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The following segment was excerpted from this fund letter.
Burford Capital Limited (NYSE:BUR)
As the ancient Greeks said, “The wheels of justice turn slowly, but grind exceedingly fine.”
As a litigation financer, Burford has funded a large portfolio of legal cases that are working their way through the legal process. Their largest “holding” is a judgement against Argentina related to the YPF case, for which Burford is in charge of pursuing the payout. If Burford were to collect the full $6.2B (not including post-judgement interest accruing at ~5% per year), this windfall would be worth $28 per share. To be clear, especially given Argentina’s history in cases of this type, it is my expectation that Burford will take a haircut in a negotiated settlement.
Interestingly, Burford’s CIO Jonothan Molot appears on the visitor logs for senior Argentinian officials… at least they are talking.
While the YPF judgment is a massive asset for Burford, it is far from the only case that should start gaining more traction in the near term. Despite receiving $242M of proceeds from $135M of pre-2020 vintage deployments in 2023, Burford still has ~$782M of deployments remaining in that vintage that we should start seeing flow through the P&L in the form of realizations as courts are now fully re-opened and cases delayed by the pandemic conclude.
Similar to the inevitable growth of KKR, excluding a change of law limiting litigation finance, I believe that Burford should continue to grow because of corporate manager incentives. They are solving two problems, particularly for public companies.
First, legal cases are a drain on current year P&L. Thus, if a CEO or CFO wants to preserve this year’s earnings, they can have Burford pay the legal expenses, resulting in “found money.” It is easy to see a CEO hugging the General Counsel and CFO when they tell him/her that they found the money to “save” the year simply by partnering with Burford.
The second problem is that the market does not generally attribute value to pending legal cases, and GAAP accounting does not help. However, if you sell a portion of the potential outcome to Burford for cash, the market does value that. Want to “strengthen” your balance sheet, at least optically, for the market or lenders? Sell a part of your case to Burford. One Fortune 50 company partnered with Burford last year for a $325M commitment to their case.
Right now, Burford is the only funder with that scale. CEOs, CFOs, and General Counsels like collecting bonuses. If that means giving up some future economics to Burford, which is playing the justice-turns-slowly game, so be it. With these dynamics, I think demand will grow. Ultimately, shareholder returns will come down to Burford’s case-selection abilities, which historically have been outstanding.
Since inception, only 8% of deployments have gone to adjudication and lost, resulting in a ~85% loss of capital to those line items. In contrast, 73% of deployments reached a settlement returning an average of 58% (23% IRR), and the remaining 19% reached a winning adjudication returning an average of 247% (49% IRR). Time will tell if these high returns continue, but there is a lot of upside potential that is not being priced into shares today. The CEO seems to agree with his recent $5M purchase.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
