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.