ARMMY PICCA
The following segment was excerpted from this fund letter.
Burford Capital (BUR)
The most significant event affecting Burford will be the outcome of its YPF case against Argentina. Should Burford win, it could receive net proceeds between $1.1bn and $5.6bn. These numbers are derived from a formula written in YPF’s prospectus and bylaws and depend on several assumptions, hence the wide range, but in any case, are significant when compared to Burford’s current market capitalization of approximately $3bn.
In a recent lengthy interview, an Argentinian legal expert concluded that based on what we know, the case should be a home run for Burford, but “we don’t know 70% of what is said, we don’t know the private documents, we don’t know the private positions. We don’t know lots of things. Experts have testified in both sides; we don’t know what’s there.”
Hardly conclusive.
Nevertheless, I believe Burford remains an attractive investment regardless of the outcome of this one case. To understand why it is helpful to consider how Burford’s litigation finance works. Each case Buford funds has one of three outcomes, a win, a loss, or a settlement. A loss typically results in Buford losing its entire investment. Which has, historically, occurred 10% of the time. Given this risk, Buford actively assesses a case’s merits and potential return. A high payout on wins, typically 5x, increases the expected payout of the whole portfolio.
In this way, litigation financing somewhat resembles venture capital investing, where VCs expect only a handful of big wins to make up for lost investments and still provide a reasonable return on the overall portfolio.
A key difference to venture capital is that most litigations defendants decide to negotiate a settlement rather than risk hefty penalties at the hands of a judge and jury. Moreover, the legal system ensures an eventual resolution to every matter, and Burford’s cases generally have resolved in 2-3 years. As a result, Burford’s portfolio generates a fairly reliable, though irregularly timed, stream of profits over time. Ex-YPF Burford has produced mid-20% IRRs on matters that have concluded.
Based on existing cases alone, ex-YPF, Burford projects it could generate over $3.2bn in realizations. Furthermore, suppose we assume Burford operates in run-off mode, where it incurs operating costs until it concludes all outstanding matters in, say, five years. In that case, it could generate cumulatively $8 per share in pre-tax profit, compared to a share price of approximately $10. In other words, even in an unrealistically negative case, we should get 80% of our investment back in 5 years.
Of course, as the biggest litigation funder with a strong brand in the market, Burford is in a commanding position to win more business, so I expect it to do better than this in practice.
If Burford wins the YPF case, our investment will be a home run. If it loses, I fully expect mid-term volatility in the share price. Still, I expect that as its cases come to resolution and generate profits, the share price will continue to compound.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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