Burford Capital Ltd Q4 FY2025 Earnings Call

Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Burford Capital Fiscal Year 2025 and Fourth Quarter 2025 Financial Results Conference Call and Audio Webcast. I would now like to turn the call over to Josh Wood, Head of Investor Relations. You may begin.

Thank you, Bailey. Good morning, everyone, and thank you for joining us to discuss Burford's fourth quarter and full year 2025 results. On the call, we have our Chief Executive Officer, Chris Bogart; our Chief Investment Officer, Jon 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, as well as our annual shareholder letter, and we also filed our Form 10-K for 2025. If you haven't already, you can find all of these materials 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 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. With that, I'll turn the call over to Chris.

Thanks for joining us today. I want to share some key messages, starting with what happened in 2025. We had an exceptional year in new business, which is something we can control. We achieved significant growth, bringing us closer to our goal of doubling our portfolio by 2030, and if we maintain this pace, we could exceed that target. We experienced excellent performance in new commitments and deployments, adding a net of $700 million to our overall portfolio, now exceeding $5 billion. However, our realization activity wasn't as strong as last year, which was disappointing. As you know, this aspect is beyond our control and can fluctuate based on court activity. We've highlighted the challenge of many older cases in our portfolio that are moving through the court system slower than we would like, a situation which may stem from the previous portfolio. In our shareholder letter, we likened this to four lanes of traffic trying to merge into two. The good news is that the portfolio continues to generate cash and realizations without any decline in quality. Loss rates and returns remain stable. The main issue we face is more about throughput and timing rather than anything else. This impacted our income, which is somewhat down, and Jordan will provide more details on that. Moving to the business front, we had a remarkable year with a 39% increase in new definitive commitments, building on a solid performance from the previous year. This led to substantial growth in our portfolio base, achieving a 20% growth rate this past year alone, positioning us well for the future. Looking at realizations, we reached a new high in our rolling three-year average. However, while portfolio activity was strong, we didn't achieve as many significant victories as last year, leading to a decline in overall realizations. We had activity from 69 assets in fiscal '25, which is similar to the 71 in fiscal '24, but the dollars per realization were lower. This doesn't reflect a decline in portfolio quality but rather that we missed some major cases we were anticipating for cash generation. In terms of unrealized losses, we did see some year-over-year gains, though we also faced an increase in losses. It's crucial to note that realized losses are still low and consistent with historical practices. The unrealized losses stem from various factors, including changes in duration and cost, which are not reflections of the merits of the cases. I encourage everyone to review our Shareholder Letter, which discusses AI, technology initiatives, and our market expansion, including launches in Madrid and Seoul. On Slide 13, we specifically discuss the proteins cases involving antitrust allegations. These cases are progressing positively, although the complexity of litigation is causing delays, which in turn affects our accounting values despite our optimism about their outcomes. Slide 14 illustrates that sometimes our earnings are affected by external factors unrelated to case merits, such as a counterparty entering bankruptcy, resulting in a charge to our earnings while the underlying claims continue performing well. Slide 15 shows another example, where we have a mining arbitration with two cases. One case faced an unfavorable initial outcome while the other is still undecided, impacting our asset's accounting value despite still keeping opportunities for positive results. The key takeaway from these examples is that there are complexities in our accounting that don't reflect the underlying cash performance of our business. Overall, I'm satisfied with the new business generated and the steady returns and loss rates. This bodes well for the future, even though we would have liked more cash generation in 2025. Before I hand off to Jordan, I want to highlight YPF, a topic familiar to our shareholders. We're anticipating a decision from the Second Circuit Court of Appeals regarding Argentina's appeal of the judgment, and while we wait, there are multiple developments and ongoing enforcement proceedings in various jurisdictions. In summary, we recognize the desire for more realizations, and while we share that wish, we believe we're in a strong position within the business, and there remains plenty of potential in our portfolio, as you'll hear from Jon shortly.

Thank you, Chris. Good morning, everyone. I will discuss our two segments, starting with the total segment, also known as Burford-only, which represents what the shareholders own. Let’s focus on Principal Finance and the portfolio first. As shown on Page 22, our portfolio stands at $3.9 billion, with YPF comprising just under $1.7 billion. We’ve deployed slightly over $1.7 billion, and the unrealized fair value is around $500 million, accounting for approximately 27% to 28% of the total deployed cost. This positions us well for potential future gains relative to our historical return on invested capital of 82% to 83%. The portfolio remains diverse, with just over 50% allocated to North America, and we are actively exploring international opportunities, as Chris noted. Our asset types are also varied, with several segments representing around 20% each. Moving on to how this segment, Principal Finance, evolves in terms of revenue capital provision income, Chris presented insights on Slide 12 that break down capital provision income into gains and losses, along with net realized gains and losses for the period. I’d like to remind everyone that when transitioning from fair value, there is a transfer from unrealized to realized gains, which is a natural outcome when an asset has been positively marked, resulting in a decrease in fair value as the asset concludes positively, leading to realized gains each period. Additionally, regarding our balance sheet, I hope you’re familiar with the charts on the bottom of Page 23, so I will quickly summarize. We have our asset value at year-end, ongoing investments totaling $457 million, and the effects of time on asset resolution. Changes in the discount rate also affect asset value, similar to bond math—when rates rise, asset values drop and vice versa. During this year, the portfolio experienced about an 80 basis point improvement in the discount rate, leading to a $75 million value change. Other impacts stem from milestones and variations in our case studies, both positive and negative, alongside adjustments in models due to changes in duration or expected values, affecting fair value. Realizations occur when assets convert into receivables or cash, plus a minor foreign exchange impact. Overall, we’ve moved from just under $3.6 billion to $3.9 billion. Before passing it to Jon, regarding new business on Page 24, you can see the relationship between fiscal year 2025 and 2024, as we’ve achieved a 39% growth in our definitive commitments, involving not just partnerships with law firms or corporate clients but also identifying cases where we commit our capital over their duration. The rise we see in 2025 wasn't due to taking on more risk; rather, the amounts we illustrate for case analysis have remained consistent with 2024. Most of the growth came from middle and lower risk segments in our portfolio. We are pleased with the type of new business added as we continue to expand the portfolio. Now, I'll turn it over to Jon.

Thank you very much, Jordan, and thank you all for joining. As both Jordan and Chris mentioned, it was a very successful year in terms of acquiring new business and enhancing our portfolio's potential. I want to focus on that, but first I’d like to address the past by looking at Slide 25. According to Slide 25, the realizations in 2025 were not equivalent to those in 2024, which was a record year. However, as Chris pointed out, we had 69 assets contributing to realizations in 2025 compared to 71 in 2024, which is quite similar, albeit with fewer substantial realizations. There was one significant deployment that was relatively short term. In fact, when examining the ROIC numbers, one reason 2025’s ROIC was lower is that this matter was resolved quickly enough to achieve a 40% IRR, but resulted in a 25% ROIC. I would take that deal anytime it comes up, even though it affects the figures. Nonetheless, our track record over the two years yielded an ROIC of 81%, which aligns closely with our long-term historical performance. This isn't surprising. If you turn to Slide 26, you will see this slide again. Essentially, our business has three possible outcomes for every investment: we can achieve an adjudication gain by going to trial and winning, we can face an adjudication loss, or we can reach a settlement. Most of our cases settle, which they do at attractive IRRs and ROICs, even if those figures are below our historical averages. The reason for this is that our wins significantly outnumber our losses, creating a compelling model. As long as we maintain rigorous underwriting and case management, and keep investing in this asset class as we have, I'm optimistic about adding new matters to the portfolio based on our track record. Moving to Slide 27, you've seen this as well, and rather than categorizing it into three segments, we've broken it down by each investment we’ve made, shown graphically. The red bars represent investments that exceeded a 200% ROIC, far outstripping the black bars, which indicate losses, many of which are only partial, as well as the singles and doubles in between. This asymmetric distribution of returns is what makes it attractive and why I remain eager to continue investing in good deals as we have been doing. On Slide 28, which you've also seen, the data is presented by vintage. The IRRs and ROICs may fluctuate, but they average out to be very favorable. The last two slides compare the black bars with the red bars by vintage, where the black bars represent the money invested, and the red bars reflect the money received. The latter is a larger figure, contributing to our IRRs and ROICs. Day to day, I pay close attention to the gray bars, indicating the investments we've made and are continuing to make significantly in 2025, which are positioned to generate future value. If the gray bars perform as we expect, there is great potential. Moving to Slide 29, this illustrates how successful our year was regarding new commitments. The modeled realizations for the entire portfolio as of December 31, 2024, were $4.5 billion. By December 31, 2025, that figure rose to $5.2 billion, a substantial increase. What led to this increase? It comes from $1.4 billion in modeled realizations from our new commitments in 2025. That has been the success story of this year. When we factor in $0.5 billion from actual realizations, naturally, the future modeled realizations decrease. As Chris described, from an accounting perspective, there are elements that reduced fair value on an unrealized basis, so it is expected that the models would show some reduction as well. Overall, however, we more than compensated for that with the modeled realizations from the new definitive commitments. I’m very pleased with our achievements this year in preparing for the future, and I’m happy with the portfolio. Now, I’ll turn it back over to Jordan.

Thank you, Jon. I will move to Page 30 and discuss how the $5.2 billion relates to our Principal Finance balance sheet, based on the ex-YPF scenario. The first thing to consider is what happens if all the cases are decided in our favor. This estimate, often referred to as the win node, serves as the basis for our initial calculations. When contemplating a settlement and assessing the probabilities involved in the cases, it stems from the potential winning scenario. Although the majority of our cases, around 70% to 80%, typically settle, the win node would amount to $12.8 billion. From there, we develop a model that incorporates litigation risk premiums and the time value of money. Adjusting for these factors brings the estimate down to $2.2 billion, which is represented on our balance sheet as fair value, split between net unrealized gains and the deployed cost, totaling $2.2 billion and $1.7 billion respectively. Ultimately, the modeled realizations, as Jon mentioned, amount to $5.2 billion, and we anticipate a return on invested capital of 110%, based on future estimates of deployed costs, which we estimate to be around $2.5 billion to conclude these cases. This framework helps us connect our modeled realizations to our balance sheet, as these cases are reflected there, and in conjunction with our asset management business, we expect them to generate cash receipts of approximately $350 million in the future. This naturally leads us to the Asset Management segment, so I will now turn to Page 33. Starting with cash, it has remained relatively stable, recording $32 million in 2023, with a slight dip in 2024, then returning to $32 million in 2025 due to asset management cash receipts. We achieved an income of $36 million for the year, which will align closely with fluctuations in fair value. Since our assets closely resemble those in the Principal Finance segment, changes in these assets will also be reflected in the expected future income related to our profit-sharing agreement regarding the BOF-C fund. Additionally, in 2025, we anticipate beginning to receive income from the Advantage Fund, which continues to perform well. The fund sizes, visible in the bottom right corner, show that they are mainly in runoff, as indicated by the black bar. Our partnership with the BOF-C sovereign wealth fund continues, even after the investment period ended, as they are still actively investing in assets. We have a strong relationship and are seeking further opportunities together. On Page 34, you will find more details about other funds, but I'll now shift to discuss liquidity and cash. At the start of the year, our liquidity and cash stood at around $500 million. We indicated a strong year with $530 million, though this is down from 2024 figures. However, we ended the fourth quarter with cash over the $100 million mark. The bridge illustrates the debt raised in the summer, which I will address twice. Initially, this was intended to pay off existing bonds due in the summer of 2025, resulting in a net figure on our balance sheet. We issued $500 million at a 7.5% interest rate, but the immediate proceeds were utilized for bond repayment, leading to lower deployment to our balance sheet. The cash generated sufficiently covers our operating expenses, and we concluded the year with $621 million in cash. Before elaborating further on our capital structure, let's briefly touch on expenses on Page 37. Operating expenses have increased slightly compared to 2024 for a few reasons. Total compensation and benefits are nearly flat, though slightly higher due to salary inflation and team expansion. There is fluctuation between annual and long-term incentive compensation, also known as our carry program, resulting from the previous years. It's essential to note that we accrue carry but only disburse it when the cash is realized. Regarding share-based and deferred compensation, I previously mentioned the mechanical vesting affecting expense acceleration for some tenure-based awards, although the actual share delivery will occur as scheduled. In General and Administrative expenses, we saw an increase from last year mainly due to professional fees, including our successful transition to KPMG and the resolution of a material weakness related to our 10-K publication, as well as other policy-related expenses. Looking at all these figures, it's important to consider the trend in case-related expenses. Despite a revenue item from 2024 due to an insurance settlement, case-related expenditures decreased from $15 million in 2023 to $1.1 million in the fourth quarter. Reviewing the right-hand side of these figures, the 2.3% expense ratio appears favorable relative to our portfolio and supports our long-term target return on equity of around 20%. Lastly, regarding debt outstanding, I previously mentioned our summer activities. In the first quarter of this year, we executed a similar strategy, removing the remaining bonds in the U.K. Thankful for our long-term investors, we found the 144A market much more accessible for efficient capital raising. We successfully raised funds and settled the last of those bonds, which changed our slide configuration to reflect only the maintenance covenants, demonstrating we are well within those limits. Finally, in evaluating the pro forma life of our debt against our assets, we find that the weighted average life of our assets is under three years and our active capital exceeds three years, while the weighted average life of our debt stands at 5.7 years. This structure shows a well-laddered maturity schedule that aligns with asset durations. With that, I'll turn it over to Chris for some closing remarks.

Thanks very much, Jordan. And I'm on Slide 39. And just to really come and sum up here. We have what we believe is a pretty fantastic core operating business, and Jon took you in some detail through why we believe that. We have shown a consistent ability to grow that business over time, growing to what is now a very substantial player in the legal industry. We deliver cash regularly. We don't always deliver as much cash as we would like as 2025 is a testament to. But that doesn't mean the cash isn't coming. It just means the cash is somewhat delayed. I've used for years with many of you the analogy of the litigation process being a conveyor belt, and that's exactly what it is. It moves forward. It moves forward inexorably, but it twists and turns and moves at unpredictable speeds. We can't control that. But in some ways, we're the beneficiary of it because that is what gives us our completely uncorrelated returns. So we have growth, we have cash, and we continue to believe that this business can produce a long-term ROE in the 20% range, as we've said before. On top of that, we've got the YPF assets, which we think continue to have very substantial value and option value for the business. And we are continuing to grow this business, not only in the core business, but as we continue to drive throughout the legal ecosystem. So we thank you all for your support. And with that, we're happy to take your questions.

Operator: Your first question will come from the line of Mark DeVries with Deutsche Bank.

I appreciate this is not going to be an easy question. But just looking across all the different matters in your portfolio, where they are in the development, can you give us any sense for how the outlook for realizations looks for '26 relative to 2025?

So the short answer to that is no for two reasons. One is because as a matter of policy, we don't guide that way, just because we simply feel like we're unable to do so. And number two is I used my four lanes merging into two. And the problem with that is that we don't really know the pace of that merging. Like if you go back to Slide 28 that Jon talked about, that shows you a lot of stuff that is, to use a technical expression, jammed up in the 2015 and onward. And there's stuff there that just shouldn't have taken that long. Some stuff in litigation always takes a long time. And I always get people asking me when they look all the way back on this chart, they say, oh, look, you've still got active deployments from 2010. Are you kidding yourself? Are those ever going to come in? And the answer is yes to that. We write them off if they're not going to come in. But we actually got some money out of that 2010 band this year, and we're expecting to get more in this coming year. So no is the answer to that question. But the simple reality is those cases are going to move over time, and we just don't know exactly what that timing looks like. It would be lovely if we could take this on a quarter-by-quarter basis and give you a pretty reliable projection, but we just can't do that. And candidly, if we were able to do that, I think that more people would do this business and the returns would be lower. So the fact that it is unpredictable, while I realize is painful to many of our current shareholders, it, in fact, is also, to some extent, a moat in this business.

Okay. Any other color you can give us on what's driving this dynamic of the four lanes merging into two? Are we still dealing with like backlogs related to court closures from the pandemic or other factors worth calling out?

No, I think you really are. Like when you think about what happened there, you had court closures at a time when there was no lessening of new disputes. And so you had the same volume of new disputes. If you look at the filing levels, it's not like they collapsed during the pandemic. So you had a world where all of a sudden, courts don't have any physical ability to expand their operations. We already have vastly fewer judges in courtrooms than we do for the number of cases filed. And the reason for that is that the system expects, just as our portfolio shows, most cases to resolve by settlement. But to get a case settled needs a catalyst, right? If you're a defendant, you're not going to settle a case if you can simply sit on your hands and not spend the money to settle the case. So you need to feel some pressure. And the pressure usually is the case is moving through the process along the conveyor belt that I described, and it's putting you at trial risk. So if the court congestion is kicking the trial risk out, then you're realistically also kicking that settlement pressure out. And look, I think it's getting better, but it's a lot for the system to absorb, given that every single year, something like 12 million new civil cases are filed in the United States.

And then I've got an accounting question for Jordan. Jordan, do you have room to get more conservative on the duration assumptions on your fair values such that you reduce the risk that you have these negative fair value marks when you don't have a negative development, it's just a change in assumption related to the duration of the case?

Absolutely. And I think that we're constantly looking at our models with respect to how to initially establish duration and then how it impacts over time. So yes, to the extent that we see it up at the onset, that we should set a duration that's longer, we can, and we have that ability.

Regarding new definitive commitments, I was wondering if you could provide some color on the composition of those, understanding that '25 lacked some of those big case resolutions. So as we look at new commitments for this year, I guess, any color on the composition of maybe how many dollar amount or case-wise are these larger scale cases, that would be great.

For those who are new to Burford, I want to highlight that in addition to the detailed information we provide in the slides and the 10-K, we also have a comprehensive table on our website that outlines each case. This includes demographic details for both existing and new cases, such as the type of case—whether it's business court, intellectual property, or antitrust—the relevant industry, the geographical location of the case, and the size of our financial commitment. Once we begin to see returns, we also provide detailed information on those returns. You can find this information online, and you'll notice several dozen new cases or investments for 2025, showcasing significant diversification. We cover a wide range of industries, case types, and geographies, and 2025 was no exception. The cases vary in size, from large commitments to single cases that we believe have the potential for attractive future returns. This source can be very useful if you're looking for detailed insights into our portfolio.

I had two questions related to the negative fair value marks on the cases highlighted in the presentation. The first one with the Sysco proteins case, what are the potential gains for that?

The potential gains for the case? So we don't release individual case modeling expectation data for pretty obvious reasons that, that would feed very nicely into the litigation strategy of the other side. And so that's something that is not only something that we don't release, but something that we would regard as being protected by legal privilege. That being said, I think if you look at those cases, and there's quite a lot of public information about them, I think it's clear that the size of the claims in those cases is substantial.

And the next one with the bankruptcy case. Is the collateral separate from other claims?

When we provide litigation finance to individuals, we are entitled to receive proceeds solely from the claims held by those companies. Unlike a bank, we are not general creditors seeking repayment from all assets. Our claims strictly pertain to the outcomes of the underlying litigation. As these claims progress, there are many factors at play, particularly since this involves a multibillion-dollar distributor. Cash flow is not limited to the litigation claims; within the Chapter 11 proceedings, cash is also directed to senior secured creditors from ongoing business operations. The business continues to operate effectively, and we are positioned to receive proceeds from the litigation claims, which remain robust and are resolving favorably. Therefore, we are seeing positive cash flow from those claims as well.

And just one last question. I don't think you guys give guidance, but in terms of your long-term ROE target, the 20%, when you say long-term, how do you bridge that gap from where ROE is sitting currently?

Well, we do it on a rolling basis. We've certainly had individual years where our ROE was well in excess of that long-term target, and we've had years where it's well below it. Right now, as you can see from one of the early slides in the deck, our multi-year ROE is in the teens, but it's not up to our 20% target. And that's something that we believe, and Jordan walked through the unit economics associated with ROE at our Investor Day. And that's something that we still believe is achievable over a longer period of time.

Okay. Bailey, I think we'll jump in here with a quick question that's coming in through the webcast. We have a question. You mentioned before reluctance to buy back shares due to unpredictability of capital needs. If so, there seems to be no real justification to pay a dividend, especially with current share price. Why not turn off dividends and opportunistically buy shares instead?

Yes, we have heard this perspective from several investors and have taken it into account carefully in recent months, including discussions with the Board and our external advisers. I understand the reasoning behind the suggestion. Our situation is as follows: we have maintained a consistent dividend of $0.125 per share annually, which totals around $25 million. This is a relatively small amount. If we were to eliminate the dividend completely, it could force certain U.K. income-focused fund investors to sell their shares, as they would be mandated to do so if no dividend is paid. We compared the value of a $25 million buyback, which we considered insignificant, to the potential negative impact of losing a segment of our shareholder base, including some long-term and loyal investors. Ultimately, we decided that the buyback amount wouldn't sufficiently outweigh the repercussions of alienating those shareholders in the U.K. While this is a nuanced decision, a significantly larger dividend might have led us to a different conclusion. We also discussed the possibility of reducing the dividend to finance some buyback, but we realized that the amounts involved were so minimal that it wouldn't significantly benefit anyone. That was our reasoning behind the decision.

Okay. One more from the webcast here. How is your underwriting changing to reflect potentially longer court times on new pieces of litigation?

Yes. I'm happy to take that. So we're constantly updating our modeling and underwriting based on our historical experience. And one way I think we've talked in the past that we've dealt with duration is to structure deals so the terms reward us for delay so that our returns go up as matters go longer. There's no doubt that we have paid increasing attention to that dynamic to make sure that we're compensated for the longer run times. So that's a little bit why also when Chris says that not having the realizations this year, of course, we would rather, but we feel good about the portfolio. The same case that resolved at this moment, if it resolves in another year, it may well be it resolves with a higher return for us, given the way we've structured things. And that's on top of the dynamic that often the question of whether it resolves now or later is going to be a product of the recovery level, both that whether it's going to be a settlement or an adjudication win, but also that settlements later on can end up being higher settlements. So we definitely take into account duration as part of our underwriting, and I like to think that we try to get better at it as time goes on and learn from experience.

All right. We'll do one more question from the webcast around debt structure. Why not obtain a revolver, delayed draw facility or securitization facility instead of discrete notes to better match capital unpredictability and allow for share buybacks?

Sure. I was about to mention that Chris discussed our thinking regarding share buybacks and how it connects to our capital structure. We are always looking for new ideas and ways to strengthen our balance sheet. The asset itself doesn’t quite align with some consumer or commercial assets in terms of predictability for fitting into a securitization facility or obtaining a size that matches our current balance sheet. I see the logic there, and we are continuously having discussions, but we haven’t identified the ideal solution. Ultimately, the unsecured and covenant levels we have, along with the cost of capital and the amount we can manage, have turned out to be quite favorable compared to some of the other options we have considered, especially given the scale we would need.

Well, we have made it to the top of the hour. And with thanks, as usual, to all of you for your interest in Burford, quite frankly, for your patience as we wait for some cash and as we wait for some YPF news. We're looking forward to an exciting 2026, and we'll continue to keep you updated about where things are going. So thank you all very much.

Thank you. This concludes today's conference call. You may now disconnect.