Burford Capital Limited

At this time, I would like to welcome everyone to the Beaufort Capital fourth quarter and full year 2023 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. We will also be taking web questions. If you would like to ask a web question, type your question in the box on the right-hand corner of your screen. Thank you. I would now like to turn the conference over to Christopher Bogart, Chief Executive Officer. Christopher, you may begin your conference.

Thanks very much and welcome, everybody. Thanks for taking some time to be with us today. As usual, I'm joined by John Malo, Burford's Chief Investment Officer, and Jordan Leach, Burford's Chief Financial Officer. And you're going to hear from all three of us as we walk through the slides that have been put up on the website already. And after that, we'd be delighted to take your questions. When you look at these numbers, you know, and I'm starting on slide four, when you look at these numbers, you know, we're just so very pleased to be able to produce numbers like this for you. and to be able to report on what was such a fantastic year. The last few years have been a little frustrating for us. We really started growing very rapidly in 2016. And if you look back in history, in 2017, for example, we did 11 times as much new business as we had done only four years earlier in 2013. And so given the life of our assets, we expected to be delivering great results a few years later from that growth. And instead of being able to do that, we ran headlong into COVID, headlong into the global pandemic. And so instead of delivering the results that we were expecting from that burst of growth that we've continued, we instead have spent the last two or three years saying to you, well, just wait for it. It's coming. Trust us. And now this year we can really say, instead of having another year of that, we can really show you what we've been so excited about over the last few years. Terrific results on sort of every quadrant of the business. And, you know, these sort of speak for themselves. You know, when I was walking through them with the team, You know, they wouldn't even let me, the reason that we show net income margin here, they wouldn't even let me put the rate of increase of actual net income. They thought it was too showy, you know, at a mere 1901%. And we're going to talk in a minute about YPF, and YPF obviously was a substantial contributor to this, but it was far from the only thing that went well. Lots of things went well in the business and in the portfolio, and we're delighted to be talking about them. So turning to slide five, slide five gives you a little bit more data in a compressed form. And, you know, the headline of this slide is about our $7 billion portfolio, you know, up 17%. You know, I'd sort of add to that the fact that if you look at the business on a perfect only basis, in other words, the piece of the business that delivers the greatest level of profitability for equity shareholders, That portfolio actually went up by $900 million, up 23%. So we're really pleased with what the future holds, even though we've been able to deliver very meaningful realizations and cash generation during 2023. We saw very significant portfolio activity, as we've discussed with you during the course of the year, and this really brings it all together. So a significant increase in portfolio velocity. Again, on a Burford-only basis, $496 million of realizations. On a group-wide basis, that number is over a billion dollars. And if you just sort of underline the second bullet there, taking YPF out altogether, we nevertheless went up 67% over 2022. YPF, which John will talk about more in a minute, continues to progress. We're pleased with the asset management business and particularly with BOFC. BOFC has had the same dynamic that I talked about at the top of the call. You know, we started investing BOFC assets several years ago, and, you know, they have been slower to come to fruition than we would have liked. But now they are. Just like the rest of the business, they're generating cash, and we are the beneficiaries of that cash generation. 88% of our asset management income this year came from BOFC, and we've already now booked $135 million of income since its inception a few years ago. The business is not just seeing realizations. It's also generating cash. We had a significant amount of cash come into the business this year, $415 million, again, just on a Burford-only basis. We ended the year with very strong liquidity. And we also ended the year with a significant receivable for a case that's a chunk of which was for a big case that settled in December. And that receivable is already paying. There's a payment plan in place for that. We've already seen a bunch of cash from it in January and February. And I'll talk a little bit more later about that case. And AI and data science is something that we've talked about before. And it's something that we have been investing in for a number of years now. sort of well ahead of the curve in terms of now the market enthusiasm for AI generally. And rather than take a lot of time to talk about it here, I actually just yesterday recorded a podcast hosted by John Quinn, the founder and the managing partner of Quinn Emanuel, the world's largest litigation law firm on this very topic. His podcast is called Law Disrupted. And I assume that episode will drop in the next few days. So if you're interested in that topic, you'll find a pretty fulsome discussion of what we do and how we do it on that podcast. Turning to slide six, this really goes back to what I said at the beginning about 2016 being the beginning of our growth run. And so what we've done here is just to show you the scale of the change, we've picked a bunch of data points. and showing you what the business looks like today compared to what it looked like in 2016. And it really, as you just sort of pass your eyes over those dynamics, you can see that it's just been transformational in really quite a short period of time. And we're very pleased with how that's gone, and we're also very pleased with just what the market potential for Burford is you know, if you will, how many moats we've established and what that enables us to do in the market. Slide seven is a slide that you've seen before, and it's really here just to remind you of the four pillars that we associate with the value proposition that we bring to the market. We've got this very large core portfolio. These are existing assets that are making their way through the litigation process. We obviously actively manage our portfolio, but at the same time, these are things that are going to have outcomes. And we've now got a 15-year track record of producing pretty predictable outcomes. And you can see there the kinds of consistent high returns we've been able to generate. So you start with a base of existing assets. You add to that the fact that we have this powerful origination platform that year after year has been able to write more than a billion dollars of new business. An asset management business that is really showing its stripes now with BOFC producing a significant amount of additional income for us. You can almost think of that as structural leverage, if you will. And then finally, we've got the icing on the cake, maybe quite a thick layer of icing from the YPF assets. Slide eight gives you a little bit more detail about the fourth quarter. You know, we didn't do this last year. People gave us some feedback that they'd like a little bit more information about the fourth quarter. So we've added this slide. And through this slide and the next slide, I'll give you a little bit more color about a big deal that we did during the course of the year. um that contributed to these numbers but you know it's it's notable when you pass your eyes over these numbers comparing fourth quarter full year that there does remain some real seasonality some real year-end fourth quarter seasonality to this business um you know if you see in terms of committed dollars um and in terms of realizations in both cases we do a little bit less than half of the whole year's business in the fourth quarter um and and that's just I think a function of lawyers being procrastinators, very focused on year-end numbers, companies doing more settlements towards the end of the year. So the fourth quarter remains a significant dynamic in our world. And as you'll see from some future slides, there are also other points in the business, notably the first and third quarters, where things can be really very sleepy indeed. Turning to slide nine, This is, I think, a really interesting perspective on a couple of different dynamics in the business. So this describes a deal that we did in June. It was for a Fortune 50 public company in the US. We did a large deal, a $325 million commitment. We deployed $225 million of that commitment at the closing of the deal. And the remaining $100 million was due to be deployed in December. That was across a portfolio of cases that this company has as a claimant. And this shows the unique capability that we bring to the market. First of all, virtually none of our competitors can do a deal of this size and scale. But beyond that, it shows that when we bring together the quality of the legal underwriting that we have the quality of the financial services team, the data science work that we're able to do, all of that together enables us to structure innovative solutions for companies as opposed to just offering sort of an off-the-shelf litigation funding package, which is what you see a lot in this market. So this is the kind of thing that gets us these clients in the first place and keeps them coming back. Now, interestingly, what happens here does happen sometimes in litigation. We closed this deal in June, and rather than taking years and years and years to go through the process, this case settled pretty rapidly. It settled in December. We're going to get payments. This is the case I mentioned earlier that has already started to pay. And on that quite short exposure of our capital, we're going to make quite a lot of money. 32% IRR is just on the Burford Direct capital. 37% IRR is when you include the fund income that we're going to make from it. And like anything, there's a pro and a con. That's terrific. It took us off risk immediately. We've made a nice profit in six months. Who wouldn't like those kinds of returns on that profit? On the other hand, we didn't deploy the remaining $100 million because the case settled in time. And we didn't get years of income flow from this case. And so as you turn to slide 10... what you see there is a little bit of the impact of that. So if you start at the bottom, if you look at the deployments that we made, this is the bottom left-hand quadrant of the graphic. If you look at the deployments that we made there, if we had deployed the additional $100 million, that slide would have gone from what today looks like a decline to instead a new deployment record for us. And this is just the nature of the business. On a case-by-case basis, there is going to be variability like this. And it doesn't concern us because we're confident on a long-term basis of the ability of a number of cases to simply continue to take and use a lot of capital. And you can see in the sub-bullet the other thing going on here is just a question of a business mix, of how many deals were monetizations at close and how much capital each case uses during the course of its life. And so when we see variability like this, it doesn't cause us any particular concern because you go back to the top of this chart and you look at the top line. And what the top line is telling you is we're still writing a lot of new business. And the mix of that business changes a little bit, but we still are doing, we did on a group-wide basis $1.2 billion of new commitments. On a Burford-only basis, $691 million. So basically right on top of last year, because that's just a little variability caused by how much BOFC takes. Obviously, would we always like more here? Sure. But one of the other dynamics is when the portfolio is really busy. as it was in 2023 with so many trials and so many other litigation activities, there's effectively a finite limit to what the team can do between a combination of managing those activities and new business. And so we're very happy with the totality of the activity level during the course of the year. And the other thing, of course, this slide points out to you is that seasonality point that I made before. This one's particularly stark in the top right corner showing you the third quarter. And that's just lawyers not being very much interested in doing stuff like this during the summer and the early fall. And so with that, John, we'll now take you through some of the real meat of the portfolio.

thanks Chris and thanks to you all for joining I'm going to start with slide 11 and like Chris there I'm very pleased and proud of what we're reporting here today there's a lot in here but more than anything I want to emphasize a point that that Chris made that for a number of these calls now I have said I think the word is that I'm bullish about our portfolio that I am very pleased with the matters that our team has rigorously underwritten and included in the portfolio and the deals we've closed and also monitoring closely the cases that we've already put on and watching them through the litigation process I've been quite pleased with how they've been progressing for a number of calls now as Chris said we've had to say Yes, COVID slowed things down. We did have enormous growth some years ago that has increased the size of our portfolio, and investors were waiting to see when would we see the realizations that would be a product of that growth. And my feeling was, you know, be patient. You know, I'm bullish. There's been nothing negative. It's all been positive. And now, finally, we can show you that is actually starting to kick in. I'm glad we can actually share those results with you and you can see them with the tangible results. So from 2022 to 2023 on slide 11, you see that our capital provision direct realizations just for the balance sheet, just for Burford only, we're up 42% and we're $496 million worth of those realizations. It's just a much bigger number and it reflects the growth in our portfolio and those matters finally making their way through the process. And keep in mind, as the third bullet on the page shows, this is just balance sheet. If you look at group-wide, it's more than a billion dollars in realizations, more than twice that. And if you had a chance, there hasn't been much time to look at the shareholder's letter, and Jordan will speak to it later, We've let everyone know that as we saw greater opportunity in this market and we realized we could scale up our business, we decided the prudent way to do that was to finance that growth with fund capital. Based on how much debt was available to us in the UK markets before we had a US listing, And also just in terms of being prudent stewards of your capital, we didn't want to take on too much debt too quickly and fund capital seemed the right way to do it. And so we've generated this machine that is capable of putting out much more capital than our balance sheet was putting out and therefore generating larger cash realizations than historically from our balance sheet alone we could have generated. And that does endure to the benefit of the business and to you, our shareholders, now through the management fee and performance fee income that Chris has talked about, the fund business. But over time, we have begun to wean ourselves of fund capital and put more of our balance sheet capital to work so that our equity holders get an even larger share of those results. So it's pretty important that we're showing cash and you know we're saying positive realizations for the benefit of the balance sheet now but also that we've built this machine that's generating even larger realizations that over time will in order to the benefit of the balance sheet as well so I'm very pleased as you can see from slide 11. if we turn to slide 12 this is a slide you've seen many times before And the basic gist of it is this is a very attractive asset class. People may wonder, well, how do you produce these kinds of returns? What is it about the asset class that has this return profile? And it's not that complicated, right? The majority of the matters we invest in settle, and those produce very attractive returns, 73%. then of the ones that go to final adjudication, our gains far outstrip our losses. That's a result of rigorous underwriting. And they outstrip it both in terms of number and size. And so from the adjudication gains, you get really outsized returns. And the adjudication losses, in comparison, are a relatively small amount, right? If it's 18 million realizations on 115, that's less than 100 million of losses. And the big thing is here, you know, that you've seen over time, but the big thing is that red circle, that's $2.7 billion worth of realizations, right? Early on, people may have said, okay, that's an attractive business model. I understand this chart so intuitively I can see why it makes sense you're able to generate these kinds of returns. But are you going to be able to do it when you get to scale? Once we're at $2.7 billion, I think that question is answered. And keep in mind, that red circle, the $2.7 billion, we first started reporting realizations to date in our life 10 years ago, in 2013, and that number was less than $150 million at that point. That just shows how far we've come. And that $2.7 billion is just for the balance sheet. If that were a group number, it would be well over $5 billion. So we've shown that we've built a pretty good mousetrap that is able to scale and still produce great returns given rigorous underwriting and careful monitoring of our portfolio and good work with our counterparties and law firms. The ROICs and IRRs, we've said continuously, they will bounce around from period to period, but within a pretty narrow band. And the ROIC, why would it dip? Chris mentioned that very large matter, were we unhappy that it resolved early generating absolute cash of a significant number? Yeah, we were perfectly happy having that happen. It's going to affect our ROIC numbers when in any given period you have a large result with lower ROIC. But on the whole, we're just so pleased that with this kind of scale, we're producing this kind of returns. If you turn to slide 13, you kind of see graphically how that intuition about the litigation model plays out, that there is an asymmetric return profile, right? If you look at the right side of that graphic, it looks a lot like venture capital, that you have the potential for real home runs. But then when you look at the middle and left, it doesn't look at all like venture capital because the losses compared to the gains are fairly modest and not that frequent. So it's just the nature of the asset class and the way we underwrite the investments, when you map that out into results, it's a very attractive asset class, the way we have structured our investments. If you turn to slide 14, you can see the evolution of the business over time by vintage, right? You can see basically that the, you can see the deployments and the realizations by vintage with the red is the realizations that have come in, the black is the deployments that have concluded and the kind of shaded diagonally black and white striped are the deployments that are an ongoing assets that haven't resolved. That doesn't capture everything. As Chris mentioned, there are commitments beyond the deployments, particularly in more recent vintages. You put on a deal and you agree to fund a certain amount over time, or you agree to a portfolio with the first matter added and several additional matters to come in. The deployments bar doesn't show that. The numbers for deployments in 2023, it's 167 when you add those up, and our commitments were 691 million. So there's more than is there, but you can see not just that the black to the red is a very attractive comparison. We've made money on the money that we put out and we've had realizations from, but also there's a lot there in that shaded area and that's the potential for the future in addition to commitments that have not yet been deployed. One other thing worth noting, which is not something we shout from the rooftops about, The second bullet on the page about the conclusions from pre-2020 vintage years, and you'll see more about this in the shareholder's letter from some very old matters that have resolved profitably. I think there is probably a temptation on the part of investors because of experience with investment funds that when they have older matters in their portfolio, they sort of carry them without writing them down or writing them off because they're raising new funds and don't necessarily want to rush to report that. There might be a tendency among some people in modeling this business to assume, well, if things are still outstanding that are really old, they must be losers. That just hasn't been the case. You see, we still are generating profitable returns from older vintages. We wish they had resolved earlier and That would, of course, be nice, and we're not shouting for the rooftops, but nonetheless, they are not losses. They have produced for us. So if we turn to slide 15, as Chris mentioned, there's YPF, and we've talked about this on public calls before, and there's probably not a lot more to say given that we're constrained in terms of only speaking about things that are a matter of public record, but it's pretty hard not to finish 2023 and look back on our accomplishments and not acknowledge the great success we achieved in winning the largest judgment ever in New York history. And this was the case, mind you, that we didn't just finance, we also managed it. And that's because the Spanish bankruptcy court, on behalf of the creditors who had financed an equity investment in Argentina and had lost money and were entitled to recover, They didn't have the resources or the ability to manage that case and take it through a multi-year, complex, cross-border litigation. They retained us to do it, and we were able to achieve that kind of result, and we're just so pleased. It's been a long journey to get to the judgment, which is now final and enforceable. The trial court has ruled that it is immediately enforceable. As I say, I can't say more than what is public. I can observe the appeal is pending. Argentina has appealed and the plaintiffs have cross-appealed against YPS as a defendant. And the enforcement process has begun. It's commenced. And we will report more as there's more public information. But we're very pleased. It's definitely a high point in a year filled with many other high points. And with that, I will turn it over to Jordan to turn to the next slide.

Thanks, John, and thank you, Chris, for before. Good morning, everyone, and I think we've flipped over into afternoon. I know we're a little bit earlier today, but good afternoon to everyone in Europe. I'm on page 16, and I'll start going through some of the financials. 16 is on a Burford-only basis. To reiterate, some of the numbers that we hit on before, capital provision income more than quadrupled in 2023 versus 2022. That's driven by the strength in both realized and unrealized gains, and it's up close to $700 million year over year. We saw an increase in asset management revenue, which I'll go into more detail later, but that's primarily driven by the growth in BOFC, which, as a reminder, is our arrangement with the Sovereign Wealth Fund. In the fall of 2023, we were happy to announce the extension and expansion of that relationship through the end of this year and look forward to continuing that opportunity in the years to come. Net income for the year was a record, $2.74. That drove tangible book value per share close to $10 at year end. Overall, our capital provision assets finished the year at now 3.4 billion. To dive a little bit deeper into that number, 1.6 billion of that is our deployed cost, and 1.4 billion of that represents the YPF assets. As you recall, our valuation model or methodology now takes into account duration and time value of money. And so average discount rate for our portfolio over the year decreased about 30 basis points since the end of last year. Certainly volatility throughout the year, but point to point, it was 30 basis points. that resulted in approximately $50 million of positive impact on the fair value of the asset. But just as a reminder, the change in discount rate doesn't impact the ultimate exit value of our investments. I'm going to flip to page 17. On this page, we show capital provision income and its various components. both the quarter and for 12 months. I talked about the $700 million increase year over year, which was obviously driven by two positive case milestones in YPF. But I don't want to make this a story of just YPF-related assets. Year over year, the performance was up in realized and unrealized gains across the rest of the portfolio. by about 140 million or 67%. This reflects the velocity that John and Chris have talked about as the courts continue to move forward and are fully back in business. Specifically with respect to realized gains, our fourth quarter in 2023 was extremely productive, represented close to 50%. of the full 2022 total with respect to realized gains. Page 18, now talking a little bit more about the asset management business, which continues to perform and we continue to reap the rewards of using the funds to augment our balance sheet efforts. Asset management income grew in 2023 from 56 million to 64 million. Cash receipts from asset management more than doubled in the year to around $32 million. Chris mentioned this, but as you can see, the overwhelming majority of this income is driven by income from BOFC. That fund's dedicated to participating in 25% of nearly all of our new commitments on a pro-rata basis. I'll pause here and actually take a moment to go a little bit deeper on where we are with Advantage Fund and our thinking around that and the Advantage Fund strategy given the forthcoming end of the fund's investment period at the end of this year in December. We've had the opportunity after weighing a number of options for this segment of the litigation or legal finance market and we've decided not to immediately raise a second advantage fund when the investment period for the current fund expires. As a frame of reference, this fund has historically targeted somewhat lower risk legal finance assets with an expected mid-teens or greater IRR, and we've deployed approximately $300 million over the life of the fund over the last two years, or $150 million annually into the strategy. In today's market environment, we're likely not to replicate the same terms of the current fund structure. That backdrop, combined with our increased access to affordable, sustainable, and the long-term unsecured debt markets, makes originating these assets on balance sheet a potentially accretive opportunity. And fundamentally, we now have a greater opportunity in front of us given our range of financing options. So as a relative share of overall deployments, we don't anticipate a significant change in our mix of business going forward. And to the extent that we do decide to finance these assets on the balance sheet, we're still focused on our belief that the business can produce 20% returns on a tangible equity over time. We believe that this is an appropriate use of our debt and equity capital to drive returns for our shareholders, and we'll continue to monitor the backdrop of raising incremental funds. Switching to page 19, I'll switch from revenues now to talk about expenses. We've talked a lot about this page in the past couple of quarters, and I've gone through a number of the details. And so before jumping back into those details, I think it's important to pull back and look at some overall metrics. On the bottom of this slide, we show operating expenses, and this includes everything, all the non-cash accruals and one-time expenses as a percent of total revenues on the left and as a percent of the total portfolio on the right to give some historical context and perspective to these numbers. In a year with significant revenues, more of it was driven to the bottom line. The bottom left shows 2023. OpEx represented only 20% of revenues, and the comp and benefits portion was 23%, which we believe compares favorably to peers in similar industries. In addition, operating expenses, when compared to the group-wide portfolio, has remained comparatively consistent. over the last several years, adjusting for the one-time accrual with respect to YPF. With respect though to the details, let's jump in to 2023 totals. 130 million of the 270 million of expenses represent either non-cash accruals, one-time expenses, or case related expenses that we can't include in the asset cost. And so let me remind you of some of the details with this. In the salary and benefit line, we were impacted by approximately six to seven million in the year, driven by the increase in our stock price. This is because, as a reminder, our employees have the ability to invest their deferred compensation in our stock. And when the share price increases, we have an accrual expense. we look to offset that economically by purchasing shares to hedge that exposure. Legacy asset recovery expenses will be limited in the future due to the impact of only one remaining asset in that historical arrangement. Our case-related expenditures that are ineligible for inclusion on asset costs will fluctuate from time over time. And we saw elevated at the beginning of this year, but it's returned to more historical levels and was approximately $1 million in the fourth quarter of 2023. And then finally, I want to point out on the long term incentive compensation line, you know, that's our carry program, which includes accruals for when the fair value of the asset increases. But it only pays out cash when cash is received. In the 2023 carry payments on a cash basis, those are approximately $10 to $11 million. That's it for page 19. I'll now move to page 20 and talk about some of our liquidity metrics. So we sit in a very strong liquidity position at the end of the year. We have over $300 million of cash and securities, as well as another 185 million of receivables. Through the end of February, we've already collected on 40 some odd million of that receivable balance, which is included some of the payments related to the settlement that Chris described earlier in the presentation. In addition, we took advantage of a robust high-yield market. In January, we tapped the markets for an incremental $275 million add-on to our 2023 June issuance. And we were able to issue that at more than 120 basis points inside of the original issuance level. And that's just a little over six months ago. So a strong result there. Turning back, though, not just to what liquidity we have, let's look at the cash receipts that we received. They were significantly higher in 2023, just shy of $500 million of cash receipts last year, significantly larger than the $330 million in 2022. And the core capital provision assets reached a record of $415 million. Overall, on the bottom, to simplify it, our cash spend on OPEX and interest expense was around $217 million, and that's less than half of the total $489 million of total cash receipts. Moving to slide 21, A quick snapshot of the maturity schedule and our covenants. I've talked before and continue to stress the importance of the ladder debt schedule that we enjoy that extends out to 2031. Our next maturity is in August of 2025. But as you can see, we feel well positioned with only 22% of our debt maturing in the next four years. We also get asked one question about our covenant levels and where do those stand and where would we operate the business. You'll see this discussed briefly in the shareholder letter, but we frequently get asked about our debt capacity and how we think about that. We think it would be prudent to put a maximum leverage level out there at 1.25 times debt to equity. Obviously, we're well within that threshold. And also note that's a maximum, not a target. We are constantly and continuously managing our liquidity levels in the short to medium to long term, thinking about our anticipated cash needs as well as our expected cash receipts. So overall, that wraps up some of the highlights of the financial numbers. An exciting year to present, obviously. And with that, I will turn it back to Chris for final remarks and open up for questions.

Thanks, Jordan. And since we've gone on for more than 40 minutes, I think rather than talking at you anymore, I think it'll be better for us to take your questions. But I think you've heard from all three of us how how very pleased we are to be able to deliver this kind of set of results to you. But with that, operator, we can take some questions and we'll do them either from the phone or the webinar.

Thank you. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. And we are also taking web questions. If you would like to ask a web question, please type your question in the box on the right-hand corner of your screen. Thank you. We're going to pause for a moment to compile both rosters.

We'll start with the webcast. And we have a pair of questions from Rakesh at Bell. The basically relates to OPEX and Rakesh is trying to sort of determine how much of the OPEX base is sort of maintenance or existing and how much of it is for growth and sort of as a follow on how much of the OPEX is fixed versus variable. So in reverse order, a lot of our OPEX is variable. So as Jordan was just saying a moment ago when he was talking to the slide on this, we have cash OPEX going out the door, which is basically base salaries and then the existence cost of the business. And since we're a professional services business, basically, those non-compensation costs are you know, the usual existence costs, office rent, you know, audit fees, listing and so on. But we don't have an enormous number of fixed costs in this business. And so, and base salaries. Virtually all of our compensation is variable. It's annual bonus, you know, the compensation structure here is base salaries that are consistent with sort of the financial services model. In other words, not particularly high. And then annual bonuses and stock and long-term carry. And the reason you're seeing these pretty volatile accounting expense numbers is because of the portfolio performance. So when an asset goes up in value, we also accrue for a potential future carry payment, but we're obviously not making those payments until we get the cash in the door. And that's why you see such a sharp disparity, as Jordan pointed out, between the carry payments we actually made across the business this year, which were, you know, sort of 10-ish million dollars, as opposed to the kind of accruals that you saw, which were, you know, many multiples of that. So that's the dynamic going on there. In terms of how much of the OPEX is necessary for the maintenance of the current business as opposed to growth, it's pretty difficult to break that apart because we don't segment the business that way. So if you look, you know, just pick a random part of the business. If you look at the patent and intellectual property part of the business, you know, we have a team of people there, and those people do it all. They're cradle to grave. They know that market. They're well-known in that market. So they maintain client relationships, they originate business, they underwrite the business that comes in the door, and they manage that business after we close it all the way to its conclusion. And so it's not as though I have a team of people who is just originating patent business that I can separate from the team of people who are doing the business. But if the thrust of the question is to try to model sort of runoff value, there's no question that a decent portion of what we do relates to that second pillar of the business, the fact that we're originating more than a billion dollars a year of new business. So if you were to throw the business into runoff, you clearly would not be originating that new business any longer, and you could, I think, have meaningful cost savings. We approach the business in entirely the opposite direction because we think there's an extraordinary opportunity here over time to continue to grow this business, and so we continue to invest in growth. But that, I think, is the modeling question. Operator, I think we're ready for a question on the phone.

Your first question comes from the line of David Chiarurini from Wedbush Securities. Please go ahead.

Hi, thanks. Great to see the realizations come through in 2023. You mentioned about seasonality in the business. Now, is it is it fair to assume 2023 was an outlier on the high side? And can you talk about, you know, the realizations pipeline looking forward?

Yeah, I don't I don't know that you can assume that in terms of seasonality. You know, when you when you think about what drives the what drives lawyers and and litigation you know we've talked before you know there's the new business side and then there's the realization side the new business side you know it's simply the case that there's a big year-end rush in this business and that drives year-end traffic um and that means as well that the people who are going to do a deal are almost certainly going to do it in November and December as opposed to doing it in January or February. And so we've got this phenomenon of having a very busy November, December. On every single year we've been in business, we have closed multiple deals literally on the last day of the year. But nobody then turns around and says, oh, well, I didn't bother during December, so I'm going to come in January and do my deal with you then. And so the first quarter tends to be fairly sleepy. And the summer and September tends to be extremely sleepy because lawyers are simply trying not to do anything that they don't have to do during that time. And so you can see that. And that's been a trend that you've seen in our numbers for years and years. It hasn't been as visible because we've only started reporting quarterly in the last little while. But the fourth quarter dominance has certainly been a trend that you've seen in the numbers for a long time. In terms of realizations, it's a little bit less predictable than that because some realizations are driven by just the court schedule. So if you've got a case that is likely to settle as it's heading into trial and it's heading into trial in May, you might well extract a settlement rather than having that case go to trial in May. But the other dynamic that you see in corporate litigation matters is that companies will regularly wait to see what their year is looking like and then at the end of the year sort of figure out how much money they're going to make available so subtle cases and you know years ago when i was the general counsel of time warner this was a dynamic that i had you know someone at any given time had a huge portfolio of litigation um and the cfo would sort of come along in november and say okay i've got a pretty good sense of the year I can give you X million dollars this year to go and see what of these cases you can buy off. And to some extent, that's what you do. You'd go out to a bunch of the cases being litigated, and you'd say, look, I've got a finite pool of money, and so whoever hits my bid the first, you're going to be getting it. And so we do see a fourth quarter level of activity for that reason as well.

That's helpful. In my follow-up, could you talk about the new deal pipeline, how it compares to prior periods?

Um, I think the answer is, is one, like, I guess, I guess, right. I guess the way that I talk about new deals is the constant evolution of what's going on in the market in this business. And you heard John say when he was talking to the slides, um about the increase in our average ticket size and so what we see in new deals is an increasing trend towards corporate use of of our capital for monetizations and portfolios in addition to our traditional more law firm driven litigation financing model and so we see both of both things in the pipeline The corporate stuff probably has a longer gestation period because you're still at a stage in the market where people are, for the most part, doing it for the first time. So when I took you through that sort of mini case study of the Fortune 50 company that did a deal with us last June, you know, that's not a deal that walked in in May and we just did it in the space of a couple of weeks. That was a relationship that we had been cultivating We had been working with the client to help, you know, our contacts with the client educate their internal peers more broadly about the use of legal finance. And so it's a process. And so that's what we're excited to see when, you know, when we go and have ongoing interaction with people. So we're constantly building relationships to turn them into matters that will ultimately close.

And I would add in any one period, like right now, we'll have matters that come in that are more conventional, you know, single case litigation finance. They could have come in late in the year and not closed by year end. And then there's the ability to close them now. And there could be larger opportunities where you're putting out much larger ticket sizes and the cultivation may have started in the fall or even we have some that the cultivation has been going on a long time and we're working on those and progressing them through.

Your next question comes from the line of Julian Roberts from Jefferies. Please go ahead.

Hi guys, thanks very much for the presentation. I'm afraid I missed the first few minutes and so this could be something that you've already covered. Am I right in thinking that the the large investment that realized quite quickly, only accounted for about half of the realized gains in Q4, looking at the schedule of capital conversion direct asset data.

I think that that is right. Although, Jordan, can you check me on that?

Yeah, that's correct. Give or take. I mean, yeah, it's around that.

Yeah, sorry, my point being that actually that means that even in Q4 with a pretty big realization, you still had quite diverse sources of realized gains, which is good news. Sorry, that's all I had, actually. Thank you very much.

Thank you very much, Julian. I would just say that is consistent with, as Chris said, the number of trials going on at any given time. There's just a lot going on in the portfolio. And as Chris also said, some number of them may settle on the courthouse steps and some number will go through and then companies will pick a time to pay through the appellate process often. And so it makes sense that the money is coming from diverse sources.

Your next question comes from the line of Alex Bowers from Barenburg. Please go ahead.

Hi, everyone. Just three questions for me, if I may. Just firstly, can we get sort of a latest update on the sort of COVID-related case backlog and sort of how much further you believe there is to go on that? And sort of more specifically to Burford, what your sort of outlook is for 24 in terms of cases that are sort of nearing completion? So that's the first one. Second one is, I think you mentioned in the presentation that sort of transaction sizes have doubled since 2019. How do you think about sort of mix or diversification of the portfolio between sort of larger and smaller cases? And then just sort of lastly on YPF, I think we saw a small markup in Q4. Could I just get sort of the understanding of what drove that? Is that sort of primarily the sort of post-judgment interest accruing on that? And then sort of secondly on YPF. Sorry, I guess it makes it four questions. But in terms of the appeal, I think we've seen Argentina's opening briefing come out. Was there anything in there that sort of surprised you? Thanks.

So we're going to split these up. And John will take the last two, the two YPF related questions. I'll do the COVID backlog. and Jordan can speak to diversification. In terms of the code backlog, I think if you look back at slide 14, that slide is really there to try to illustrate the backlog in the portfolio. And as I said at the outset of the presentation, all things being equal, without COVID, you would expect the middle of that slide to be further along towards realization of this. Now, we've made big strides this year, but we've still got more to do in terms of putting that backlog. And that's why we said that we expected a continued, I forget the language we used, but a continued robust level of activity in 2024 as yet more of those cases move through the litigation process. You know, we've got, you know, as we had last year, we've got a significantly larger number of trials scheduled, for example, in 2024 than we did in, say, 2022. So I think that's sort of where we're headed for clearing the COVID backlog. And then, you know, before I turn you over to Jordan about the numbers there, Just my sort of macro comment about diversification is that, yes, we've got increases in transaction size, but, of course, we've also got increases in total business volume and portfolio size. So in some ways, the business is as diversified as it's ever been in terms of the relative share of the portfolio that any single thing represents. You know, when we were much smaller, we had a world where we were actually somewhat less diversified because we simply didn't have that much capital. So even if you were only putting a comparatively smaller amount of capital into things, they were taking more of the total portfolio. So, Jordan, do you want to carry on with that, and then we'll turn to John?

Yeah. Look, Chris, I think you hit on some of the right points. Obviously, from a mass perspective, you know, the increasing in transaction size is going to slowly over time, increase the average size of an asset. That being said, I think, Chris, you hit on the right point, which is that overall diversification, when you think about it with respect to client concentration or the asset type in terms of commercial versus arbitration versus patent and so forth, we consistently monitor that. And I don't think that we have any undue or different exposure levels now than we've reported in the past, and that that diversification is consistent with years past. I'm actually going to steal from John one part of the YPF question, which was, how did the values change in the fourth quarter? And I'll just remind folks that, like every asset, given our valuation methodology, you know, the change in discount rates and duration have, you know, slight changes to the change in value. And so you're going to see that in every asset class, or in every asset, regardless of period over period, regardless if you saw a specific milestone occur in that period.

And actually, just before turning to the YPF-specific question, I did want to address the question about diversification and ticket size, which is I wanted to remind everyone that I'm often asked this question about are we looking for a particular kind of case? Are we too full on one case and looking for another? And we have built this business by making sure for everyone in the market for legal assets, whether it's companies or law firms, We are a taker if the risk reward on the individual matter is attractive. And so we have teams that are able to underwrite in various jurisdictions, various subject matters, whether it is investor state arbitration, commercial arbitration, antitrust, intellectual property, contract breach in various jurisdictions. We have people that can underwrite and evaluate those matters and shepherd them through and And so we achieve diversification because it's a robust, diverse legal market. And I've found there's a nice mix of small and large matters. There's a nice mix by jurisdiction. Does it ebb and flow one quarter to the next where we'll have a very rich arbitration pipeline for a couple months and then there's a whole bunch of patent matters that come in? Yes, but generally we're firing on all cylinders in all the pipelines. On the YPF point, I can't get into as much as ... I'd love nothing more than to keep you on the phone for hours talking about the merits of the case. I can't really get into it and I don't want to sort of preview our appellate briefing, but all I can say is it shouldn't come as a surprise to you that we've been litigating this for nine years. would be very familiar with all the traps that Argentina would run and all the points their lawyers would make. And so I don't think there's going to be anything surprising, but I can't really comment on the merits. And you'll see our brief will be filed, and you'll get to see all the responses.

So, Operator, we're two minutes past the hour, but I think we have time for one more question.

Our last question today will come from Andrew Shepard Barron from Peel Hunt. Please go ahead.

Okay, thank you very much, and thanks for the presentation. Well, actually, I have three questions, so let's see how we do. One is on IRRs. I don't think you've actually published what IRR was for the cases completing this last year. But if I look at lifetime, lifetime has dropped from 29% a year ago to 27%. now, which suggests that IRRs were probably somewhere around 23%, 24% for last year. So can you talk a little bit about that and if that is right? And if you're thinking, if you're going to be taking the advantage funds in-house, which I think you said were mid-teen IRRs, what does that say about future IRRs? Second question, if I may, is you said that, I think you said that you'd throttle back effectively a new business because you have a sort of resource constraint. and so much of your team was focused on settlement. Isn't that going to repeat next year? Wouldn't the logic continue there? And thirdly, if we have time, I wonder if you could talk about a tool about what other large deals might be out there outside of YPF. Thank you.

Sure. So maybe I'll take them in reverse order.

So I think we're not really in a position to talk about individual matters that are out there. But just looking at the nature of, even if you just look at the U.S., looking at the nature of the U.S. litigation market, there are a significant number of large matters there. And if the premise of your question is what we wrote in the shareholder letter about basically being able, being willing to take on, you know, to consider take on, you know, a couple more Pearsons, if you will. What we're saying there is that there are matters that are very potentially large, but also come with, you know, probably outsized risk. And, you know, we have we have very careful about how much risk we're prepared to take in the business and we calibrate it very carefully. But when we can find something like Pearson that has such an asymmetry between the risk that we're taking, the capital risk that we're taking and the potential upside, those are those are potentially attractive to us. And so we you know, we keep our eyes open for for things like that. In terms of the new business point, I think the answer is sort of yes, but. And what I mean by that is we have a finite number of people. I'll keep on using the patent group that I just described. And those people are, as I said a moment ago, they're sort of doing it all. And so it's a natural outcome of that if they have a lot of time being spent on a case in a particular week, because that case is going to trial, they're probably going to spend less time during that particular week on originating new business. But the week following that, they might not have a case going to trial and they can be full bore on new business. And they would never be in the position of being 100% full bore on new business anyway. So is it a constraint? Sure, it's a constraint. If I were to double or treble the size of the patent group and devote all the new people that we've just hired to only trying to find and originate new business, would we probably do somewhat more new business? Yes. But is that a sensible way to run the business? John and I have not historically taken that view. We've been pretty moderate in how we expand it. both with an eye to cost base and with an eye to not trying to get it over our skis. And so if the price of that is that in some periods when we're raking in the cash, we're not doing quite as much new business activity, that's, from our perspective, sort of an acceptable short-term compromise. But the stuff always, from our perspective, comes back and rights itself.

And with... I would just add to that. We are hiring. And as Chris said, the idea is hiring a new patent person. You don't want to double the size of the team in a short period of time and change the quality control. But integrating people one by one is a good way to do it. And we're in the process of doing that now. Not just in patent. And... Sorry. And I'm...

Yeah, and on the IR point, we don't and we never have produced sort of annual IRRs. We produce vintage IRRs, which you see on slide 14. And the 2023 vintage IRR right now, even though it's early on in its life, is 32%. You know, you see the IRRs and the ROICs moving around in this business, and they're affected by, you know, by a variety of factors, including, you know, actual performance, obviously, but also time and time and duration. And so, as Don noted earlier, you know, we're going to see, and what we did in fact see, a reduction in our ROICs because of the fairly rapid settlement of that large matter. And so when you settle a case that quickly, you're inherently going to take a hit on your ROICs because we're not going to double our money with capital that's only out for six months. Wish that it were. I hope that was responsive. And with that, since we're now materially past time, I think we'll call it a day. As usual, we're always delighted to engage with investors directly as well. So please don't be shy about being in touch with us. But thank you very much for taking more than an hour today with us and helping us celebrate a little bit what was a terrific year. And now we're excited to see what we can do in 2024. So thank you all.

This concludes today's conference call. Thank you for your participation and you may now disconnect.

a little bit what was a terrific year.