Burford Capital Limited

Ladies and gentlemen, welcome to today's Burford Capital 2020 Interim Results Conference Call. My name is Jordan, and I'll be coordinating your call today. If you'd like to ask a question, you may do so at any time by pressing star followed by one on your telephone keypad, or if you're joining us via the webcast, you can type your question. I'm now going to hand over to Chris Bogart, CEO, to begin. Chris, please go ahead.

Thank you very much, Jordan, and hello, everybody. Thank you very much for joining us today for this call. As usual, with me are John Malo, Burford's Chief Investment Officer, and my partner and co-founder, and Jim Killman, our Chief Financial Officer. This is a very exciting day for us. Not only do we get to talk to you about some terrific results, but we were also able to announce this morning that we are done with the U.S. listing process. We have, in U.S. securities parlance, gone effective. with the U.S. Securities and Exchange Commission as of yesterday afternoon. And that lets us have a little period of mechanics now, and then our shares will start to trade on the New York Stock Exchange on the 19th of October, in addition, of course, to continuing to trade in London. So that's the end of a long and multi-month process, and we're very pleased with that outcome indeed, and I'll talk a little bit more about it in a moment. But turning to Burford and what we've been able to accomplish, I'm looking at slide three. And really, if you look at the vignettes on that slide, the numbers really speak for themselves here. We had a great half year, really sort of the best in our history for investment performance. And before I even turn to some numbers, let's just set in context what has happened here Fairford has obviously been on a growth trajectory for a number of years, but starting in 2016 was when you really saw a big, sharp uplift in our ability to upsize the portfolio and develop a large and robust portfolio of litigation assets. And obviously, within that period, since litigation is not the world's fastest process, we, just like you, have been waiting for the investments in those vintages to start to produce. And what you saw in the first half of the year is that they really delivered. And they didn't just deliver. What they did was underlined our ability to produce outsized returns over and over again. Looking just at one group of related cases, we produced $423 million in group realizations. That's a 56% IRR on those investments. return on invested capital of 194%. And that just feeds into what is now an 11-year track record at Burford. And within that track record, we've now generated more than $1.6 billion of investment recoveries, and that is in our core. litigation finance business. That's not including any of the other adjacent strategies, like complex strategies, for example, that we also run. And on that $1.6 billion across 11 years, we've produced very consistent IRRs right now at 32%. And our returns, our nominal returns actually went up to 97% return on domestic capital. And sort of to underline the point, that this is the way this business works, this combination of settlements and outsized wins accompanied by a few losses. We now have 23 separate investments in our history that have produced more than a 200% return on invested capital. And we've done all of this in this six-month period without any contribution, without a single dollar of contribution from our YPF-related assets. really showing the depth and breadth of the overall business. And these are not just paper gains. This is cash. Our cash balances have gone up. The large case wins that I referred to have been paying steadily. We've got receivables in the second half that have been paying steadily. And just as a reminder, this is very characteristic in litigation for you to win something and then for there to be a period of time to get the cash. But 85% of the time, our receivables pay within six months. And in fact, if you look at the receivable balance at the end of last year, at the end of 2019, virtually all of those receivables are all paid now. So we've got increases in profitability, increases in cash, and more cash coming in the door. Before I turn you over to John to hear about the portfolio and our progress in more depth, let me just touch on a couple of non-financial issues. So as I said earlier, we're very excited to be done with the U.S. listing process. And I think there's no real debate that the combination of the SEC process and the New York Stock Exchange process is the most rigorous regulatory process in the world. So that's a significant check for Burford. And I think that we're excited not only to have been involved in that process, but with the opportunities that we think await us, being able to access the domestic investment capital in the U.S., which has not historically been able to buy Burford stock. So we're excited about what that brings us in the future. And as you saw, we've expanded our investor relations team to take advantage of that. In addition to Rob Ballasch, who has been with us in various capacities for years, we've added Jim Ballan in the U.S., a longtime specialty finance investor relations and sell-side analyst. And so for those of you in the U.S., we hope that you'll work with and get to know Jim. And as I said, the trading starts on the 19th of October. For those shareholders who have seen the various communications about the mechanics involved in this – you know, I frankly have to apologize on behalf of the stock exchanges. You know, as a former tech executive, I have been pretty taken aback at how cumbersome and archaic these processes can be. And we regret the fact that you need to go through a little bit of complexity now yourselves for this to happen. And we also regret that the language describing this process is not quite our usual crisp, clear language pros, but rather was, frankly, foisted on us by the exchanges. So all I can say is, you know, we think the long-term benefit here dramatically outweighs the short-term inconvenience that you'll experience, but we do apologize for the fact that there is a little bit of inconvenience along the way. And with that, let me turn you over to John Malo to talk about the portfolio.

Thanks, Chris, and thanks to all of you for taking the time to speak with us. As Chris says, we're really pleased with being able to report these first half results to you, and I'll be speaking in slide four to begin with, but I do want to step back and echo something Chris said, which is we're now 11 years in, and we have produced on a fairly consistent basis very attractive risk-adjusted returns, right? Our IRRs hovered around 30%. We've had returns on invested capital that are quite attractive and we've told people in the past will tick up or tick down depending upon the duration of matters, right? We end up with higher returns on invested capital when things run long and end up going to trial and either produce big wins or, as Chris says, occasionally losses. and we'll have lower returns on invested capital but still quite attractive ones with attractive IRRs for the matters that settle earlier on. But we've generally produced consistent results from period to period such that no one period after 11 years can you say, oh, that was a fluke. We have enough realizations that everybody understood this is the nature of the business. And I think probably the other thing that investors would have recognized is we've grown significantly over the past several years. From 2016, 17, 18, 19, we've put out much more capital. We've grown the team. We did it to meet demand because law firms and corporate clients needed our capital, and the legal services market had previously been ignored by the capital markets. So we saw tremendous opportunity. And we added people, but we did it in a very careful way to target the same risk-adjusted returns to make sure that in meeting the demands of our clients, we were able to include in our portfolio of assets opportunities that were just as attractive as the ones that had come before it. And I've been very confident of that process and the team and have said as much on these calls twice a year. But I could understand that for investors, the question they'd like to see answered is, okay, you've grown the business quite significantly. We love that. Are you able to generate the same level of returns on this larger asset base that you've historically been able to provide? You know, have you had to sacrifice quality? Is there some sacrifice in the team? Or are you able to really keep up that level of returns just on a broader scale? And I think the answer with these results is a resounding yes. And if you look at slide four, on the upper left, you see the acceleration of realizations, which has been going from 2016 through 2020. Each first half, it's been a larger pool of realizations than the one before. And if you look on the lower left, you see that those larger realizations sizes of realizations have translated into larger realized gains. And it's a significant uptick from 2019 to 2020. First half of 17, 18, and 19 were quite impressive. We were very pleased with them. But you look at the realized gains just for the balance sheet, putting aside the group for the first half of 2020, and it's a big step up from prior years. And we're really quite pleased with that. On the upper right of slide four, you can see a little bit of what I described of how the portfolio has grown and have we seen realizations from those larger pools. And just as you'd expect when you look at that slide, of course, you're going to see a larger portion of the 2015 vintage. generating returns than you would of a later vintage, right? As you get to more recent, less mature vintages, you're going to see a larger portion of the deployment still outstanding. With the earlier vintage, you see a larger portion of the vintage has concluded and generated realizations. With the one caveat, which I'll return to, or one exception, which isn't a caveat, it's a positive, that 2019 has already, right, the vintage of investments put on in 2019 has already delivered substantial realizations to your investors in the first half of 2020. And I'll get back to that in a few minutes. In the lower right of slide four, I think it's important to note the composition of income from our capital provision assets. right you know we've heard investors who have been very impressed with our our results in the past but they really wanted to see large realizations and they wanted to see it from non-ypf assets and if you look at the composition of income in the first half of 2019 broken down into how much was realized versus unrealized how much came from ypf related assets versus non You see the balance there. If you look at 2020 in the first half, zero came from YPF assets. It's all from non-YPF assets, and the vast bulk of it is from realizations as opposed to fair value adjustments. You've got $251 million, and 65 of that's fair value, and 186 of it is realized gains. I would like to say, though, that 65 in fair value adjustments is nothing to sneeze at, and it's something that I'm quite pleased about. When we put out an R&S in April, just updating the market on progress in our cases, we pointed out we had already enjoyed some successes in cases, a portion of which were in matters that were very close to being final. and therefore could lead to realizations quite rapidly. And indeed, that's come to pass. We've enjoyed those realizations in the first half of 2020. But there were many others that we said we've enjoyed successes that could be trial wins, but they'll be an appellate process. And we were very pleased with the progress of the portfolio in those cases, but we did not expect final realizations during this period. And so the fair value adjustments, we've said repeatedly over time, only take into account a fraction of the income we would realize when those matters concluded if they concluded successfully. So the fact that we have progress in cases, trial wins and such, from matters that are not fully realized is a positive for not a negative. But of course, investors wanted to see realized gains, and we've delivered there as well. So we're just very pleased with how the portfolio has performed in the first half of 2020. Turning to slide five, there's a little more granularity on the breakdown of where the realizations came from. On the left side, you see it broken down group-wide and on the balance sheet, and you see a further breakdown between Realizations from our capital provision direct portfolio and the capital provision indirect portfolio. And it may be worth a reminder on capital provision indirect that we've long said that the capital provision indirect portfolio is not as long term. It's a shorter term or medium duration asset class where we have much greater control over the progress of the litigation and over the ability to settle. And we were able to, on four assets, which constituted about 70% of the portfolio of outstanding cash as of December 2019, turn those into cash, demonstrating the medium-term liquidity from this strategy, which we've always said was there and we've been able to show. Turning to the right side of slide five, you see further description of those 10 related assets that Chris noted that we had made a concentrated debt on an asset where we had a great, we had very high conviction and we're very pleased that that has resolved favorably. in a complete win, and that has generated $423 million of realizations group-wide, of which $279 million is realized gain. For the balance sheet, that's $266 million of realizations, $172 of which is gain. And mind you, the balance sheet numbers don't take into account that on the additional $100 million-plus that the funds would have earned, the balance sheet and you, our investors, would earn performances, which is a positive. And I think it's important to see this as yet another example of what we've been saying for some time, that outsized returns are not a one-off in this business. They are part and parcel of the business model. That when we take matters into our portfolio and we have a diverse array of matters, We don't know whether any particular matter is going to be the one that settles early, delivers a decent return, we can recycle that capital and move on, or whether it's going to go the distance, in which case if it wins, it could mean a much, much larger return, a home run, or it could mean, in a smaller number of cases, a loss. All we know is that when we take these matters into our portfolio, We negotiate deals and price them in such a way that the returns are going to be attractive for early settlements, and we are going to share in truly outsized returns for the matters that go the distance. And so when we have a matter that generates high returns, Chris mentioned before just the number of resolutions we've had that have generated returns on invested capital greater than 200%, that's not a one-off. It's not like the diamond in the rough. It's not that we happen to have found a particular opportunity and will we be able to find it again. That's not at all the way it works. That is just part and parcel of our portfolio. When we underwrite a matter and price it and negotiate the deal and decide to include it in our portfolio and put capital out, we go through all the possible permutations. We model out all the things that can happen in the case, ranging from the very high-end recovery to the complete loss to the settlements in between. And we know that the high-end returns are one of the possible scenarios, and we have enough matters in our portfolio that some number of them historically have traditionally generated those kinds of returns. So we're very pleased with this as just yet another example of that fact about our business model. Turning to slide six, I'll kind of finish with the question I started with, which is as you've grown and you've delivered greater returns on an absolute basis, you see on the right slide that we're up over a billion and a half of realizations from our capital provision direct portfolio alone. are you able to maintain the return levels that you were able to achieve in earlier periods when you had a smaller portfolio? And you see on the left slide, the answer is yes, we are. In fact, the IRR ticked up slightly to 32%, but we've had consistent IRRs throughout our history, and the return on invested capital, in fact, has gone up to 97%. So As Chris said, we're just really pleased to be able to report these results. I have had confidence in the portfolio throughout, but I'm very glad to be able to show you what I've long known. And just a note, I mentioned on that two slides ago that 2019, those investments we put on in 2019, have contributed significantly to our realized gain in 2020. And just think about that, you know, 2019 was a year when, to the outside world, Burford appeared perhaps like it was under siege, there were people that were questioning Burford's business model and potential. Meanwhile, Our team was very hard at work. We maintained our relationships with law firms and corporate clients. We continued to put on deals. We maintained rigorous underwriting. We put out lots of money and didn't let the public noise distract us. And there's some irony that during a period when outsiders were questioning whether Burford was doing well, We internally at Burford were working hard, and now you in 2020, whether you're a long-term holder who held stock and maintained faith or you're new to it, I'm really pleased that you've been able to benefit now from the hard work we put in last year. And so I'm just really pleased with the results, and with that, I will turn it back to Chris.