Burford Capital Limited

Hello and welcome to the Burford Capital Insurum 2021 results call. On the line with me today is Christopher Bogart, Chief Executive Officer, Jonathan Mallow, Chief Investment Officer, and Ken Browse, Chief Financial Officer. If you would like to register to ask a question today, please press star followed by one on your telephone keypad. If you have joined on the webcast, you can type your question in the tab above the slides. I will now hand over to your host, Christopher Bogart, Chief Executive Officer. Chris, over to you.

Hello, everyone, and thank you for joining us for another Burford earnings presentation. We're delighted to have so many of you with us today on the phone or on our webcast or online. And as usual, I'm joined by John Malo, Burford's Chief Investment Officer, and for the very first time, Ken Brouse, our new Chief Financial Officer. We're looking forward to introducing all of you to Ken. The three of us, as usual, will walk through the slides that we've distributed and that are available on our website. At the end of our presentation, we'll open the floor to questions and look forward to having some further dialogue with you. We're excited about the results that we were able to post for the first half of 2021. Really three key messages came away from those results. The first is around new business growth. Not just commitments, but also a really strong, record-breaking deployment position. Having us deploy capital is obviously critical to our future potential profits from that capital. And so smashing our prior performance there, especially in an era where we had seen some prior COVID-related delays, was really very, very rewarding and sets the business up well for the future. The portfolio itself, It was slower in terms of its turnover this period, but we didn't come away with any bad news. Returns are up a little bit, losses are down, and we completed the Akhmadov matter, which over time has brought in $108 million to us. Pretty impressive returns, 233% return on invested capital, 71% IRR. And in addition to that, sort of underlining our ability to do large, complex, noisy matters like that, and frankly, the appropriateness of us doing them for all the reasons we've said in the past, I think the other part of the message that goes along with that is that while these cases are going on, to the extent that our involvement in them has become public, you just can't believe what you read in the media. And we're not able, during the course of pending litigation, to go and correct any of that. You know, we make, as John has outlined many times in the past and doubtless will continue to do so today, we make our investment decisions based on, you know, rigorous underwriting and we have low loss rates and high levels of confidence in the matters that we do take on. And finally, and I'll talk about this in a little more detail in a minute, as we can, as to accounting, you know, we see U.S. GAAP in our future, as we've been pretty clear about with people. And to facilitate us looking more like a U.S. GAAP issuer, we're taking a series of one-time non-cash accruals that really just match up those accruals to the carrying value of the cases. And this, from my perspective, is really just what I'll almost call some accounting noise. As you know, I've always focused on the cash performance of this business and not the accounting performance. And this stuff is all theoretical until the cash actually comes in from the underlying investments. And I'll take you through a slide on that in a minute. But the numbers on this page really are very pleasing to us in terms of the overall performance. Before I go into any more details, I just note a couple of other elements, sort of the non-financial part of the business. Our board has continued to evolve exactly as we said that it would in 2019. We've kept to all of our commitments there. Mr. Peter Middleton retired as our chairman at the AGM. Steve Wilson stepped into that role and now will serve a three-year term. And we're in the market recruiting for another new non-executive director. During the course of the year, we already talked once before about the successful U.S. debt offering that we that we generated earlier this year. That offering has been trading nicely as has the remainder of our UK debt. So we're very pleased with our capital and our liquidity position. And we've seen a nice run of US market receptivity to the dual listing. We didn't do a flash bang approach with a big offering that would have generated all sorts of immediate coverage and interest. We did it more organically instead. And I'm pleased to say that about a quarter of our total trading volume went through the New York Stock Exchange, which is pretty nice from our perspective on a purely organic, low-resource approach. So turning to slide four, the numbers here, this is all about our new business. The numbers here really speak for themselves. COVID continues to have some impact on our business development and origination activities. But as you can see from these numbers, we've been able to post substantial numbers nevertheless. And so we feel good about that in terms of what it says about our ability to write new business. And it leaves us with some optimism about what our pace can look like once the world does come fully back to normal. The trend of new business continues as it has over the last several years, a mix of smaller one-off matters and larger high conviction matters with real scale to them. It's important from our perspective to do both of those things in our business. We are simply of such a scale now that if the only thing we did was a diet of small one-off litigation funding matters, that would not be enough to continue to grow the business. But at the same time, it's very important to do those matters as there continues to be real growth in the market. We still are just scratching the surface in terms of the proportion of litigants who are users of third-party capital. And so mixing those in with the larger matters that have been successful for us in the past is, from our perspective, a very desirable way of managing the portfolio. I'm sure that, you know, to forestall what inevitably would be some questions, you'll notice here a bullet point on the bottom of this deck about, you know, one of those new large matters. As usual, we don't have any ability to go beyond the pretty limited public disclosure that we give in most of these matters, and this is no exception. This is, as you'll see in another chart, a large global antitrust matter that has hundreds of underlying cases associated with it. As always, these kinds of large deals come with bespoke structures and a substantial amount of underwriting work on our part. The accounting for them is awfully complex, and this won't be any exception to that. We have a component of equity risk in this transaction as opposed to our more traditional credit risk, and that will tweak the accounting somewhat, but obviously we wouldn't be doing deals of that size unless we had quite a high level of conviction about it. Turning to slide five, and John is going to talk in more detail about the portfolio. I'll just note quickly here that, you know, as we've always said, the speed of resolution of these matters is unpredictable. That's what gives us our uncorrelated nature. If our business were wholly predictable as to both duration and outcome, then you wouldn't need people like us doing it and you wouldn't be able to generate the returns that we can. So we're satisfied with the quality of this underlying portfolio when we think about where the returns and the loss rates have come. And John, as I say, will address the dynamics of the portfolio later. a little bit more. Before we get to John on slide six, I need to take you through a couple of accounting points. As I mentioned up front, we are having a serious eye towards US GAAP, and we've thought not only about what that looks like as we convert to US GAAP. The answer is not a huge number of changes. But also, given that we want to make the most of the New York Stock Exchange listing and the dual listing, we want to try and look like other U.S. GAAP issuers as well as part of our goal to make the stock as investable as possible to as many shareholders as possible. And even though the practice is mixed on this subject among European companies under IFRS, there's more consistency of practice under U.S. GAAP when it comes to matching accruals against fair value changes. And so that's just what we've done here. As we explained in August, we've taken some one-time non-cash accruals that basically take prior fair value gains, a whole big chunk of which are in the Peterson and Eden Park cases, and accrue a potential expense against those. This is all, to me, as I said earlier, this is sort of accounting noise because this only becomes relevant when the cash rolls out. And the cash numbers, to make the accruals work, the cash numbers have to be big. So, for example, the YPF-related cases, Peterson and Ethan Park, would have to generate in litigation money you know, more than I think $1.6 billion in cash before, you know, the accruals become fully an issue. So that's what we're doing here. It's required a one-time accounting charge, but, you know, it is from our perspective something that is accounting related and doesn't relate to the cash performance of the business. Before I turn you over to John, while I've been talking about Peterson here, Just a word about Peterson to forestall the inevitable question. As you know, given the case is in active litigation, we can't discuss our views about it or really very much at all, but we can tell you factually that the case is proceeding now through the litigation process. And at the end of August, fact discovery did close, did come to a close in the case, which is the longest tentpole, if you will, in the post-jurisdictional elements of this case. which means under the current schedule, the case would go to trial in the middle of next year. There's now some expert discovery and some briefing. Obviously, every court schedule continues to be subject to potential change, but finishing fact discovery is a pretty significant milestone in moving the case forward. And with that, let me turn you over to John Malone.

Thank you, Chris. Thanks to everybody for joining. Speaking of court schedules, I would say that Chris pointed out that the sort of slowdowns we experienced in doing new deals and putting new money out during the COVID-related effects on the economy, that really feels like it's behind us. We've bounced back. When it comes to how our portfolio has performed, like what kind of realizations have we seen, there we still do see COVID-related delays. If you look at slide seven, I'll walk you through how we're doing in terms of realizations. On the one hand, there's good news that although our realizations are down from the first half of 2020, they're up from the second half of 2020. And to the extent that realizations haven't yet returned to earlier years, levels, it's not because anything bad has happened. It's not because we've lost cases. It's just because of delays. In fact, our realized loss rate decreased to 0.5% in the first half of 2021, down from the second half of 2020. But close to half of our matters have been delayed by COVID. And We see the courts picking up, but there's no doubt that that slowed things down. Now, those delays are just that, delays. There's not a single case in our portfolio that was discontinued because of COVID. All the money we put out, the assets we've got in our portfolio, the deals we've done, they're all there. And so, in fact, delay continues. is not necessarily a bad thing for us because often our deals are negotiated with increasing returns that are a product of time, and therefore they can lead to greater profitability. So the fact that you can sort of see it graphically represented on the lower left where you see realizations by vintage year. The red lines are the realizations that came in And the black lines below the middle line are the ongoing costs that are out. And on the one hand, we've said before, we have begun to see those years with greater deployments. The real growth we've enjoyed since 2015 have started to produce. The red lines are significant. And an example of that was the success Chris talked about earlier in a fairly prominent asset recovery matter where we collected more than $100 million. But you also see that the black lines below are quite big, and those are the deals we've already put on that we're sitting on and managing and watching for future performance. And actually, if you turn to slide A, you'll see why I am quite bullish on our portfolio, on what's in those black lines. And we've shown you this slide before, but just to tell you how I think about this, you've basically got a business where we do a deal and we put out money and we're going to end up with a result that falls into one of three general buckets. We can get more granular, and I will on the next slide, but the big buckets are we go to full adjudication and we win, we go to adjudication and we lose, or the case settles. The majority of our investment dollars do result in settled recoveries, and those are quite attractive returns, generating a 31% IRR and return on invested capital that's almost a half, meaning you're getting your money back and then half your money back again on average in those cases. The adjudication losses, they're not complete losses, and it's only 10% of our cases, but But then the adjudication gains, which is 30% of deployment so far, that's where it's really generated really phenomenal returns, where we've gotten investment back and two and a half times your investment back. So when you take the big gains from the adjudication wins and combine them with the still attractive gains from settlements, it obviously much more than offsets the smaller number of adjudication losses. and generates the returns you see on the side with the 95% return on invested capital, which Chris points out is actually ticked up from the past, and a 30% on our R. And so to the extent those black lines I talked about are matters that we have taken on using the same rigorous underwriting process that we adhere to, it's our belief and hope that those have a lot of dry powder left. Turning to slide 9, you'll actually see even greater granularity, which we've shown before. Here, instead of just lumping the cases into the investments into three buckets, you have every individual resolved case, which is represented by one of the bars on the bar chart, ranging from the very high-end wins to the losses. And you can see from the shape of the curve, which The curve doesn't quite help you. The categories above really do give you a sense of why this is such an attractive business. On the one hand, you look at D, the number of matters and the size of the matters that have produced returns greater than 200% return on invested capital. That means you're doing better than your money back plus two times your money. 15% of the money out has produced 77% of our returns, which fall in that bucket. And so you've got these asymmetric, very attractive upside returns from a slice of the portfolio. And yet, those are the kinds of returns you'd expect from a high-risk strategy of a venture capital type strategy, which would also carry with it a large loss rate. But when you look at the left side, where we've gotten a 0% or less return on invested capital, meaning you've made an investment, you haven't gotten your full investment back, it's a relatively small portion of capital, right? It's under $100 million that fall into that category. And the vast bulk of investments are not just, you know, in terms of dollars out in number of investments. are cases that are producing still attractive returns. You see the ones in C that are producing greater than the 1X return on invested capital. You're somewhere between getting your money back in 1X or your money back in 2X and the ones in column B, which are providing more modest returns but still attractive. So the thing about the strategy, to the extent that those black bars are subject to the same that I talked about a couple of slides ago, The money is still outstanding. To the extent those are deals put on with the same rigorous underwriting process as these that have concluded, we believe there's a fair bit of promise left in there because it's very hard to find an investment. where you can combine the attributes we have. Usually, if you're going to have the asymmetric upside potential that we see in the right-hand side of this slide 9 with the very large returns, you're going to have to take a risk, a very high risk of loss. Or you might decide you want stuff that looks much more like the middle of this chart, where you're getting more modest returns, but you wouldn't necessarily, in order to avoid losses and reduce your risk, you're taking modest returns. And what I love about this and what makes me happy not just to be an employee and a manager but to be a shareholder is that we're able to produce these levels of returns without the accompanying loss rate that you'd expect from producing that level of returns. And mind you, these are all unlevered returns. This is without leverage that we're talking about. So it is a theme you've heard from me before, and I'm just showing you based on past experience from realizations. But, of course, we are focused every day on the new deals, both the ones we're putting on and the deals that are in our portfolio that haven't realized yet. And, you know, I really love what's in our portfolio. And with that, I will turn it over to Ken.