Burford Capital Ltd Q4 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome you to today's Burford Capital's Fiscal Year 2024 and Fourth Quarter 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Josh Wood, Head of Investor Relations. Josh?

Good morning, everyone. Thanks for joining us today to discuss our fourth quarter and full year results. On the call as usual, we have our Chief Executive Officer, Chris Bogart; our Chief Investment Officer, Jon Molot; and our Chief Financial Officer, Jordan Licht. Before we get started, just a reminder that today's call may contain forward-looking statements that involve certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed during the call. For information regarding these risk factors, please refer to our earnings materials relating to this call posted on our website and our filings with the SEC. We will also be referring to certain non-GAAP financial measures during the call. Please refer to today's earnings materials and our filings with the SEC for additional information, including reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. Also, I would just highlight, as we did in our press release last week, that we've refreshed the structure of our earnings presentation, and of course, we'll guide you through some of that here on the call. If you missed the preview in the press release, there's a quick primer on Page 5 of the presentation that I would encourage you to read for more context. And with that, I will turn the call over to Chris.

Thanks very much, Josh, and hello everybody. Apologies in advance, it feels to me like half the people in New York and London have come down with a winter bug, so apologies if my voice is a little crackly or I am coughing during this. As Josh said, we're going to start with Slide 6. This is a new format, and it's something that you can anticipate seeing going forward. You're of course also seeing for the first time a full U.S. Form 10-K. We expect to file that later today. These slides now take the form of our full earnings presentation, earnings release combined into one document, as opposed to having two separate documents as we had in the past. We hope you'll find this useful and helpful. And it matches the way that you see all of the classic U.S. public companies providing their information to people. This first Slide 6 will always lead with these are our GAAP numbers, and they're important to lead up front for GAAP prominence. But at the same time, these are not the things that management is terribly focused on. We're focused on cash more than accounting numbers. But before I take you to the cash, which has some pretty exciting news, I will just say a word or two about accounting because I think there may have been a little bit of confusion after we put these results out, which caused, from my perspective, a reasonably adverse market reaction. Most significantly, when we show unrealized gains or losses separately in these accounting matters, that does not necessarily mean that something has happened with respect to the substance of the cases. So, for example, in the fourth quarter of 2024, you see a negative number for unrealized losses that does not correlate to the portfolio performing poorly. In fact, the portfolio performed very well in the fourth quarter. We had dramatically more positive case milestones than negative case milestones. We only had a few negative case milestones amounting to a very small amount of money, small single-digit millions. Jordan is going to walk you through one of the later slides in a bridge to show you all of the different components that you now see in those kinds of numbers. But it's important not to look at them and say, 'oh my goodness, a number in trends means that something bad might have happened in the portfolio,' that isn't the case at all. So let's turn to Slide 7, which is really the focus of my message to you today. As I said just a minute ago, when Jon and Jordan and I and everybody else who runs this business looks at how we think it's doing, we focus on cash, we focus on how the portfolio is performing and what's going on with respect to concluded cases that are bringing in cash for the business. And on that metric, we have an amazing year. These are blowout results for us. We set a number of new records this year. Our realizations were very high. In other words, realizations meaning cases that have actually concluded came from lots of different things. This wasn't a period where we had just one big winner. We had lots of things go well. We brought in a very significant amount of cash, more than we ever had in our history. Beyond just bringing in cash and realizations, we had very strong levels of net realized gains, in other words, the profits that we make on our investments. Those were an annual record by a very wide margin and much higher than they had been in prior years. This is all consistent with the theme that we've been sounding to you for a little while, which is that after a couple of years of very slow movement in the court system because of the pandemic, it took a long time for that motor to get back to running smoothly. But that's where it is now. We're seeing the benefits come through in the kind of portfolio activity that we're demonstrating. It's not only that the portfolio is performing strongly and concluding and generating strong cash realizations for us, it's also that our returns have recovered to very high levels. In fact, our 2024 net realized gains were about double the level of realized gains in the prior year and above our historical track record overall. That was at a more than 100%, 108% return on invested capital, or for those who prefer multiple of invested capital, more than a double, more than a 2.1x multiple of invested capital. At the same time, all of the data that I've just given you has focused on cases that have been in the portfolio and have made their way to the end and concluded. At the same time, we're continuing to grow the portfolio to set ourselves up for future performance. You can see with the chart on the right, the portfolio has been growing by about a 15% compound annual growth rate over the last four or five years. We continue to see growth during 2024, with portfolio growth of about 8%. The way we talk about the portfolio here is deployments at the door and milestones. The other thing you're going to hear us talk about more and more, Jon's going to go into this a little bit, and we're going to go into it even more at Investor Day in a month or so, is we're going to begin now sharing more about the way that we look at these things inside the business. That's what we call target realizations. When we write new business, we're trying to determine what we think that business is going to produce over the life of that litigation matter. Our target realizations for our 2024 new business were up significantly year-over-year and, again, I believe set a new record. Turning to Slide 8, just briefly before I turn you over to Jordan, this is just a snapshot of some financial metrics. I'm not going to go through each one of these, but I would just sort of highlight for you again that net realized gain number, which is pretty close to being a double year-over-year, and return on equity. While we have not yet made it to that aspirational 20% that we have talked about the business being able to produce on a sustained basis, we're pleased with the progress that we're making towards that goal with a 14% rolling average for the moment. And with that, we'll be happy to take your questions at the end. I'd like to turn you over to Jordan.

Thank you, Chris, and hello everybody. As we've discussed previously, this year we flipped over from foreign private issuer to a U.S. domestic filer. With that transition, you will start to see 10-Ks and 10-Qs rather than a 20-F. In addition, this spring you'll see us file our first proxy statement. Let's start off by noting that none of these changes have an impact on the historical financials. There are, as Josh mentioned earlier, a number of important changes in the presentation, which I'll outline. For those investors who've been following our numbers for years, you'll know that Burford has always been focused on providing disclosure that represents what shareholders actually own. That's why we've always outlined the difference between Burford-only and our consolidated financials. Our consolidated financials include the private fund entities and other third-party interests. Let me give you two examples of those. One is the Colorado units that represent YPF entitlement that was sold previously to third parties; and two, the BOF-C sovereign wealth fund that partners with the balance sheet on investments. While these entities are consolidated under accounting standards, the economic ownership of these resides with third parties. Beginning this reporting period, the Burford-only disclosure will be enhanced. We're going to use more prominently the segment reporting. We have two reportable segments: Principal Finance and Asset Management. Principal Finance captures the financial impact of the legal finance portfolio that's funded by the Burford balance sheet. Asset Management, as you can imagine, captures fee income from Burford's private funds funded by third-party capital as well as some income from other service-related operations. The sum of these two segments is referred to as total segments, and that disclosure is consistent with and identical to reporting on an aggregate Burford-only basis. There are a couple of other items that changed, and I'll make sure to highlight those when we get to other sections of the presentation. But what are the takeaways that you should have from these changes? There are two. First, historical numbers have stayed the same, and we're committed to the same level of transparency that we provided to shareholders over the years. Second, the disclosure will be easier to digest for everyone, most importantly, investors that are new to the Burford story. Moving to Page 11, this is the first example where I'm going to start using some of the new nomenclature total segments. This is the same as what we would have called Burford-only, and we will at times use them both interchangeably. Overall, a strong year for 2024, particularly from a cash perspective. It's difficult to stack it up to the prior year on revenue recognition, which includes the significant revenue from the YPF government judgment. But realized gains were up 75% for the year to a new record, and that's the driver of the $460 million in revenue in 2024. We obviously didn't have another YPF size win, and thus unrealized gains are lower and will move around period to period. I'll go into that in greater detail as we continue to discuss. Operating expenses were down significantly in 2024 from 2023 by approximately 43%, driven by the lower long-term incentive compensation that corresponded with the unrealized gains in 2023, again associated predominantly with YPF. Let's go to the Principal Finance segment. This section outlines, as I mentioned, the portfolio that directly owns our balance sheet investments. Here's what's changed with the migration to the 10-K and how it impacts this segment in particular. First off, we're going to be discontinuing the use of the labels capital provision direct core portfolio and capital provision indirect. Our performance and track record measures such as return on invested capital and internal rate of return will be consistent with prior reporting. Those figures will always reflect direct funding by the balance sheet and exclude the impact of any balance sheet commitments to private funds. On Page 14, let's start with a snapshot of the portfolio. I'll mention some of the key highlights. The portfolio has grown at a 15% compound annual growth rate over the last five years and has now topped $5 billion. This is a Burford-only number; group-wide we're around $7.5 billion. Our fair value on the bottom of the page is broken into its various components. YPF represents less than half of the portfolio at approximately 40% of the assets. Fair value marks on our current portfolio excluding YPF are slightly less than one-third, or 31%, of deployed cost. If we repeat our historical performance, there's a lot of incremental revenue to come from the portfolio. Note that our deployed cost has been growing at about the same mid-teens rate, meaning that our growth is fundamental and not driven just by fair value. On the right-hand side, we highlight the diversity of our portfolio, which is both global in nature as you see on the top right, as well as made up of very many different asset classes. Moving to Page 15, you'll see the breakdown of our capital provision income with $327 million of net realized gains. Again, that's close to a 75% increase when compared to last year. Those gains were driven by three realizations that individually exceeded $50 million and four more case resolutions of over $20 million. Unrealized gains are negative per year; the portfolio had positive momentum. However, that number is net of the transfer of previously recognized unrealized gains into realized gains, which occurs when an asset resolves. Discount rates were certainly volatile through 2024. Through the first half of the year, we saw rates rising and creating a significant headwind to our unrealized fair value gains. Then in the third quarter, we saw our valuation discount rate drop approximately 90 basis points. This reversed course in the first quarter as rates increased significantly. In sum, there were volatility in the quarters, and that created considerable negative movement in the fourth quarter. Rates backed up by about 52 basis points, which is why a strong quarter from a fundamental perspective can be masked by these movements. A reminder, rate-driven movements are non-cash and have no bearing on the terminal value of our capital provision assets. Overall, the discount rate on the portfolio basically remains flat over the course of the year, finishing at 6.9% compared to 7% at the end of 2023. The bottom of this page outlines the impact of these rates and other discrete factors on the ending balance of our capital provision assets. This is new disclosure. Let me walk through it in a little detail. Let's focus on the left side of the page first that outlines the movements throughout the year. The right-hand side is the quarter. First, let's start with the cash movements of deployments and realizations. Deployments can be either drift over time as our clients incur expenses or monetizations in which we provide our clients significant working capital upfront in the beginning of a case. The cash going out the door, which is capitalized in our asset balance, is offset by the realizations on the portfolio. You see those realizations in the red shading, which is the conclusion of our assets turning into a receivable. We then have the impact of duration or the passage of time. This is the increase in value of our assets as they get closer to the ultimate resolution. Next is the discount rates, which we discussed a lot already. With minimal movement in the year, there's limited impact in 2024 from discount rate changes. Finally, we have the $166 million associated with the fair value impact of milestone changes and other model impacts. As a reminder, milestones are objective occurrences in a legal case that can be either positive or negative as the case progresses towards conclusion. Before turning the page, the right-hand side illustrates the same content demonstrating both the significant headwind of the change in interest rates and the positive impact of milestones and, of course, the high number of realizations in the fourth quarter. Moving to Page 16, our portfolio continues to build. As Chris mentioned, we're not just focused on commitments and deployments. Our business has shifted considerably over the years. Look at the diversification in the portfolio, which I highlighted earlier in terms of geography and asset type. It's also important to recognize that the return profile of our assets is not homogeneous; different assets have different durations, implied internal rates of return, distinct risk profiles, and other financial characteristics. Thus, as we think about new business each year, we're originating each year, focusing on the target realizations that the new business will produce. We plan on providing a lot more detail on this topic in April. I hope you can join us at our Investor Day. Overall, we are excited about the business that we wrote in 2024, and it's targeted to have higher realizations than the business we had written in previous years. Switching back to some other metrics on the page, we've been consistently deploying around $400 million per annum for the balance sheet. Our outstanding commitments to counterparties on a definitive basis have grown significantly and are at $774 million as of year-end. It's important to note that this will not happen all at once but rather over time. With that, I will hand it over to Jon to discuss the portfolio performance over the last year.

Thanks, Jordan, and thanks to you all for joining. I'm very excited to be talking about these results today. If we turn to Slide 17, I'm going to do three things with this slide. One is just to go over the highlights, which are pretty significant and I'm very proud of. The second is to flesh out what Jordan and Chris mentioned earlier about this focus on targeted realizations. I think these numbers will help explain that. Third, I'll provide a little further nuance, really a preview of what we're going to discuss on Investor Day. So first, the highlights on this slide. Realizations of $641 million in 2024, which is a significant increase from 2023. This is not one case that happened to hit, right. There are seven assets, each generating more than $20 million. Three of those generated more than $50 million. It was spread in terms of vintages such that four of the matters were pre-COVID, generating $187 million. The return on invested capital was very strong; you see the 108% number for the year, which ticked up. It's an increase from last year, and it's above our historical average because of some good resolutions in the second and fourth quarters that had high return on investment capital, which brought up the overall average. The net realized gains, which is really what investors care about, at $327 million, not only is that larger, but it's more than double the average annual net realized gains over the prior four years. That's really impressive. I've been saying for some time that the portfolio is moving. I'm very excited about it. But to see it translate into cash realizations and to see those realizations with an upward trend in returns is really exciting. Now, the second thing I want to point out is Jordan talked about targeted realizations. Why do we care about that? What does it mean? Just look at the last two columns on the right, the last two bars and just look at the balance sheet-only numbers. In 2024, you've got $625 million of realizations, which results in, if you look at the numbers excluding private fund interest, $325 million of realized gains. What does that mean? It means basically that for those deals that concluded in 2024, we had put out $300 million; we got back $625 million, so $325 million was gain. Let's look back at 2023 and how we did. We had $496 million in realizations, the red bar balance sheet only, and $186 million of that was a gain. That means that the deals that generated those realizations in 2023 accounted for $310 million of deployed capital. One who’s just looking at deployments and commitments would say, well wait a second, the deals you put out that generated the realizations in 2023, that was $310 million worth of investment versus $300 million worth of investment that concluded in 2024. Well, that doesn't show growth. But look, you'd much rather put out $300 million to generate $625 million than $310 million to generate $496 million. I'm not saying 2023 was a bad year; it was a great year. But 2024 was even better on that metric. And that's how you can understand that when we look at new deals, we care not just about how much money we are putting out; what we care about, which is what shareholders care about, is how much money is going to come back in. Now, the third thing I want to mention is I don’t want you to think that we are slavishly adhering to some really high minimum return on investment capital number and rejecting opportunities that don't meet that threshold because we want our numbers to go up. That's not the case. We have lots of opportunities, especially large corporate monetizations that are lower risk and typically shorter duration that will not generate that kind of return on investment but will generate really attractive internal rates of return, and we will be able to churn the capital and reinvest it in profitable future opportunities. So we'll talk on Investor Day about how we balance those things, how we are looking at targeted realizations, but we take duration and risk into account as well because that’s what makes a really attractive portfolio. The difference between a large commercial monetization, which might be turning faster versus a single patent case where you're putting out money that may take longer, but you have the potential to ring the bell. If we turn to Slide 18, this is a slide you've seen before, but updated with new numbers. You see how we can generate that spread of potential returns. That’s our bread and butter; the bulk of the things we invest in resolve through settlement. These are cases where there are strong commercial cases and ultimately both sides understand they have merit, both sides understand there's going to be a business resolution here and they will settle. The claimant needs our cash as a corporate finance mechanism to use it for other purposes or to finance the litigation, so they don't bear the expense while it's running. Those are attractive opportunities. There are occasions when it doesn't resolve through settlement. The parties can't agree; they go to adjudication. You see our wins far outstrip our losses and generate really high and attractive returns. Our loss rate is attractive when you look at the full balance of the portfolio. One thing about these numbers compared to past numbers is you see our return on investment capital since inception has ticked up from 82% last year to 87% now this year. That stands to reason; we have a year where 108% blended return on investment capital and all the resolutions is going to bring up the averages. Some say, oh, can you maintain this over time as you grow; are you going to maintain the returns? I think these numbers speak for themselves, and I'm very happy about that. If we turn to Slide 19, I love this slide. You've seen it before, but it's great to see the spread of potential matters. It has the venture capital type feel of those red bars to the far right with truly outsized returns, but it doesn't have the same kind of risk because when you look at the black bars to the left, they are smaller and the losses are much more contained. The third bullet on the left talks about 14% of our deployments experience losses, but we got back 32% of deployed costs, so we have less than a 10% lifetime loss rate. The 14% that are the red bars, those more than 2x returns generate really outsized returns; the asymmetry is very attractive. This chart also provides a little more color on when Jordan and Chris talked about targeted realizations because we will have deals that we look at that we think this could represent the modeled spread of outcomes for a single investment as well. No doubt, when we look at things at the beginning, some of them have characteristics that make them more capable of generating the red, truly outsized returns, with the risk of the black. But we have a good track record there. Some of them we can see are more likely to be in the green. We can tell at the beginning there’s always going to be a range, and we model the range of outcomes. We know there's a different risk profile and duration profile, which this slide doesn't capture. We’ll say more about that on Investor Day next month. If you turn to Slide 20, this breaks it out, as we've done in the past, by vintage of investment rather than the years that the money is coming in or the realizations are occurring. What's really nice about this is when you compare the black vertical bars to the red ones, you see how well the portfolio has returned in the past. The red bars are much taller than the black. But you also see those gray bars, which are the deals we've done. The money we've put out, that still is out there, and we hope will make those red bars even higher when we reproduce this slide in future periods. You can see the internal rates of return by vintage, which bounce around, which stands to reason; there are things that are going to go longer. They might have attractive return on investment capital but lower internal rates of return. Others will resolve faster with higher internal rates of return. Finally, if we turn to Slide 21, the status of the YPF-related assets; we don't have much to say here. As we said, it's not in investors' interest for us to give you the blow-by-blow. The basics we've talked about in the past remain true. We have a judgment. Argentina has appealed to the Second Circuit regarding its liability. We have cross-appealed on the YPF, the corporate defendant. There is an enforcement process that is ongoing both in the United States and in various jurisdictions worldwide, and we're very much on top of all of it. I don't think there's much more I can or should say than that. With that, I'll turn it back over. Thanks very much.

Thank you, Jon. That's a natural transition from talking about our portfolio to the portfolios that we manage for third parties. The second segment, Asset Management, summarizes some of the key metrics. 2024 was a slightly lower year with respect to revenue recognized, given that our income is predominantly tied to the fair value movement of our assets. On a cash basis, we had $26 million of receipts in 2024 versus $32 million in 2023. I'll jump ahead to Page 27. As we've mentioned throughout the presentation, 2024 was a great year regarding cash generated on the assets and the portfolio as they concluded. Here's our cash bridge. We started the year at $300 million of cash and securities and ended the year at over $500 million. That's highlighted by almost $700 million of cash receipts. While it's exciting to see the annual numbers, it's just as satisfying to continue to see the productive quarters strung together quarter after quarter in a row on the bottom of the page. In addition to the cash we have on hand, we currently have $184 million of receivables, which is almost identical to the receivables we had on hand at the end of last year. However, they're not the same receivables. We collected approximately 97% of the receivables that were in place as of last year, and we maintain a history of very high rates of collection after litigation concludes. On Page 28, an overview of our expenses. They're approximately 43% lower than last year, primarily driven by the decrease in long-term incentive compensation attributable to the fair value movement in YPF. While this page illustrates GAAP expenses on a cash basis, operating expenses, net of our change in working capital were $123 million, as highlighted on the previous page in the cash bridge. Two items that want further explanation are share-based compensation and case-related expenditures. First, on share-based compensation, that includes movement in our stock price for deferred compensation for employees. We've talked about that on previous calls, but as a reminder, when employees elect to defer their compensation into receiving Burford stock, that creates a liability for us. That changes with the stock price. If our share price rises, we see an expense; if it falls, we see a benefit. The decline in our share price this year resulted in a positive impact of $4 million and a negative impact of $7 million in 2023. But these are accounting movements as we purchased stock to hedge the economic impact. The relatively low expense in case-related expenditures not included in our asset cost has also decreased since 2023, benefiting from almost $4 million in an insurance settlement, showing that we're not only good at financing other people's litigation but managing our own affairs. On Page 29, a quick review of our capital structure. We have close to $1.8 billion of debt outstanding, with approximately $350 million of debt coming due in the next 20 months. We've been gradually chipping away at that outstanding balance due this summer, having purchased about $50 million of that issuance below face value. At 0.8 times, our leverage level is well below covenant levels as well as our stated maximum of 1.25 times. With that, I will hand it over to Chris to wrap up.

Thanks, Jordan. That takes us to Slide 30. You've seen this slide before. Let me just return to where we started, which is the portfolio. We've told you for a long time that we really like our portfolio. We're really happy with the quality that we perceive in it. The recent past, including 2024, has certainly borne that out in terms of how the portfolio has actually performed. The big question that Jon and I have talked about before is when we went through a period of very significant growth in the business several years ago; the question was could we maintain the investment quality and could we maintain the returns? A number of you were wondering that as time passed. I think what we've done now, as those investments have made their way through the process to the end, is show that we have been able to do that. Now, we're sitting on a substantial portfolio that has years of runway ahead of it, producing high levels of cash and desirable returns. We couldn't be happier with the portfolio and how it’s performing. That will be the source of many years of future cash flow generation. At the same time, we are generating a significant amount of new business every year. While we'd always like to be generating more new business, the reality is, as we've expressed before, that it's challenging for us to do both at the same time: to have high levels of portfolio activity and also high levels of new business. But a 15% compound annual growth rate in the portfolio overall over the last four or five years seems a desirable level of growth from our perspective. As Jon said, we have this large and interesting YPF asset sitting out there, and we will wait and see what comes of that in the year or two to come. With that, I think we're delighted to take your questions.

Great. Thanks, Chris. Okay. It looks like our first question today comes from Mark DeVries with Deutsche Bank. Mark, please go ahead.

Yes. Thanks. First, just wanted to clarify, Jordan, on the unrealized losses in the quarter; is that primarily discount rate driven, is that correct?

Yes, it's driven by two items. If you're looking at the fair value change, that can be driven obviously by the discount rate, but also the movement from unrealized into realized. So in a quarter in which you're going to have a lot of realized gains, then you'll see a reduction in fair value.

Understood. Thank you. Just turning to commitments in the quarter, is there any color you can provide on just the nature of some of the commitments you entered into and how you're feeling about the risk-adjusted returns of new commitments that you've entered into recently compared to the past?

Jon, do you want to take that?

Yes, sure. I'm happy to take that. I can't give you color on individual investments; it would be against our policy. But I can tell you that we continue to see the same diversity of opportunities that are really attractive. Over time, there's been even more diversity of opportunity with respect to geography and subject matter than there was historically. There's a good blend of U.S. commercial space. We're moving from generating opportunities through law firms to generating opportunities with corporates sometimes introduced by law firms, but sometimes directly. They're often looking for larger amounts of money. As I said, they could be portfolios with lower risk and shorter duration, meaning we'll get paid first dollar out of a number of things that come in, could be an example. Whereas there are some assets, an individual international arbitration or an intellectual property case where the typical investment size is going to be the cost of the litigation rather than a monetization; the duration is going to be longer, but the potential multiples are much higher. We're seeing all of the above. The fortunate thing, as we talked about our track record, is that we can be takers as long as we maintain rigorous underwriting, which we do. We're investing in cases with attractive IRR and ROIC potential, which leads to diversity. We don't have to say no, we're closed to patent or we're closed to others, but we want more U.S. commercial. We can say we're looking at all of it, and we have teams that can underwrite and help the clients with all of it.

Yes. That's very helpful. Thank you.

All right. Thank you, Mark. Our next question comes from the line of Julian Roberts from Jefferies. Julian, please go ahead.

Thanks very much. Yes, I've got three or four actually, if I may. I think they're all pretty quick. The longer one is looking at the 2024 part of the portfolio spreadsheet. A glance at the second column from the left shows that there's a lot more single case action going on here. And actually of the biggest commitments, the top two and probably three or four of the top five are single cases. Is that just happenstance, or is that deliberate? I know that some of it touches on what Jonathan just said. Is that deliberate? Is it just happenstance? Also, is there anything to read into the difference between the $100 million commitment to a single pharmaceutical, biotech, and life sciences IP case that's global, and $63.5 million, all balance sheet, in this instance, commitment to a single defense securities case, which is also funded from your balance sheet, but hasn't seen any deployments yet? Is that because the former is maybe a monetization and the second one is not? What might one reason be for that? And then much quicker questions: Are there any implications or is there anything we should think about because of the new U.S. administration? Are there any noises we should think of from a regulatory point of view? This might not be possible to comment on, but the RA-4 Arg, these people who are trying to intervene somehow in the YPF case. Is there any comment you can make on that? Is it perhaps slightly spurious, or is there something we should think about on that front? Thanks very much.

Thanks, Julian. We'll take them in reverse order. On the RA-4 thing, I think we probably don't have anything more to say than the public filing in response to it, which I think made clear that we thought the court can and should simply disregard the filing. On the U.S. administration front, no, I think the answer is the same as before. There are many things on the plate of the administration, and we don't think our business is anywhere close to the top of that list. Even if it were, the U.S. market feedback is all about accepting the reality that litigation finance is here to stay. The question goes to smaller issues like the level of disclosure and so on. I don't see that as a significant issue at all. On the question about the mix of deals, yes, you’re correct to assume that the $100 million deal is a monetization. Whenever you see that pattern of a large commitment with full deployment at closing, that translates into a monetization. The security side sets us up for future activity with either a corporate client or a law firm. We like having both. Jon, do you want to add any color there?

Yes. I would say, as Chris said, your perceptions having looked at the investment table are accurate regarding how those work. That corporate monetization is of the ilk I’ve described: if I’m putting out more money on something that’s lower risk and likely shorter duration, it can be a very attractive opportunity. Also, as Chris said, it’s not just that we’re limited by what comes in the door. I think it’s a virtue that we have been available to everyone in the legal services market, both the corporate clients and law firms, as being able to help them manage risk and expense and obtain corporate finance when it makes sense for them. In the long run, that has led to our stature in the market; I can't tell you the number of deals that have come to us of late, where they started out with somebody a few years ago that either isn’t around or isn't capable of fulfilling their needs anymore. The people that we’ve worked with come back to us because we have been able to fulfill their needs. It could be the same counterparty, either a corporate or law firm, that has come to us for funding of the fees and expenses that will be drip-fed over time that later comes back for monetization. We see that all the time. So the fortunate thing, as we discussed, is that we can be takers as long as we maintain rigorous underwriting.

Yes, and as you can see, when you look at the portfolio diversification statistics, that approach that Jon just outlined has nevertheless led us to maintain a strongly diversified portfolio overall, even if on a quarter-by-quarter basis you see concentrations and shifts. Julian, did that cover all your questions?

Yes, it does. Very clear. Thanks very much. For what it's worth, I think the new disclosure also seems very clear. So thanks for that.

Great. Thank you, Julian. Before we go to the next phone question, we'll mix it up with questions from the webcast. Here's one from Trevor Griffiths. Does the move to using target realizations to measure staff performance mean that there will be a reduced incentive to go for the jumbo wins? The answer to that is no, not at all. All we’re doing is, as Jon said earlier, applying more nuance to how we measure things because it doesn't work for us just to say, okay, you're committing $100, you're deploying $85 of them on average, and you're making X return on the $85. That's too blunt an instrument for how the business works now. Our team is absolutely incentivized to look for the very most desirable risk-adjusted returns that we can generate.

If I could add something to that, Chris, I want to clarify one thing. The targeted realization number will actually be higher if the case has the ability to generate truly outsized returns. If you're looking at that focus, it could potentially be the opposite of what the question suggests, because an underwriter looking at it is going to say, 'how much money can we really bring back on this?' That being said, not all deals have to generate a 3x or 4x return on investment in order for us to do them; they can be shorter duration, lower risk, and produce lower returns, but they'd still be attractive internal rates of return. We'll bring that in as well. I want to ensure the third part was not conflated with the second. The target realizations are looking at how much money we are going to bring back in. The more money we can bring back in, the better.

Great. Thanks, Jon. Let's go to another question on the phone.

Okay. Our next question comes from the line of Alex Bowers with Berenberg. Alex, please go ahead.

Afternoon. I've got four questions, two longer ones and two hopefully quite quick ones. Firstly, there's been some data out, I believe, by LexisNexis reporting that the average legal award per corporate defendant has increased in the U.S. year-on-year. Just wondering if this trend is being reflected in your portfolio, given the higher return on investment figure this year? Or is your figure this year more just a consequence of the variability in outcomes of individual cases? Second question; just in your shareholder letter, you talked about expanding the business in other parts of the legal ecosystem, such as law firm equity. Can you just talk a bit more about what you've done in that space so far and what you're focused on? Third question on headcount: Headcount was broadly flat year-on-year, I think around 160 full-time equivalents. Are you looking to increase headcount going forward? In what parts of the business are you looking to do this? Lastly, on YPF, I believe we're still waiting for a date for the oral arguments. Is this taking longer than you expected to be arranged? What is your indicative timeline in terms of when we should expect a decision on the appeal?

Sure. Let's tick through them. First, on the Lexis data, what you're really talking about is what insurance companies call social inflation, which is the question of whether in the U.S. tort system juries are awarding damages at an increased rate above the rate of economic inflation. There is some mild evidence that that's happening, although it’s counteracted by other data points suggesting claims are actually falling. It’s a little difficult to figure out what's going on in the tort market. But that being said, that's not really our market. What that data is about is the sort of masses of U.S. litigation dealing with personal injury claims, auto accidents, and so on. I don't think there's a read over to our portfolio. All that said, our portfolio has increased growth in the size of matters that we do, so if you were to compare the average size of outcomes in our cases today to some years ago, you would expect them to be higher. But that's not because of an underlying trend. Our corporate cases deal with real damages, not perceived damages, for the most part. Regarding expanding our business into the legal ecosystem, I’ll defer that until the Investor Day. I can't cover it in 30 seconds, but we'll spend time on that. Headcount is roughly flat; that reflects traditional movement within the business. We continue to grow the business and hire every year, but when we do, it’s more of one person here, one person there, not dramatic expansions. So I expect to see a moderate increase over time. Regarding YPF, as you pointed out, we're waiting for an oral argument date. We're not very far away from the court averaging in setting such dates. The reason this feels like it’s taking a long time is because the briefing took a year or so to complete, in part because Argentina took advantage of the ability to delay its briefing from time to time. We hope to have an argument date soon. Jon, anything to add to those?

The only thing I’d add on the first question about national data versus our cases is that our business is not actuarial analysis where we're looking at lots of similar things and trying to predict aggregate outcomes. While we use data and it’s very helpful for underwriting, we use it to underwrite individual risks with respect to individual cases. The damages that a corporate is awarded by a judge, jury, or receives in settlement are based on the particular business of that corporate plaintiff, not a broader social dynamic. I don’t think that has a huge effect on us. But as Chris said, we've grown, which means we’re putting out more money for bigger cases brought by larger, more credible players in the industry. Thank you.

Thanks, Alex. That brings us to the hour, and we'll leave it there. We hope to see you all in person or virtually on April 3 for our Investor Day. We haven't done one for three years. We're excited to share information about the business with you in greater depth than we can in these earnings calls. We're hard at work on making that a useful and informative presentation for you, including addressing points about our future plans. With that, we couldn't be happier with the way 2024 went, in terms of cash performance and how the portfolio delivered. We thank you for your support, and we look forward to talking to you again in a month.