Burford Capital Ltd Q3 FY2025 Earnings Call

Hello, and thank you for being here. My name is Bella, and I will be your conference operator today. I want to welcome everyone to Burford Capital's Third Quarter 2025 Financial Results Conference Call. I would now like to hand over the conference to Josh Wood, Head of Investor Relations. You can begin.

Thank you, Bella, and good morning, everyone. We appreciate you taking the time to join us to discuss Burford's third quarter results. On the call, we have our Chief Executive Officer, Christopher Bogart; our Chief Investment Officer, Jonathan Molot; and our Chief Financial Officer, Jordan Licht. Earlier this morning, we posted a detailed earnings presentation, which we'll refer to during the call, and also filed our Form 10-Q, both of which you can find on our Investor Relations website. 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 more 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'll 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. With that, I will turn the call over to Chris.

Thanks very much, Josh, and hello, everybody. Thank you again for joining us today. We're going to do this call today a little differently than usual. Before we turn to Jordan and the usual financial review, I would like to cover a few different topics with you. Let's start with YPF, given the market reaction to last week's oral argument. The YPF case was adjudicated in the Southern District of New York. That's the Federal Trial Court in Manhattan. It is one of the highest quality courts in the United States. Court-wide, its reversal rate on appeal is 6.28% over the last 10 years. The YPF case was decided by Judge Preska, the former Chief Judge of the Southern District. Her individual reversal rate is 4.63% over the same period. So, the statistical reality is that a judgment from this court, and especially from Judge Preska, is likely to be affirmed on appeal. Because of some of the questions and comments from the panel at oral argument, the market seems to have overreacted a little bit about the risk of the case being dismissed on the legal doctrine known as Forum non conveniens, literally an inconvenient forum. Forum non, as it's called, is a discretionary doctrine. It allows the court only once it has determined that it has jurisdiction, which is settled law already here. It allows the court to send the case to another more convenient court for trial. This occurs most often when there is some logistical issue going on, for example, that witnesses can't travel to the U.S. courts for trial. A sort of example of Forum non is for Jordan and me to go to a conference in Arizona and get into a fight and for Jordan to punch me in the nose and for me to sue him for damages. That case could be brought in Arizona because that's where the incident occurred. But given that Jordan and I both live in New York and never otherwise go to Arizona, Jordan could try to argue that it would be more convenient for the case to be heard in New York and not in Arizona. That's really the essence of what Forum non is all about. And although anything can happen in litigation, it would be extraordinary for the appellate court to dismiss the YPF case on this ground for several reasons. First of all, the trial judge has discretion to decide Forum non motions. And Judge Preska twice exercised her discretion to deny two separate Forum non motions over time. To reverse her decision, the appellate court would not only have to disagree with her rulings but also conclude that she abused her discretion in deciding the matter. That is a very high standard, and it is very hard to satisfy. Second, there is a substantial body of law out there that says that further along a case goes, the less viable a forum non dismissal is. It's one thing to send the Jordan-Chris case to New York as soon as it's filed. It is quite another to do so after 10 years of litigation, a trial, and a judgment. Indeed, it would be extraordinary to dismiss a case after trial judgment. As the plaintiff's lawyer, Paul Clement, who is the former Solicitor General of the United States, said during the oral argument, the only case example Argentina could find was 38 years old and from another circuit. And its facts are nothing like the fact here with a New York Stock Exchange issuer being sued in New York by U.S. shareholders. In fact, the old case was about a Peruvian sailor who died on a Peruvian ship that just happened to be docked in Texas at the time. Every single other element of the case was Peruvian, and that's the best case Argentina could find 38 years old. Third, Argentina would also have to show substantial prejudice from having to litigate in New York, for example, by not being able to have witnesses show up to testify, which was a problem in the Peruvian case. That is simply not an issue here. Every witness showed up for trial. And Argentina suffered no prejudice at all from litigating in New York, which it has been doing for decades in numerous litigation matters. In short, although we don't litigate cases in the press and while there is always litigation risk and Forum non was not the only issue on appeal, it would be exceptional for this case to be dismissed out of the U.S. courts at this juncture and sent to Argentina on Forum non grounds. And even then, by the way, it wouldn't be the end of this case. The market seems to us to have completely overreacted to the appellate argument. As we said in our release before the argument, trying to read the tea leaves in an oral argument is a perilous course. Of course, it would be lovely if all the judges came in and said loudly and in unison, of course, you win. But that is just not how the process works. Judges ask probing questions of both sides as part of the Socratic process. So now we wait for the court's decision. That will take months, but we remain bullish on this case. The YPF case is only part of our business, and it's not the largest part. We are excited about the broader business and its growth and performance potential. We're continuing to grow organically and inorganically, and we're confident in our 2030 plans as laid out in our April Investor Day. Looking at Slide 9, we are having a great year for the business. Definitive commitments are up more than 50%. The overall portfolio is up 15% already year-to-date, that's 20% annualized. That is well above the level to achieve our goal of doubling the business by 2030. I don't care much for quarterly results, but looking just at the third quarter, deployments were up 61%. We have done a lot more business this year in dollars and in number of cases than last year. The thing that makes the difference quarter-by-quarter is the presence of big cases, and we have already had more than our fair share of those this year. A lot of that new business is also in the nicely high returning zone on a modeled basis. In other words, we have seeded the ground for substantial realizations in the years to come. And don't forget the overall potential of the portfolio. We showed you modeling at Investor Day, estimating $4.5 billion of potential realizations from the portfolio as it was then, and we keep on growing it. Let's shift from new business to actual realizations and move to Slide 10. We are running ahead of last year in the volume of realizations. We're making new realization records on a rolling average basis. That's consistent with how we are feeling about the portfolio that things are moving. They never move as fast as we would like, and Jon is going to address this a little bit more in a few minutes, but they are moving, and you can't look at this on a short-term basis. This is always a long game. Results. In fact, the weighted average life of both the concluded book and the ongoing portfolio are pretty stable, around 2.5 years for the former and a bit over 3 years for the latter. Does every location drive us nuts? Sure. Especially because delays can cause accounting noise, which occurred this period when some duration extensions negatively affected the unrealized line. No court ever calls and says, 'Hey, good news. We've moved your trial date up by 6 months.' So while delay and a lack of predictability is something that is a constant frustration to anyone involved in litigation, it is simply how the system operates. Frankly, we are good at managing through that process and structuring deals around the inevitability of delay. Our focus really has to be in running this business on whether bad things are happening, like a spike in losses, which simply isn't happening and not whether the system is working as it has for the entire 35 years I've been involved in what are always delayed litigation matters where, frankly, no deadline ever actually holds. Notwithstanding delays and uncertainty, our IRRs are also remaining steady at 26%, and that's now on $3.6 billion of realizations. With that and loss rates steady, we're feeling very good about the portfolio. Let me add just a bit of color to those bare numbers as a cross-check. As we showed you at our Investor Day, the business relies on big cases for a material portion of its growth and performance. Whether we do a new big deal in any period will affect our new business numbers and whether a big case concludes or has forward progress will affect our realized and unrealized gains. As we have said since the beginning of time, this doesn't happen smoothly. Our realized gain numbers are down, suggesting that we haven't had a big case realization yet this year, although we have actually had more case realizations in total this year than last year, just not as many big chunky ones. However, we have lots of good forward progress. We have had 4 large case wins so far this year, each of which, if held at their current levels, would generate more than $100 million in proceeds for us. Those cases aren't over. As a result, their value is nowhere close to being reflected in our accounting numbers, but they offer a window into the potential performance power of the portfolio. At the same time, we have not had any case losses of anything approaching that size because of the continuing positive asymmetry in the business. Another important point about the business reflected in Slide 11 is the very significant spread between our book value and our expected value. That disconnect exists because of the nature of our asset class. Value occurs at the end of the case because that is when the binary nature of litigation has ended in either a trial conclusion or a settlement. Our history demonstrates that we know how to identify that value and to do so much earlier in the process than the accounting will actually drive. That being said, we can't just create income or GAAP value in a case by merely investing. We need the case to run its course. And that leaves us with a disconnect between the likely ultimate value of our assets versus the accounting value, as you can see with this graphical illustration of the point. If our track record holds true, there is a significant amount of embedded value in our assets yet to come. So in short, Jon and I are passionate about the business and the portfolio. Investors can take confidence in our strong alignment of interest as large shareholders and committed executives. Our personal financial performance is directly tied to the success of the portfolio and to the performance of the stock. We recognize that needing to take the long view and put up with volatility like the volatility you've seen in these quarterly numbers isn't the perfect fit for quarterly earnings obsessed public markets. But that is just the way this business works, and that is the price of high uncorrelated returns. Turning more directly to the market. Shareholders have every right to be unhappy with our share price performance, just as we are. As we all know, markets can become obsessed with elements of the company, and they can attract an undue level of attention, often masking more fundamental valuation presets. That seems to be what has happened with respect to the YPF case. When a company's share price goes down, especially when it declines in what seems to be a fashion unrelated to its fundamental value, shareholders tend to respond by wanting management to buy stock or for the company to do a share buyback. Here, management has indeed been buying the stock because we think there's good value. In fact, Jon and I bought more than 1.3 million shares of Burford stock in just the last year. But we don't think it's prudent at this moment, much as we think Burford shares are cheap, to use corporate funds to buy back stock. This is something we've talked a lot about with the Board, with shareholders, and with our advisers. Here's our reasoning and Slide 12 tries to help make this point. We are continuing to grow this business. In fact, we are sticking to our prediction of being able to double it by the end of 2030 as we laid out at Investor Day. Given that we don't reliably have incoming cash flow from realizations at any particular point in time to meet our growth capital needs, we fund the gap with debt. Because the asset cash flow isn't predictable, we don't want to take on too much leverage. We think the current level of long-dated maturities is fine, and we have confidence in the portfolio performing over time to meet our debt service needs. However, diverting cash to a buyback changes that equation because we're essentially funding the buyback with debt but removing the cash and its earning power permanently from the business. This isn't just about accretion. Given our returns and the average life of our assets, we would expect $200 million today to generate about $800 million of cash by the time we need to repay the underlying debt. That's a comfortable position. But if we divert the $200 million to a buyback, we will have to find all that repayment capacity elsewhere. At some point, that becomes less comfortable. I'm not saying that we couldn't do that; our leverage is low enough, we probably could, but it doesn't seem very prudent, and it would certainly add risk to the business. When investors sit back and think about that dynamic, they tend to agree based on our conversations with them. To be clear, we're not a closed book on this point, coming back to our shared frustration with the stock price. We will keep on discussing it and continue to welcome shareholder feedback. I think it's clear to the market what we believe about the business and the share price. I don't think a signaling release where we do a little buyback does a whole lot for us. A big buyback just seems imprudent when we talk through the issues. But as I said, it's something that we will continue to talk to people about and continue to listen to shareholder feedback on. Just before I turn you over to Jordan, I'd like to highlight Slide 13. First, to highlight the appointment today of Bank of America as a corporate broker for us, representing yet another step forward in both the U.S. and the U.K. markets, and just more evidence of our maturity and market leadership. I'm not going to spend time on the rest of this slide orally, but it's worth a look for those of you based in London, where I never cease to be amazed.

Thank you, Chris, and good morning, everyone. I'm going to take us through the two segments, Principal Finance and Asset Management. Jon will spend some time in the middle on the portfolio. Three things that I want to ensure to hit upon a little bit deeper and coincides directly with some of Chris' comments, which is to talk about capital provision income, discuss realizations and new business. When you look overall at the financial results and see that year-to-date, we're down in capital provision income revenue. A lot of that was driven by the extension of fair model durations. I'll unpack that even further when we get into the Principal Finance segment and the bridge. But before we get to that, I'd like to spend a little bit of time just commenting on the portfolio. Right now, excluding YPF, we're at a deployed cost of just under $1.7 billion. Chris already highlighted that it reflects in some earlier slides, the amount of fair value unrealized gains associated with that, which is around 32%. So as mentioned, there's significant upside to come in terms of future gains to the extent we hit our historical ROICs. I do love the right side of the page, as it correlates with not just the historical portfolio, but the way in which the business is continuing to grow. You look at all the different colors, and you can see the diversity. On the top, it's the diversity in geography, and on the bottom, the diversity in the actual portfolio, whether it's arbitration, antitrust, contract cases, or patents. We really have a diversified portfolio and a diversified team around the globe. Moving to Page 20, we can go through the capital provision income and the fair value bridge. I'm going to focus specifically on the bottom left-hand side to illustrate some of the numbers. This shows how we moved from $3.8 billion to $3.9 billion in total fair value. The first two pieces to discuss that somewhat offset each other when you look at the quarter or the year are deployments and realizations. Deployments put the money out, and we'll discuss that more on a future slide and then realizations with the cash coming in. The middle is how we earn the income in terms of fair value as well as the realized gains, and we break it apart into three components. First is the Duration Impact. This Duration Impact that we're outlining here as the passage of time is truly just the passage of time. This is if you take all of the fair value models and move forward a quarter towards the ultimate completion date. Then you have the change in discount rate. We've discussed that before. When rates go up, the value comes down slightly, and vice versa; it works the same way as bond math when you're discounting an NPV. Finally, you have the collection of milestones and other model impacts. This is the recognition of an objective event with a milestone or, in the case of this quarter, if we've identified some cases in which we've extended the fair value model estimated duration. When you push that out, it will then correspondingly have a reduction when you think of an NPV, and we will have a reduction in value. It's important to pause there and state that by moving duration, that doesn't necessarily change our view of the case or the outcome. It also doesn't necessarily impact what we're going to receive. In many instances, we have back-end adjustments in which multiples can rise the longer the capital is outstanding. Duration can also be extended because the case has progressed through the lower courts and has made it through objective milestones. While the movement of duration was a significant impact this quarter, it doesn't change our perception of the portfolio at all. Flipping back to new business and how that portfolio expands, the first piece on Page 21 is to think about new definitive commitments. Chris highlighted the diversity of the risk bands associated with this year, not to mention the growth that we've seen in 2025 compared to where we were at the same point in 2024. That also corresponds with a growth in deployments. Ultimately, the commitments are great, but you still have to put the money out and the cases are progressing, and it's the money that earns the returns. You can see our deployments here have increased over 2025. And it's important to note that we do not look at ROIC on a quarter-by-quarter basis or even on an annual basis, but rather on a blended basis across the entire portfolio. I want to remind folks that the 43% ROIC we see that occurred in 2025 did have a very large event that ended quickly in Q1. That was a great IRR, but given the short duration resulted in a low ROIC. Given where we stand, we would expect to see that number obviously be lower. I will pause there to hand it over to Jon to talk more about the portfolio.

Thanks, Jordan. Thanks to you all for joining. I'm going to turn to Slide 23, which you've seen before, but I want to talk to it in a way that emphasizes and fleshes out something Jordan said earlier, which is as a shareholder and running this business, I don't pay as much attention, as Chris said, to how we do in a particular period, except maybe to ensure that we are continuing to put out money. And why is that important? The growth in commitments and deployments are important. You can understand from Slide 23 that it serves as a reminder that we have a really good asset class that when we are the ones managing that asset class and deploying capital into it, only three things can happen. It's going to go to trial and win, it's going to go to trial and lose, or it's going to settle. Over the course of our life, these numbers have stayed pretty steady. In any particular period, they could bump around because you could have one really large adjudication gain. Large adjudication losses are harder to come by, as Chris said, because they don't happen in the same way due to our asymmetric returns. When you look at this, you can see what we're putting the money into, that we know the majority of our matters will settle as long as we continue to pick good cases, and our track record shows that we have been able to do just that. If you turn to Slide 24, you see the same theme but in a different representation, which again describes how the nature of the asset class as invested in by us produces attractive returns. Here, we can truly have outsized returns for the smaller number of losses, which are much smaller numbers. You take these two slides together and ask how Burford did, and the answer is, we continued to put money into this very attractive asset class that has generated returns over time. And that to me is what, as Chris said, makes me so bullish about this business. I will turn it back over to Jordan.

Thanks, Jon. Coming back to the asset management part of our business, I'm going to focus on Slide 27. To take a step back and remind folks where we are with asset management, we're continuing to deploy capital for the balance sheet. We've been clear on the importance of doing that and enjoy the partnership that we do have with the sovereign wealth funds, which we also call the BOF-C portfolio. The rest of the other funds are in runoff. We wouldn't see management fees coming from those funds, and we'll see episodic performance fees from the fund. Overall, you'll see cash receipts from asset management were approximately flat year-to-date at $17 million between '25 and '24. If you isolate just to the quarter, the negative impact on asset management is simply put that when fair values move, we book a corresponding adjustment to the future potential profit-sharing income. If you have a negative impact in fair value movement, you'll have a negative effect. That doesn't alter our view of the future of the cases. Switching to Page 29 now to go through some of the capital structure and expenses, we sit in a great cash position at $740 million. That number has been impacted by two factors: one, the recent issuance of $500 million in notes in July of 2025; and two, we do have a maturity coming due in December of 2026. Part of that cash sits there to address that maturity. The bottom of the page shows the cash receipts, again, consistent and coming back over $100 million in the third quarter. On our operating expenses on Page 30, while we look at this also more frequently on an annual basis, it's important to look at that. A couple of items I want to pull out are share-based and deferred compensation. That includes movements in our share prices that impacted both up and down given the DCP program. Also, what's included is a one-time item related to the mechanical acceleration of tenure-based awards that vested in this period but haven't been paid out, and that's a one-time impact. With respect to G&A overall for the year, that's slightly up due to increased costs associated with policy and planning.

Great, thanks, Jordan. Rather than doing more closing remarks, why don't we just go straight to questions, operator?

Your first question comes from the line of Mark DeVries with Deutsche Bank.

I appreciate all that new perspective on the YPF case. Just had a related follow-up on that. Could you just give us a sense of potential timing of the appeal of the Second Circuit on the order for Argentina to turn over its YPF shares?

Sure. Although like everything in litigation, as you've heard from us today, the timing is inscrutable to some extent. But that appeal is going to be fully briefed, if I’m not mistaken, Jon, correct me if I'm wrong on this, by sometime in December. Then after it’s fully briefed, the court will schedule it for argument. There's no argument date for it at the moment. From the main appeal, that can take a long time. It doesn't always take a long time, but it can take a long time. After the oral argument of the appeal, the court will write a decision about that. Again, that doesn't have any particularly fixed timing associated with it. So it's certainly not a 2025 event; it's likely, but not certainly a 2026 event.

Got it. And then just a question on realizations. How are you guys thinking about the trajectory of that over the coming years, particularly as we think about the impact from the pandemic on courts and the backlogs that created? Are you still getting, are you seeing elevated realizations as courts play catch-up? And what might the implications be for the next couple of years?

Well, we tried to show the data on a few different metrics when we did some of these slides. Some of the slides that we put together had some new information because we know people are focused on this theme. Looking at the rolling 3-year realization is an interesting way to do it as opposed to having sort of quarter-by-quarter up and down shocks. If you look at where we stand today, we have more events, more trials, and more hearings scheduled for the next 12 months than we had for the 12-month period a year ago. What that says is there's this continuing velocity in the portfolio. The thing that drives settlement activity is usually pressure on the defense to get there, and that pressure is a looming trial date. When cases get set for trial and when trial approaches, that's the most likely time for them to resolve by settlement. You’re continuing to see forward momentum, at the same time, you have frustrating moments, like we had this quarter where we also saw courts not move as quickly as we would have otherwise expected. Because of the relatively new valuation approach we use, that can have a negative impact on our unrealized gain and loss line.

Julien Roberts is joining us by webcast today. His question is, thanks for the presentation. Are you able to give us any more detail on the change of expected or modeled timing of the case whose duration has been extended? Sure. And thanks for the question. I'm going to answer that in a second and first, just to make sure everyone understands how we think about modeling. Firstly, we look at all our assets every quarter, and the assets are constantly changing with various different inputs, whether that's an observable milestone event, whether it's expected proceeds or duration discount rate that I've mentioned. With respect to this, Julien, I'm not going to answer the part of which case or cases it was, I think that would be inappropriate. But overall, if you looked at the impact of the duration change, it's somewhere in the $40 million to $50 million impact when you look at that compared to the overall deployed cost fair value associated with the non-YPF book.

We've got another webcast question. This is from Jonathan Alexander at Evergreen, who says, on the buyback, the logic you have laid out makes sense. But if we anticipate a positive YPF return, isn't it merely a short-term levering of the business when the stock is cheap that will then be paid off when the YPF result comes through and the overall risk to the business hasn't increased? My partner, Jon Molot, would probably agree with you on that question. It all comes down to a question around the prudential management of the business. We lack the ability to accurately predict when cases are going to turn into cash. We have shown that we're pretty good at predicting whether they'll turn into cash. We have a long and successful track record of being able to do that. But that doesn't answer the 'when' question. It sits somewhat uncomfortably beside a world where public debt does come with a 'when.' The interest on the debt has to be paid, and the principal has to be repaid on agreed timing. It doesn't work; the debt holders don't say, 'Oh, well, the court delayed, so that's fine. We'll delay too.' That’s not how it works. Where we’ve come out thus far, and this has been the discussion with lots of investors, advisers, and the Board, is to be on the prudential side of that equation. We welcome continued dialogue and debate about this.

Just a follow-up question on kind of the recent commitments deployments, whether there's any noticeable trend worth calling out on kind of the distribution of those among shorter duration, lower ROIC versus longer duration, higher ROIC.

Our approach is to be all things to all people. It depends on what comes in the door, and we achieve diversification not just geographically and by subject matter but also in terms of duration and risk. I haven't the numbers at hand as to the portion of new deployments that are on the shorter or longer, but I would note that a sizable chunk of the new business that was done is in deals that have the capacity to generate higher returns and higher ROICs. We do know that things can settle earlier, and you can end up with lower returns earlier but with attractive IRRs. But if they go as we project, they are meatier investments with higher upside potential.

I wouldn't necessarily correlate the two. We do see opportunities that are smaller but can also be more towards the monetization in which we're putting more money out the door earlier. I don't want to equate the two.

If I sum up some of the capital allocation buyback-related questions and comments, one perspective is looking ahead, if we're successful in meeting our objective of doubling the base portfolio by 2030, that obviously means we'll be doing a significantly larger number of cases. One hopes at some point, the law of large numbers kicks in, and you get more predictable, steadier returns. We haven't succeeded in achieving that thus far because of how the asset class has grown. We're doing much larger transactions than we were a decade ago. If we had stayed at our average ticket size a decade ago and had the business of the size it is today, then I think you would have greater predictability. But at the same time, we'd have such a volume of business that the OpEx and business model would be slightly challenged. We've quadrupled the average ticket size, leading to dependence on larger cases for a significant portion of returns. Thank you all very much for your time and attention. We enjoy being able to give you these updates. Hopefully, we've shed a little more clarity on our views about what's going on with the YPF case and the business as a whole. We remain bullish. Thank you all for joining us today, and we look forward to talking to you soon.

Ladies and gentlemen, that does conclude our conference call for today. Thank you all for joining, and you may now disconnect. Everyone, have a great day.