth.
The case, the asset, on which growth itself relies, is written-off (with a negative or positive cash remainder/outcome).
There is cash but cash does not grow and must be re-invested for further growth.
Intrinsically, therefore, growth per se relies on the amount of new, and growing, investment.
If investment stops, we get no further growth and the business runs down to its distributable cash. If we don't have growth in investment then the overall business does not grow. The basket of remaining cases depreciates to nothing (all cash being returned to shareholders).

OK, one could argue that so long as returns are positive and in excess of what investors are happy to live with as an ongoing return then the business can continue for a while. But at what level of return would this be (ie what is the long run self-financing return without raising new finance)and what is the risk at this level?

(Juridica, imv, is the example of a similar business being run down without (compounding) investment).

My model (hypothesis) comes from the resources sector where, say, a mine is developed and the resources are depleted over the mine's life. The asset is depreciated at end of mine life. Resource companies must keep investing in exploration and development to replace reserves that are sold/depleted. Over the long term these companies become "utility-like" (low but steady returns) so long as they are successful but out of business when the asset is depleted. BUR must keep finding, from a depleting pool (?), cases that exceed "normal returns" for growth to continue.
Is this analogy a false one in BUR's case and, if so, why?

Maybe my concern is irrelevant at this stage of the development of this industry?
Ie the long run is so far in the future relative to the development of this industry that we are not really concerned about "resource" (cases) running out or being of such low quality that returns are commensurately reduced?

[djderry] 22/7/2019 11:07

Sogoesit,I understand your caution.In investing,it's a positive trait.Firsly,for the company to grow,all we need is a realistic appraisal of its value.I suggest it is completely undervalued on almost any metric you care to use,but the market is the market.Sentiment can change in an instant.As regards the future? Well,the company has had an astonishing step up in scale over the past two years.Watch the returns that this generates over the next two/three/four /five years.,As we have seen,the cases that take the longest to resolve ( sometimes)pay out the most.I think the 'hamster -wheel' is not the analogy I would choose.For me,it's more a box of chocolates.Does Burford choose this case or that one?They(in general) do not get on any wheel.They do due diligence on cases and decide which ones to back.

[jonwig] 22/7/2019 10:10

Sogoesit - I'm not clear what you mean by its assets "depreciating".

Any investment company buys an asset and disposes of it at maturity or sale hoping to get a positive total return. Getting the right assets is part of the game, and legal claims look to be pretty good for the present, provided the investor isn't a right chump.

"Once a case has an outcome" - then comes the award (could be 1p, could be £1m), then comes the business of getting paid. The fact that secondary markets are now arising means that a matter can be offloaded at any stage.

I agree about the long term: aren't there three 2010 matters still unresolved?

[sogoesit] 22/7/2019 09:56

For growth, in the value, to occur too BUR will need to continue to grow the "invested" capital in cases either through raising debt, equity, innovative financing deals or re-investment of outcomes.
To a large extent this is a company with depreciating assets. Once a case has an outcome any further potential gains disappear. Those legal "hamsters need to keep going on the wheel of fortune" (to misquote Boris Johnson) while being fed money.
Depending on the term view of the market, but mainly short term (1-2 years), there will be cycles of expectation as invested capital flows into cases and delivers outcomes. Unless, as an investor, one has a handle on the variables of invested flow, term to outcome, probability of outcome and quantum of outcome betting on the value will be a difficult, if not impossible, task. Given the number of variables that looks like an impossible task.

Conclusion: this has to be a long term (10 year plus?) investment. And therein also lies risk.
AIMV

[djderry] 21/7/2019 20:57

Yes,as bestace says,the company doesn't fit neatly into predictable six and twelve month returns.The long term shareholders understand this and know there will be ups and downs along the way.The company doesn't give guidance,how could they? No,they spread risk through multiple types of cases,law firms, jurisdictions,judges,etc.The question for the investor is straightforward.Is the company,step by step over time becoming more valuable? I believe it is.If the company continues as it is,over time the share price will take care of itself.

[williamcooper104] 21/7/2019 19:09

All sensible comment - though the PE doesn't appear to have priced in a lot of future out of park hitting Still v likely that we get great results a share price pop and then a fall as the market worries about Woodford

[bestace] 21/7/2019 18:47

rar - even if the results are good it does not necessarily follow that the share price should rise. That applies regardless of what Woodford does. What matters is how good the results are compared to expectations, so if everyone expects the results to be good then the share price may go nowhere or even fall.

In my view that's what happened at the finals in March - everyone and their dog seemed to be expecting Burford to post results which smashed the published forecasts out of the park. That's what they've always done in recent times and everyone now expects it to happen. So it really shouldn't have been a surprise when that's what happened in March and as a result the share price went nowhere.

Is that hindsight bias? yes, quite possibly, but perhaps we shouldn't be surprised if exactly the same thing happens this week - great results and Mr market says 'meh', even if Woodford were to sit on his hands.

I hate to think what will happen to the share price when Burford posts results which are merely 'in line' or worse, as surely they will one day.

However good the business is, elevated expectations always increases the risk of disappointment, and I think they were absolutely right to warn in their last annual report about earnings volatility and complacent shareholders; indeed I think a lot of posts on this board fall squarely into that latter category.

Their words bear re-reading in advance of every earnings release they put out:

"The path... remains uncertain and continues to carry real risk of earnings volatility. We have said this before, but when our caveat has been accompanied – as it has been – with steadily rising earnings, we fear that shareholders may have become complacent and expect nothing other than persistent and unbroken growth. If anything, the risk of volatility is greater now than it has ever been.

"We are not pessimistic; far from it. But we have a long-term view, and we believe Burford continues to be an investment better suited to patient long-term investors than for shareholders who will be disturbed by potential fluctuations in short-term results."

For me, that's a far more important message for shareholders than anything Woodford might do this week. Any long term shareholders should forget about Woodford, he's a distraction.

[jonwig] 21/7/2019 18:04

@ stentorian - thanks for that.

When Gateley floated, a large part of their business plan was to get partners (all staff, in fact) to take a longer-term view. They began with share awards and are moving to a quite complex LTIP system I think they've been successful, but I can't speak for law firms which have floated since.

[stentorian] 21/7/2019 16:43

jonwig,

Whether it is a PLC, an LLP, a partnership or a sole practitioner, solicitor(s) have to operate under The Law Society rules/Solicitors' Regulatory Authority Rulebook. They are allowed to borrow against book receivables (Debtors).

The problem is that as highly paid human capital, solicitors and their staff tend to like receiving their fees as they go along. They do not like risks. So they will have a limit of the number of no win, no fee cases they will enter into directly. Of course this is why Burford do so well. The Burford cases are top end fee level disputes. These solicitors introduce clients with good cases (but where the client can't afford their fees) to Burford who agree with the client to fund the solicitors fees for a share of the spoils. Burford will normally run with the firm introducing the client to effect the day-to-day legal work. If the case is successful Burford usually obtain the return of the money they have spent on the solicitors' fees - if they settle or they don't achieve the full fees, Burford will recharge that fees shortfall to the clients on top of their success fee. Everyone is happy - as long as there is a win or a settlement. Burford gets more and more introductions form the introducing legal firm. Burford makes more money.

[rar100] 21/7/2019 16:39

If the results are good, then the share price should rise but then Woodford presumably sells a shed load - what happens to the share price then? I guess a lot will depend on how good or otherwise the results are.

[stentorian] 21/7/2019 16:18

Reports over the weekend that Mishcon de Reya LLP are contemplating a flotation.

[djderry] 21/7/2019 15:43

Very interesting point,thanks jonwig.

[jonwig] 21/7/2019 05:52

@ lawdawg, djderry - the partnership business model (in the US) makes contingent fees problematic, but in the UK it is, I think, now fairly mainstream where law firms can structure as PLCs.

A PLC has flexible balance sheet capital, and with a long-standing client can draw fees from one matter rather than another. You can see this happening with the first law firm to list here, Gateley. Look at their trade receivables and how much is overdue. (They admitted at an AGM that they are flexible.)

Can a partnership in the US borrow money in order to defer fee income? In the UK a LLP can't (I understand) unless secured against a firm asset such as property.