Burford Capital Ltd Q4 FY2023 Earnings Call

Good morning and good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Burford Capital Fourth Quarter and Full Year 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Christopher Bogart, Chief Executive Officer. Christopher, you may begin your conference.

Thanks very much, and welcome, everybody. Thanks for taking some time to be with us today. As usual, I'm joined by Jon Molot, Burford's Chief Investment Officer; and Jordan Licht, Burford's Chief Financial Officer, and you're going to hear from all three of us as we walk through the slides that have been put up on the website already, and after that, we'd be delighted to take your questions. When you look at these numbers, and I'm starting on Slide Four. When you look at these numbers, we're just so very pleased to be able to produce numbers like this for you and to be able to report on what was such a fantastic year. The last few years have been a little frustrating for us. We really started growing very rapidly in 2016. If you look back in history, in 2017, for example, we did eleven times as much new business as we had done only four years earlier in 2013. Given the lifespan of our assets, we expected to be delivering great results a few years later from that growth. Instead, we ran headlong into COVID, into the global pandemic. Rather than delivering the results that we were expecting from that burst of growth, we've spent the last two or three years saying to you, well, just wait for it, it's coming, trust us. And now this year, we can really say that, instead of having another year of that, we can show you what we've been so excited about over the last few years. Terrific results across every quadrant of the business, which speak for themselves. When I was walking through them with the team, they wouldn't even let me. The reason that we showed the net income margin here is that they wouldn't even let me put the rate of increase of actual net income; they thought it was too showy at a mere 1,901%. We’re going to talk in a minute about YPF, which was obviously a substantial contributor to this, but it was far from the only thing that went well. Lots of things went well in the business and in the portfolio, and we're delighted to be discussing them. So turning to Slide Five. Slide Five gives you a little bit more data in a compressed form. The headline of this slide is about our $7 billion portfolio, which is up 17%. I'd like to add that if you look at the business on a Burford-only basis, in other words, the piece of the business that delivers the greatest level of profitability for equity shareholders, that portfolio actually increased by $900 million, or up 23%. We're really pleased with what the future holds, even though we've been able to generate meaningful realizations and cash during 2023. We saw very significant portfolio activity, as we've discussed throughout the year, and this really brings it all together. A significant increase in portfolio velocity. Again, on a Burford-only basis, $496 million of realizations. On a group-wide basis, that number is over $1 billion. And just to underline the second bullet there, even taking YPF together, we still saw a 67% increase over 2022. YPF, which Jon will discuss more in a minute, continues to progress. We're pleased with the asset management business and particularly with BOF-C. BOF-C has had the same dynamic that I referred to at the beginning of the call. We started investing in BOF-C assets several years ago, and they have been slower to come to fruition than we would have liked. However, now, they are generating cash just like the rest of the business, and we are benefiting from that cash generation. 88% of our asset management income this year came from BOF-C. We've already booked $135 million of income since its inception a few years ago. The business isn't just seeing realizations; it's also generating cash. This year, we had a significant amount of cash inflow into the business—$415 million, again, just on a Burford-only basis. We ended the year with strong liquidity, and we also ended the year with a significant receivable for a case—part of which was for a big case that settled in December. That receivable is already generating revenue. There’s a payment plan in place for it, and we’ve already seen a bunch of cash from it in January and February. I'll talk a bit more later about that case. AI and data science is something we have talked about before and have been investing in for years now, ahead of the curve in terms of market enthusiasm for AI generally. Rather than take a lot of time discussing it here, I actually just yesterday recorded a podcast hosted by John Quinn, the Founder and Managing Partner of Quinn Emanuel, the world's largest litigation law firm, on this very topic. His podcast is called Law Disruptive, and I assume the episode will drop in the next few days. If you're interested in that topic, you'll find a thorough discussion of what we do and how we do it on that podcast. Turning to Slide Six, this goes back to what I said at the beginning about 2016 being the start of our growth run. We've picked a bunch of data points and shown what the business looks like today compared to what it looked like in 2016. It’s transformational in a relatively short period of time. We're very pleased with how that's gone, and we are also very pleased with the market potential for Burford, how many moats we've established, and what that enables us to do in the market. Slide Seven is a repeat of a slide you’ve seen before. It reminds you of the four pillars associated with the value proposition we bring to the market. We have a large core portfolio made up of existing assets that are undergoing litigation. We actively manage our portfolio; these are assets that will have outcomes. We also have a 15-year track record of producing fairly predictable outcomes, with consistent high returns. Starting with existing assets, we then add the fact that we have a powerful origination platform that has consistently brought in over $1 billion of new business year after year, along with an asset management business that is showing strong performance, particularly with BOF-C. You can think of that as structural leverage for us. Lastly, we benefit from the YPF assets. Slide Eight gives you a deeper look at the fourth quarter. We didn't do this last year; we received feedback that people wanted more information for the fourth quarter. I’ll provide some additional context about a significant deal we executed this year that contributed to these numbers. Notably, there's real seasonality to this business, as we typically finish the year strong. We do less than half of the year’s business in the fourth quarter, which is typical of the legal profession; it involves procrastination and a focus on year-end numbers—companies tend to settle more towards year-end. The fourth quarter remains a significant dynamic, and there are other periods throughout the year where things can be quite quiet. Turning to Slide Nine, this presents an interesting perspective on some different dynamics in the business. We executed a deal in June for a Fortune 50 public company in the US. We made a large commitment of $325 million. We deployed $225 million upon the deal's closing, with the remaining $100 million due in December across a portfolio of cases that this company has as a claimant. The unique capability we bring to the market is that virtually none of our competitors can handle such sizable deals. The quality of our legal underwriting, our financial services team, and the data science work we do enables us to structure innovative solutions for companies, rather than just offering generic litigation funding packages. This is the type of case that helps us attract clients and encourages them to return. Interestingly, after closing the deal in June, the case settled rather quickly in December. We're set to receive payments from this case, which I mentioned earlier regarding cash flow. On a limited exposure duration of our capital, we're looking at substantial profits: a 32% IRR on our direct capital and a 37% IRR when factoring in fund income. This is excellent for several reasons. While we achieved a significant profit in a short time frame, we didn't deploy the remaining $100 million, as the case settled sooner than anticipated. Slide 10 illustrates the impact of this; if we had deployed the additional $100 million, it would have resulted in a new deployment record. Variability is part of this business and doesn't concern us in the long term. Looking at the top line, we're still writing a lot of new business. We did $1.2 billion of new commitments group-wide and $691 million on a Burford-only basis, essentially right in line with last year's results. Of course, would we like more new business? Absolutely. But one of the dynamics of a busy portfolio is that there’s a limit to what our team can manage between ongoing litigation and new business. We're satisfied with the activity level over 2023. Slide 11 transitions to Jon, who will present the portfolio's core aspects.

Thanks, Chris, and thanks to everyone for joining. I'm starting with Slide 11, and like Chris, I'm very pleased and proud of what we are reporting today. There's a lot of information here, but I want to emphasize a point Chris made about being bullish regarding our portfolio. I'm very pleased with how our team has rigorously underwritten the cases in our portfolio, the deals we have closed, and the monitoring of cases already under management. For several calls, we have mentioned that COVID slowed things down. We experienced incredible growth in the previous years, which increased our portfolio size, and investors were eager to witness realizations from that growth. My feeling was patience is key, and we've only seen positive outcomes so far. Finally, we can show you tangible results. From 2022 to 2023, our capital provision direct realizations on a Burford-only basis were up 42%, totaling $496 million of those realizations. This is a significant increase, reflecting how our portfolio is progressing through the process. Group-wide realizations exceed $1 billion, more than double that amount. As we have stated, we decided to finance growth through fund capital to seize more opportunities in the market while being prudent with your capital, avoiding excessive debt accumulation before our US listing. This has led to a machine capable of generating higher cash realizations and additional benefits to you, our shareholders, through management and performance fees. Additionally, we have started moving towards using more balance sheet capital, thus allowing shareholders to benefit from larger results. We are very pleased to show cash realizations benefiting not just the balance sheet but our shareholders as well. Moving to Slide 12, this slide reflects the attractive asset class we operate in. The majority of the matters we invest in settle, producing attractive returns of around 73%. Of cases proceeding to final adjudication, our gains far exceed losses due to rigorous underwriting. The figures back up our approach as they show how our model performs well at scale. At the end of this presentation, you’ll see that we have progressed significantly, having achieved $2.7 billion in realizations. This number, which we started tracking ten years ago, was under $150 million at that time, demonstrating our growth and the resilience of our model. We are able to maintain good returns through our careful investment approach. As we progress to Slide 13, you can visually see how the litigation model produces asymmetric returns. While there are potential for substantial gains, losses are less frequent. This is part of the nature of our asset class. In Slide 14, we observe the company's evolution by vintage. You can see both deployments and realizations. Not only have we had solid gains, capital provision income also reflects potential for future returns. There are promising projections regarding cases from prior years that have started yielding profitable outcomes. If we turn to Slide 15, there’s YPF, which indicates substantial accomplishments in 2023 with the largest judgment ever in New York history. This case exemplifies our capacity, having financed and managed it successfully. It's been a lengthy journey towards this judgment, which is now final and enforceable. We cannot say more than what’s publicly available as the appeals process is ongoing. However, we are very pleased amidst many high points in our year. I will now hand it off to Jordan to continue with our financial overview.

Thanks, Jon, and thank you, Chris, for your earlier remarks. Good morning, everyone, or good afternoon to those in Europe. I will now move to Page 16 to discuss some financials. Burford-only basis capital provision income increased over fourfold in 2023 versus 2022, driven by strength in realized and unrealized gains, totaling close to $700 million year-on-year. Additionally, we’ve seen a rise in asset management revenue, primarily due to the growth in BOF-C, our collaboration with the sovereign wealth fund. In the fall of 2023, we announced the extension and expansion of that relationship through the end of this year, leading us to great anticipation regarding future opportunities. Net income for the year hit a record $2.74, pushing tangible book value per share towards $10 at year-end. Looking at our capital provision assets at the end of this year, we stand at $3.4 billion, with $1.6 billion of that being our deployed cost, while $1.4 billion accounts for YPF assets. Our valuation model reflects the importance of time and money; the average discount rate for our portfolio decreased about 30 basis points since last year, resulting in approximately $50 million of positive impact on asset fair value, although changes in discount rates do not affect the ultimate exit value of our investments. Moving to Page 17, we’ll review capital provision income and its components for both the quarter and the full year. As I mentioned, the year-over-year increase of about $700 million reflects two positive case milestones related to YPF. That said, we don't wish for this to just become the YPF narrative; performance year-over-year across the portfolio saw a 67% increase in realized and unrealized gains, indicating improved activity levels in the courts. Notably, our fourth quarter of 2023 was especially productive, representing nearly half of the total realized gains for 2022. Page 18 transitions to our asset management business, which continues to perform well as we reap rewards from utilizing funds that support our balance sheet. Asset management income in 2023 rose from $56 million to $64 million, with cash from asset management more than doubling to around $32 million. This income mainly stems from BOF-C, which participates in nearly all of our new commitments on a pro-rata basis. I would like to pause here for a moment to share our thoughts about the Advantage Fund and the upcoming end of the fund’s investment period later this year in December. Given the dynamics of today’s market environment, we’re unlikely to replicate the same terms for the next fund. Our increased access to sustainable long-term unsecured debt markets suggests that financing these assets on our balance sheet presents a potentially accretive opportunity. Overall, we don’t foresee significant changes in our business mix moving forward, and our objective remains to produce 20% returns on tangible equity over time. Now looking at Page 19, I want to pivot from revenues to expenses. We've talked about this page in previous quarters, so I’ll provide an overview here. Our operating expenses, including all non-cash accruals and one-time expenses, as a percent of total revenues, totaled 20% in 2023, with compensation and benefits reflecting 23%. This is favorable compared to peers. Operating expenses regarding the group-wide portfolio have remained reasonably consistent over the years, adjusting for the one-time accrual related to YPF. In terms of total expenses for 2023, $130 million out of $270 million represents non-cash accruals, one-time, or case-related expenses ineligible for asset costing. Regarding salary increases, we incurred about $6 million to $7 million in stock price impacts due to employee deferred compensation investments. Legacy asset recovery expenses should diminish since there’s only one asset left in that arrangement. Lastly, the case-related expenses totaled approximately $1 million for Q4 2023. The long-term incentive compensation line primarily relates to our carry program, which only pays out cash when funds are received, with cash payments in 2023 being around $10 million to $11 million. Moving to Page 20, let's look at liquidity metrics. At year-end, we enjoyed a robust liquidity position with over $300 million in cash and securities and a further $185 million in receivables. By the end of February, we had already collected over $40 million of that receivable balance, including settlements discussed by Chris in earlier slides. Additionally, we took components of high-yield market opportunities, raising an incremental $275 million in January seamlessly. Turning back, cash receipts in 2023 reached nearly $500 million, significantly higher than 2022’s $330 million, with core capital provision assets contributing a record $415 million. Our total cash spent on operating expenses and interest amounted to around $217 million, less than half of the total $489 million cash receipts received. Moving to Slide 21, I’ll briefly outline the maturity schedule and covenants. Our debt obligations extend to 2031, with the next maturity in August 2025. Only 22% of debt is maturing within the next four years. Our leverage ideal is to maintain levels of 1.5 times debt-to-equity, which we are comfortably within. We proactively manage liquidity levels considering anticipated cash needs and expectations of cash receipts. This concludes the financial highlights. It has been an exciting year to present, and now I’ll turn it back to Chris for final remarks and open the floor for questions.

Thanks, Jordan. Given that we've talked for over 40 minutes, I believe it’s better to take your questions now instead of talking further. I hope you’ve heard from all of us how very pleased we are to be able to deliver this kind of set of results. Operator, we can now take questions, either from the phone or via the webinar.

Thank you.

We'll start with the webcast. We have a couple of questions from Rakesh at Bell. He’s interested in understanding how much of the operating expense base is maintenance versus growth? And how much is fixed versus variable? To start with, a lot of our operating expenses are variable. What we spend on base salaries and operational costs reflects expenses typical to professional services, including office rent, audit fees, listings, etc. We aim to have a flexible cost structure and very few fixed costs. As Jordan mentioned earlier, the volatility in our expenses stems from portfolio performance. When assets appreciate, we anticipate future carry payments, though those payouts only happen upon cash realization, leading to disparity in accrual numbers. As for how much of the OpEx is for maintenance versus growth, that’s a bit harder to determine since we don’t separate costs in that manner. For instance, consider our patent and intellectual property team; they handle everything from maintaining client relationships to underwriting new business. There’s no compartmentalization of roles, so expenses are difficult to categorize strictly as maintenance or growth. We are focused on growing the business, avoiding growth constraints, while seizing opportunities.

Hi. Thanks. Great to see the realizations come through in 2023. You mentioned seasonality in the business. Is it fair to assume that 2023 was an outlier on the high side? Can you discuss the realizations pipeline looking forward?

I don’t think you can assume that regarding seasonality. What drives lawyers and litigation matters leads to year-end peaks which result in busy periods at the end of the year. Our experience shows that many deals close in November and December rather than January or February. So while we see a busy December every year, the first quarter tends to be quieter as lawyers are less inclined to initiate deals. Regarding realizations, timings can vary due to court schedules. Some cases may settle quickly, with several potential settlements coming up depending on court dates, while companies assess budgetary allocations at year-end. As for the new deal pipeline relative to previous periods, we observe that the corporate use of our capital is increasing and that larger average ticket sizes are becoming more common. We are actively cultivating relationships; in instances like the Fortune 50 company I mentioned, we have developed relationships over an extended period. Similar opportunities require more time for market education, but we find that the ongoing interactions lead to fruitful discussions.

Hi guys. Thanks very much for the presentation. Apologies for missing the early parts. Was the large investment that realized quickly only accounting for about half of the realized gains in Q4, according to the schedule of capital provision direct asset data?

That is correct. The significant case comprised roughly half of our realized gains as noted.

Hi, everyone. I have three questions. Firstly, can we get an update on the COVID-related case backlog and how much longer we think we have on that? Secondly, you mentioned that transaction sizes have doubled since 2019. How do you view the mix or diversity of our portfolio between larger and smaller cases? Lastly, regarding YPF, I noticed a small markup in Q4. Did that primarily come from post-judgment interest, and regarding the appeal, was there anything that surprised you?

For the COVID backlog, we’ve made progress, but there’s still work to be done. You can see signs of backlog resolution on Slide 14. We expect a robust level of activity into 2024 as we continue moving cases through litigation. There is a larger number of trials scheduled for 2024 than in 2022. As for the larger and smaller cases, while our transaction sizes have increased, diversification remains robust. With overall growth, the relative share of any single case has diminished over time. Jordan, do you want to address the YPF details?

Yes, on the YPF value changes, we see fluctuations due to our valuation methodology, with price and duration differences affecting expenses periodically across all asset classes. Regarding the appeal, we are not caught off guard by any of Argentina's arguments, as we are well-acquainted with them given our nine-year litigation process. However, I can't go into detail ahead of our briefs.

Thank you very much. I have three questions. First, on IRRs, you haven’t published IRRs for completed cases last year, but the lifetime IRR fell from 29% to 27%. Does that suggest IRRs for last year were around 23% to 24%? What implications does that have if you’re taking advantage funds in-house? Secondly, you've indicated that new business may decelerate due to resource constraints. Should we expect that to repeat next year? Lastly, are there any large deals outside of YPF that you can discuss?

Regarding IRRs, we generally report vintage IRRs, not annual IRRs. The 2023 vintage IRR is now 32%. Yes, the numbers will fluctuate, as you’ve noted, especially considering the rapid resolution of large matters will impact our numbers; thus, in seeking new funds, we retain caution. About potential large deals outside of YPF, we can’t specify right now, but we observe numerous opportunities in the US litigation market.

We are in the process of hiring to increase our capacity, ensuring we maintain quality while growing effectively. We are integrating team members gradually.

I believe this wraps it up. We have gone significantly past the hour, and this concludes our call. We're excited to see what we can achieve going forward. Thank you for being here with us today.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.