Burford Capital Limited

Ladies and gentlemen, welcome to the Burford Capital 2020 Earnings Call for Investors and Analysts. My name is Ruby and I will be your moderator for today's call. If you would like to ask a question during the presentation, please press star followed by one on your telephone keypad. You can also submit a question via the question tab located above the slide. I will now hand over to your host, Christopher Bogart, CEO to begin. Christopher, please go ahead.

Thank you very much, and hello, everybody. It's great to be able to present some earnings and talk to everybody about Burford again. As usual, I'm joined by John Malone, Burford's Chief Investment Officer, and Jim Killman, Burford's Chief Financial Officer. And together, the three of us are going to turn the pages of the investor slide deck that's posted on our website, take you through some highlights of the year, give some commentary on what we think is going on in the business, and then take your questions. We're really very pleased with Burford's 2020 performance. This was the best year in our history for our portfolio performance, and it really shows the strength of our uncorrelated, diversified business model that in the middle of a global pandemic, we were able to put out record-breaking results. You know, group-wide, the numbers are quite staggering. We brought in $1 billion of cash this year, $500 million of group-wide income. And that obviously, to the extent that that doesn't reflect the balance sheet activity, that's setting us up for future performance fee income. On the balance sheet itself, we set a number of records. We had record levels of realizations, of realized gains, and of cash flows from case successes. Our returns, our cumulative asset returns, grew to 92% return over invested capital. And it's notable that all of that happened without any contribution from the Peterson YPF assets. In the last several years, those assets have featured in our performance, and this year they were simply flat as that case proceeds along the path towards trial. So all of this performance that you're seeing captured on this slide three that we're looking at, all of the performance that you're seeing there is happening without any contribution this year from those assets. And indeed, if you were to remove the YPF-related assets from our prior performance, our total income this year more than doubled, and our operating profit went up 226% year over year, again, without any contribution from the YPF-related assets. As you can see from the graphics on these pages, and we'll be touching more on them as we go forward in the slide presentation, I would just really call out the overall size and growth rate of our portfolio, the graphic that's in the top left corner here. The fact is that we've grown this portfolio at a 52% CAGR over the last five years, and now we have, obviously, this multibillion-dollar portfolio that, as John Malone will talk about in some detail in a few minutes, we expect to continue to throw off cash and positive cash successes for years to come. The other thing that this level of growth really suggests is that it really justifies the ongoing investment that we've been making in the business. We have been growing Burford consistently, not profitably, but consistently, so that every year we've been adding headcount, we've been expanding geographically, we've been adding product lines. Those things take some years to realize gains and to mature, but the size of the portfolio that we've been able to build and the consistency of our returns really suggests a very bright future here. Before I go into more financial detail, just a few overarching topics. First of all, I would just call to everyone's attention that following the lead of so many other firms, we suspended briefly our dividend, but we have completely restored our dividend at its historic level. And not only that, but Burford would normally have paid an interim dividend in December of 2020, and then the remainder of the full-year dividend in May or June of 2021, we didn't pay that interim dividend. And so in June of 2021, we're going to pay the entire 12.5 cents, the entire full-year dividend, even though we didn't pay the interim last year. We've consistently talked about governance and our progress in that area. And I'd call to your attention as well some real progress this year, consistent with the commitments that we've made to the market. Burford appointed three new directors during 2020. All the bios are both in our annual report and on our website. But these are high-quality, independent directors who have come in and really refreshed the board. And as part of that process as well, our longtime chairman, Sir Peter Middleton, who has chaired the Burford Board since Burford's inception in 2009, is retiring in May. We owe him an enormous debt of gratitude for him steering Burford to its current position in the market. And we'll have more to say about that at the AGM. It's been difficult during the pandemic to engage with shareholders in the way that we historically have and would like to be. Happily, that seems to be coming back to life a little bit. But we just flagged for shareholders that we do intend to hold a Capital Markets Day later this year. And we also are continuing to look for other ways to engage a wide variety of shareholders, including the fact that I'll be presenting again at the Shares Conference, which is widely available online. And finally, we would just really highlight and express a deep sense of gratitude to the Burford team during this difficult period. You know, everybody in the business has gone remote, and we have functioned pretty much as well as if we had been in the office. Certainly our numbers that you see here suggest a very strong year indeed, and that took a real level of extra effort and commitment from people, and we're deeply grateful for that. And I just remind shareholders of just how aligned they are with this team. You know, Burford's employees own 9% of our shares. They consistently increase their exposure to the business. In fact, this year, more than 20% of our employees, in addition to their, you know, annual share grants, opted to go and take on additional exposure to the stock, showing their enthusiasm for the long-term prospect of this business. So digging in a little bit and turning to slide four, this slide is showing the progress of realized gains. And what we see here, first of all, as the graphic on the left demonstrates, is just a record level of realized gains on the balance sheet. And this, of course, doesn't take into account the further realized gains that we made in our managed investment funds. And those funds, for the most part, pay performance fees on games like this later in their lives. And so in addition to the cash benefit and the income benefit from these realized games, we can look forward to future performance fees from those funds. You know, it's notable that not only did these numbers go up in 2020, but the relative contribution from realized games rose considerably. Our income streams are a combination of realized and unrealized gains, and Jim Cameron will take you through that in more detail. But our income this year had a significantly larger component of realized gains in it than it had in the prior year. And third, I'd just direct your attention to the graphic on the right-hand side of this slide. which shows graphically the impact of the YPF-related assets, in the Peterson case, on Burford's income. The graphic on the left of this dotted line in the slide shows the change in income year over year, including the impact of the YPF assets. And the graphic on the right shows it without the impact of the YPF assets in 2019. It shows you just how much perfect income grew on an organic basis. Turning to slide five, you know, as we've always said, we measure accounting, but we care about cash. This business is all about generating cash. It's the cash that we generate that we use to pay our expenses and our debt service, and we turn around and reinvest the excess in the business. And that's exactly what we were able to do in 2020. We generated, again, more than half a billion dollars of cash on the balance sheet. and indeed more than a billion dollars group-wide, that for the balance sheet alone left us with $387 million of cash available for redeployment. And so that enables us to continue to power that growth that we showed you a couple of slides back of the total portfolio. Turning to slide six, you know, one of the most notable things here when we look at these statistics is that the base that we're working on now is $1.6 billion of recoveries. That's at the far right of the slide. So when we talk about the consistent returns that we've been able to generate, which are shown on the left and have now risen to a 92% return on invested capital, and when we talk about the consistent duration or weighted average life of our assets, which fluctuates sort of around two-plus years for the portfolio right now, When we talk about those consistent numbers over years, we're now talking about a track record of $1.6 billion of recoveries for the balance sheet. So these are statistically significant, very, very large numbers. And by the way, you know, if you were to look at the business overall, these numbers are just for the balance sheet and just for the capital provision direct assets. In other words, our core litigation finances. If you were to look at our total business across all of our sources of capital and all of our strategies, we've now hit the point where Burford has generated $2.6 billion in cash on the balance sheet. And if you add in the funds, our investing success has been to the point that we've generated $4.3 billion in total cash. And that just really goes to show that we've figured out the most trap, that this business is capable of producing more ongoing repeated results, and John's going to talk some more about that. Turning to slide seven, which is really one of my favorite slides, this slide really illustrates how the business works. You know, investors who have been with us for a while have seen me talk to this slide before, but the reason I like it so much is it really just graphically illustrates the financial attributes of the business that we run. We write new businesses in the form of commitments. We turn those commitments into deployments. And then we wait. We're effectively buy and hold investors, and we wait for an outcome. And there are three possible outcomes in litigation. You can go to trial and win. You can lose. Or the majority of outcomes in our portfolio, you can settle. And it's not just our portfolio. That's a consistent litigation phenomenon. Cases settle more often than they go to trial. When they settle, they do very nicely indeed. When they go to trial and win, they do even better. And the combination of those outcomes, along with a moderate number of losses, results in the kinds of returns that you see in the red box there to the right. And finally, turning to slide eight, let me touch briefly on COVID. It's impossible to give an investor presentation these days without doing so. COVID really had a couple of impacts on us. The most significant was that our new business fell sharply in the first half of 2020, and you can see that in the hash mark areas here. And that was really a combination of our choice. We really were concerned about where the market was heading and where liquidity sat for our defendants and their creditworthiness in the first half of the year, and so we declined a number of cases that we might normally have done. And clients as well were discombobulated by trying to deal with the impact of the pandemic. And so the net of all of that was the reduction that you see here. But the reality is that the business rebounded and the market rebounded in the second half, so that our second half of 2020 really closed right on top of 2019. And I'll talk a little bit more about COVID when we get later on in this presentation. But for now, Let me turn you over to John Lowe to talk about the portfolio.

Thanks, Chris, and thanks to all of you for joining. And I'm very pleased with our portfolio, as Chris hinted, which continues to grow. It's notable that we've generated growth at above a 50% compound annual growth rate over the past five years, which positions the business for future cash flow generation as the portfolio continues to turn over, and there'll be a little more about that in some later slides. But if we start at slide nine, if you turn to slide nine, you'll see that the portfolio at the end of 2020 was larger and more valuable than the portfolio a year earlier, despite three things that you might have expected to hinder that growth. The first was that, as Chris just mentioned, COVID slow deployment in the first half of the year. That picked up in the second half of the year, but nonetheless, we finished the year having put out less money than we would have liked. yet their portfolio nonetheless is larger today than it was a year ago. The second is we've had some very large profitable realizations in the core portfolio, which Chris alluded to, and I'll talk a little bit about it further. But despite those large realizations, that didn't shrink the portfolio because although the profits on those realizations were large, the carrying cost of the investments that resolved were a much smaller number. And the new investments we put on it more than exceeded the carrying costs of the old ones that resolved. Third, we had realizations in the capital provision indirect portfolio. Those are the shorter duration, lower risk matters with somewhat lower returns that we did not replace because we didn't think market conditions warranted their replacement. So that means we made up for the decline in the capital provision indirect assets with additional value in the higher returning core capital provision direct portfolio. And a combination of putting out capital, even if not at the growth rate we would have liked, and seeing progress in the portfolio that led to modest fair value adjustments. Remember, we've got a policy that only makes fair value adjustments for concrete case events, and historically has met modest write-ups until matters actually conclude. But those two things, putting more money out and having the litigation matters in the portfolio progress, means we're sitting on a more valuable asset base today than a year ago. Turning to slide 10, you'll get to see how the more recent larger vintages that I've been speaking about these past couple of years are now beginning to generate results and bear fruit. We had 51 distinct investments contribute to our returns, 10 of which spread across 18 cases, contributed significantly to the record realizations we enjoyed in 2020. Looking at the vintages that generate these returns on the lower left, you see that a number of different years contributed to this year's profit, that's the shaded pink, and have contributed to our cumulative returns over life when you add in the deeper red. But we're beginning to see the larger, more recent investment vintages, the deployments are represented in black below the line, are generating sizable returns. Indeed, if you turn to the right bottom of the slide, you see how that has led to an increase in overall realized returns, and 2020 was, as Chris pointed out, a record year for realizations and group realized returns, which dwarfed previous years. So variability is part of the equation. These vintages won't produce cash flow smoothly, but they should do so inexorably over time. If you turn to slide 11, you can see with some greater detail the evolution of our business and of our portfolio. And this is a new slide that we're introducing here for the first time, and it really demonstrates the potential of the portfolio and helps explain my enthusiasm for it. Fundamentally, it shows that the conversion from investment to realization over time, and it shows that portfolio growth sets the business up. for potentially significant future realizations as assets in short. And we've broken the life of the business down into three stages. The early stage, which we demarcated 2009 to 2012, is when we proved the business model. We built an impressive track record with high returns on invested capital, high IRRs, and most importantly, we built our origination network, our brand, and our team, so we became the market leader by a long distance and were positioned to take advantage of tremendous growth in the years that followed. But in pure financial terms, the business was quite small at that point, and so its returns, while strong, are simply not as large in nominal terms. Turning to the middle phase, 2013 to 2016, that's a phase when we were able to put out much more capital, often in law firm portfolios, further expand our footprint in the market, and prove to investors that the early successes we'd enjoyed were not flukes but were replicable and that we would continue to grow the business without sacrificing returns or reducing the quality of our investments. We'd become by then the provider of finance to the market for legal services. We were the provider that that market looked to to facilitate its own growth and development. The recent vintage, 2017 to 2020, reflects the dramatic expansion of our business after 2016, when we began to manage a firm's platform to co-invest alongside Balance Sheet Capital. In this period, we became the provider of capital and risk solutions not just to law firms, but also to corporate law departments. And we were able not only to help corporate clients manage their legal budgets by financing legal fees, but also enable them to monetize receivables that had some legal risk attached to them. And we're able to take good investments in our portfolio and find ways to grow them as we saw favorable developments unfold, either by adding a monetization for the client to a case we were already financing, or by striking a deal with another company in the same field with the same kinds of legal receivables and the same kinds of litigation problems that they needed to solve. So we can really grow those attractive opportunities and generate significant investments and significant returns. I've been saying on these calls for the last couple of years that I'm really pleased with the portfolio we've built and with how we continue to build it. I've always seen new opportunities that were equally, if not more, attractive. But given that shareholders and analysts can only see what we've done in the past, in those prior years, when I expressed enthusiasm, they were looking at the returns from the early and middle knowing we had put out much more money in the recent vintages, but not yet having seen those vintages produce returns, and thus not knowing if they would be as successful as the earlier years. Well, when you look at the top and bottom figures and you compare 2019 to 2020, you see that the composition of the portfolio, which will generate tomorrow's returns, is now much better reflected in the returns we're already enjoying today. So last year, the recent vintage was yet to produce. But this year, you see it has started to produce, contributing to our profits this year in a size that's proportionate to its share of our portfolio. So I hope this helps you understand the enthusiasm I exhibited in past calls and leads you to share my enthusiasm on this one. Finally, before I turn it over to Jim, let's take a look at slide 12, which really captures our batting average. What's our win-loss ratio here? How have past wins and losses contributed to our returns overall? And there was an earlier slide that Chris had spoken to that reflected that to some extent, the breakdown among settlements and adjudications. But this provides a little greater detail. And I think perhaps the best takeaway from this slide is that it shows just how unusually attractive the business we've built is. Typically, investors have to choose between strategies with modest returns and low loss rates on the one hand, and strategies that can deliver outsized returns but carry with them a higher risk of loss. Think on the one end of the spectrum about a financing business that earns a spread over LIBOR such that the interest generated on its loans is sufficient to cover a smaller number of losses, cover costs, and deliver a modest return for investors. On the other end of the spectrum, you might think about a venture capital strategy where a small number of home runs delivers truly extraordinary asymmetric returns, but most of the investments just don't make any money. The amazing thing about Burford is that because most lawsuits settle and a settlement eliminates the risk of loss, we earn enough money on settlements to cover very modest losses in the smaller number of matters that lose, often after only modest spending. cover costs, and deliver positive returns. But even among settled cases, there are those that generate much larger returns and bring you into, say, Category C on the slide. You can sometimes do better than doubling your money in a settled case if the case is developed well by the time of settlement. And then with Category D, you have truly outsized returns where you're doing better than tripling your money. That has historically happened in 12% of the capital we've deployed. And this spread of returns, which lead to very high overall IRRs and ROICs across our diverse portfolio, can't be attributed to our luck in picking a few good investments. Rather, it's built into the asset class. Every case is going to have a distribution of returns, ranging from a loss of your investment to a verdict or judgment in which you not only win on liability, But the judge, the jury, or the arbitrator accepts your entire damages theory and awards you everything you were asking for. In between, there's a range of trial outcomes and settlement possibilities. We can't know at the start whether it will settle or go to trial or which category it will fall into. But what we do know is that if we construct a diverse portfolio, the spread of returns will follow. And so what's our secret sauce to be able to generate these kinds of returns is not just the asset class. It's that, A, we've got a brand and origination function that generates these great opportunities, right? The market relies on us for capital and knows we're there for them and we understand what they need. B, it's our expert underwriting team that can – they can't predict the precise outcome of any case, but they can accurately underwrite the range of outcomes and probably – probability weight them using our own proprietary rich data set so that we know which cases we should turn down, which cases we should take, and how we should price them. C, our portfolio management expertise, in which we help our clients maximize value from their cases and optimize results. We don't just put out our money and hope for the best. We remain an active investor and and offer free advice and assistance to our clients who very much appreciate and take advantage of it. So it's not just that we're in a great asset class with enormous opportunities. That's true. But it's that we have the one team in the market that's positioned to take advantage of that opportunity and deliver the spread of returns that are depicted on slide 12. And with that, I'll turn it over to our CSR, Jim Kilman.