Burford Capital Limited

and a number of the disappointments considerably. The core point from all of this is to show that we have a big diversified portfolio of litigation that is in active operation in court systems all over the world. And that portfolio is diversified. It's hundreds of cases, not just a few large cases. And if you turn to slide 10, you'll see an example you'll see some data about that diversification so what we've done here I don't think that we've done this before but if you look at the graphic on the right we have we have taken our modeled realization numbers that you've seen in the past and we've segmented them effectively by size and what you can see there is that we're not dependent on any one big asset that instead we've built this rather remarkable global portfolio that has many different things moving through the process. And many of those can be significant contributors to cash and liquidity here. It's just somewhat vexing that in addition to the usual unpredictability of litigation timing, that we have had a somewhat slower than average approach to this. but that level of diversification that you can see in the graphic, I think is really very compelling. Now, when people see that model number there in the middle of that circle, the 110% ROIC, and then they see the actual 82% performance that we've generated historically, they reasonably ask about that disconnect. And if you turn to slide 11, we've done a little snippet of analysis that goes beyond the basic historical data that we have historically shown you. Because the reality is one number does not tell the story in this business. And so we thought we would dive a little bit deeper to show you why we remain optimistic about this portfolio and its future performance. So this is just one component of what's in there, but what you can see there if you look at the chart on the left and the graphic on the right, is that very large deals tend to produce lower returns on invested capital, lower ROICs. And that's not surprising because we price to risk and we're generally unwilling to put massive amounts of capital to work in very high risk cases. We're just not enthusiastic quite obviously about putting a couple hundred million dollars out the door and losing it in a binary risk case. And so when we do big cases like that, while they may well produce nice nominal cash profits and strong IRRs, they do have a tendency to bring down our aggregate ROICs because their ROICs are a little bit lower than our sort of historical averages, and they're quite large in the computation. So if you just take these six assets alone out of the historical heroic computation, it goes from 82% to 99%. So you can't just, I think, look at the one historical number representing 17 years of history, and you do have to look at The size of the case is a whole bunch of dynamics. As many of you know, we provide extraordinarily detailed data about the portfolio in our website table. And that's where we get these kinds of insights. Now, when we're talking about these large and somewhat lower returning deals, while we remain very committed to growth in this business, I will say that one thing that we have done in response to the YPF events earlier this year and the market feedback around liquidity is we have somewhat reduced our willingness to do some of these very large but only moderately profitable deals, just with an eye to balancing growth on the one hand and liquidity and deleveraging on the other. Turning to slide 12, this is our usual slide about new business. And you can see some of the impact of what I just described on the mix of new business. So if you just look at the headline commitment number, which as I've said before, is not the number that we look at internally, but that number is below the 2025 run rate. But you'd have to look at the mix here. And if you look at the red bar, which is presumably the most profitable thing that we do, The red bar there has well more than doubled, while the blue bar went down very significantly. So if you were to look at our internal metrics, you would not see a decline of the visual kind that you see on the right-hand top side of this graphic, because the relative profitability of those bars is significantly different. and so as you can see there, we've well more than doubled the size of the red bar while significantly reducing the size of the blue bar. So that's consistent with what I was just describing before and also probably I would say a little bit of firm, you know, firm stasis for a little while after the YPS decision. And John is going to chime in now and have a little bit more commentary about the portfolio.

Thanks, Chris, and thanks to you all for joining. I'll be brief. I really just want to hit two of the themes that Chris introduced and flesh out what they mean from my perspective for the state of the portfolio and the state of the new business machine. As Chris said, he highlighted a few successes we've had in July with a jury verdict, an arbitration win, the German Supreme Court ruling and the law firm portfolio, and then yesterday, a UK ruling. Those are just examples of things that we're seeing a lot of activity in the portfolio. And so Looking historically, would people rather that cash had come more quickly and there hadn't been delays? Certainly that's the case. But when I look at the portfolio today and see what it's poised to deliver in the future, it really is active and a lot of stuff is happening. As Chris said, there could be negative as well as positive developments, but the positive ones continue to outweigh the negative quite significantly. And the underwriting teams and the case management teams are just very busy with all the developments, many of which are quite positive. And so I'm pretty bullish on the portfolio and happy that we're able to share some examples of why there is that sentiment. The second thing is on the new business machine. Chris mentions that we have been able to put on very attractive from a risk reward perspective new deals over the past quarter. And I want to hammer home why we are positioned to be able to do that. We have developed deep relationships with law firms, with counterparties who continue to bring us their opportunities where they need financing for litigation portfolios or for individual litigations. And having those relationships means we are the go-to provider of finance in a number of markets. As Chris mentioned, we have activity globally across various jurisdictions. And having spent the years building up those relationships, that know-how and repeat client base we have the ability to attract and close these deals that from my perspective are quite attractive. So the team is very busy both with an active productive portfolio and with some great new opportunities that we continue to add into the portfolio. So on both fronts, I'm very happy with was where we are today. And with that, I'll pass it back to Chris.

Thanks, John. Just to carry on that theme for a second, for those of you who are Financial Times readers, you'll note that one of the top stories in the FT today concerns law firms, law firm structure, and the desire of U.S. law firms, many of them to have some sort of more flexible equity capital structure. This is a theme that has been running for a while, and one of the themes you'll take away from the article is that while there's a strong demand for these kinds of solutions, they're not really appearing in the market quite yet. We've talked about that in the past, and that's consistent with our experience. The reason I raise the article is because you will know that there is only one legal finance firm mentioned in that article at all, and that's Burford. We have reached the point where we are the undisputed market leader standing head and shoulders above anybody else in the commercial legal finance area. And that's why we see the kinds of opportunities that John was just describing. Let's turn to slide 13. We regularly get the question about older investments. and the question basically is what's going on with these? Are these ever going to produce anything or are these just sort of dead in the water waiting for ultimately them to become and killed off? And so we thought we'd do a little analysis for you to show why that's just absolutely not the case. So what this graphic does is it on the black bar on the left-hand side shows you the state of the portfolio in terms of deployed cost at the end of 2022 as to pre-pandemic vintages. And at that point, we had almost a billion dollars deployed in those vintages. And since then, a lot has happened, as you can see. We've continued to put money into these cases, more than a quarter billion dollars more.

We've taken out

close to a billion dollars in realizations. This is all in this middle three and a half year period. And we still have a fair bit of deployed capital to go. So we think that those cases, that portfolio, that portion of the portfolio is still very strong and is continuing to produce. it's just regrettable that it's you know the duration has lengthened because of the systemic delays that we have seen across the court system but you know we're still a lot a lot faster than the average private equity deal and the reality is those cases are going to come to an end they are not at all just sitting there waiting to be put up their misery the other thing I would I would Highlight for you, and this is reflected in the last bullet point, but in case it's too cryptic, let me just amplify it. When we do portfolio deals with law firms, we basically sign law firms up to a world where we will then do a series of cases down the road with them. Sometimes those portfolios are in existence when we close the deal, but often they come into existence later. And they're often cross-lateralized instructions. So what that means is that if we have signed a portfolio deal with a law firm in, let's say, 2019, and that law firm came along in 2023 with a further case to put into that portfolio, that 2023 case is going to show up as part of the 2019 vintage because of the cross-collateralization element of it. And so it's just not the case that these are sort of old and cold assets, which is what some people occasionally ask us about. We're very bullish on all components of this portfolio. So let me switch gears on slide 14 and talk a little bit about liquidity and the balance sheet. I'm going to start with the statistics on the left-hand side. The basic message here is that we are very comfortable with our liquidity and with the ability of the portfolio to generate robust levels of cash. We're sitting with $733 million in the bank. We have only $400 million of debt due within the next almost four years. So we could theoretically just turn around and pay that debt off tomorrow if we chose to do that. If you think about this in terms of coverage, and again, this reflects my focus on cash and not on arcane gap balance sheet metrics, we have a significant amount of what I think of as asset coverage for that debt. were anticipating a significant flow of cash realizations from our portfolio. And that number that you see there does not include anything from YPF. So we are covered, if you want to think of it in those terms, 2.3 times on the existing debt. And we're pretty comfortable with that state of affairs, especially when you consider the level of cash that the portfolio generates even in years that we have found to be somewhat annoyingly slow. And when you talk about slowness, you see those bars at the bottom. Slowness, I suppose, is all relative. On the one hand, this represents a not insignificant increase in the average duration of our matters. On the other hand, it's still pretty fast compared to lots of asset classes out there. It's just that you and we have been accustomed to things being faster still. So my conclusion from all of those data points is that we're pretty happy with where we are. That being said, we are certainly aware that the YPF decision was a shock. It was a shock to us inside the business and it was a shock to the market. were aware that that has resulted in market anxiety. And, you know, it's not an ideal time for the portfolio to be moving somewhat more slowly than one would wish when at the same time we have somewhat more leverage than we might wish. And so even if we disagree with the level of appropriate anxiety over that, the fact that it exists comes with real world consequences for us. For example, the implied yields today from trading in our long day to debt are higher than we would wish to see and that we think are actually appropriate for the level of risk associated with that debt. But nevertheless, we are creatures of the market and we're responsive to what the market thinks. And so that means it is prudent for us to do a bunch of things to husband cash, to focus on our operating expenses and our cash outlays, and to drive a deleveraging program that will sit alongside our growth. So we've shown here on the right a couple of things that we've done in terms of reducing operating expenses Cousin in Cash, and those continue to be priorities for us inside the business when set against the very comfortable level of liquidity that we think we have. So we're pleased with where we set, but no one should be under any misapprehension that this is not central to the management team's focus every single day, the balance sheet and our liquidity and what we're doing about that. Let me sum up on slide 15 before turning you over to Jordan. So as I said at the outset, we've been doing this for 17 years. We've developed, I think, a demonstrable and enviable track record, both of performance and of leadership and innovation in this industry. We've got a very large, well-diversified portfolio that under any reasonable set of circumstances is going to produce a very significant amount of cash going forward. We've already produced almost $4 billion of cash out of that portfolio. And we've done so with a high degree of performance and with stable and desirable loss rates. And we have demand for our capital and an origination platform just all over the world, which continues to be driven by the fact that law firms are getting away with enormous increases in their pricing declines. which is just a call to arms for people to pick up the phone and call us. So with that, we appreciate your interest in the business and your forbearance. And Jordan, we'll take you through some numbers and then we'll take some questions.

Thanks, Chris. And thanks, John. I'm going to jump to slide 17 and walk through some of the high level metrics I know Chris talked a lot about the quarter, but we'll still go into a little bit more depth with respect to the principal finance and asset management segments. But overall, on page 17, you can see the summary. We had a break-even quarter, just slightly profitable. It's important to note not to try and compare the year-to-dates between this year and last year. given the impact of YPF in the first quarter. So we're going to focus a little bit more on the second quarter results directly as the comparative. You can see on the net realized gains beating last year, same time, same with asset management income. Chris talked about new business deployments remain steady on the existing book and our realizations were 94 million compared to 62 million. in the same period last year. On the right-hand side, just hitting again on liquidity is strong at 733 million, and then you can see our debt ratios. I'm going to jump straight to page 22 and talk a little bit deeper about the portfolio. This page has had a slight different makeup in terms of how we used to show it. This is now in its totality. It includes YPF when you look at the total portfolio of about 4.1 billion. The way we break that down is the fair value of the portfolio that you see on the balance sheet and then our undrawn commitments. Recall our undrawn commitments are split into two, both definitive and discretionary. Discretionary is similar to the way Chris actually described portfolios in the sense that while we've entered into partnership with a law firm or a corporate client, there's no obligation to take on the next case if the underwriting proves that it's not worthy, whereas discretionary is allocated specific to the cases that we've already financed. Taking that fair value, though, and breaking it down, you can see our deployed cost of $1.9 billion and then $400-ish million of unrealized gains. That's about a 22% markup, so to speak, on the deployed cost. And that is quite favorable when you think about future earnings power and you compare that to the potential modeled realizations or our historical ROIC. There's plenty of room for incremental revenue to come through as we see milestones and ultimate conclusions. The right-hand side is a similar graphic to what you've seen before, which is just the breakdown of the geography as well as the asset type. And it just goes to show the breadth of the portfolio in pairs neatly to the comments Chris had made when showing the model realizations and the diversification that we have there. The portfolio is quite large and diverse by a lot of different metrics that you review. Flipping to page 23, this is the breakdown of how the balance sheet asset moved in the quarter. The income statement up above, I'm going to focus though first on just the left-hand side, which marches the asset forward. You can see deployments pretty much offsetting realizations within the book and moving the asset balance. and then you have three other items that we historically talk about. First, there's the passage of time. This is the natural movement forward as assets get closer to their ultimate realization and we recognize a portion of value associated with that. The offset to that is changes in discount rates since they're essentially a DCF Interest rates for this quarter were pretty benign and limited movement, so you didn't see a lot of movement in the asset value. And then finally, you have milestones and other model impacts. These are the recognizable events or other changes to models that we see, excuse me, to cases that we see that then is reflected in our models. I think we've covered a lot of the other content in the principal finance section during Chris's remarks, so I'm going to jump Quickly to the asset management section, page 30. Overall, asset management continues to perform. It produced around $5 million year-to-date in cash. When you compare the asset management income, though, on the left-hand side, I'd say we're pretty much right on track with where we were last year year-to-date. The reason for the difference is, well, one, As we've mentioned, many of our older funds have been running off, and so I wouldn't expect, as we mentioned before, to continue to see management fees. And the big bump in performance fees we saw last year was actually the flip over of the Advantage Fund hitting some hurdles and then the first set of performance fees coming in, and then that will be a steady intake as that fund continues to perform. and then you can see obviously the parity in the relationship that we have with our partner in the BOSC fund. I'm going to now move to cover some of the other content related to our capital structure and the balance sheet and expenses. So on page 32, just real quickly hitting up on cash, you know, the $157 million of cash was the largest in the last five quarters and obviously one of the peaks as we continue to generate cash from the portfolio. We still also have a due from settlement balance with $122 million outstanding as of the end of the quarter. On page 33, to quickly hit expenses, I want to go a little bit deeper into some of the comments that Chris had made. The first is when you compare the year-to-date salaries and benefits, and you can see there's a jump in terms of the overall nominal amount. What that reflects predominantly is the fact that we actually did a bit of cost cutting and some changes associated with senior and middle management that captures approximately $10 million of annualized compensation expense and that's across salaries, cash bonuses, stock, et cetera. The one-time impact of that shows up in a variety of different places. About 5 million, there's a one-time impact that shows up in salaries and benefits. There's an offset to that in other line items with the reversal of some accruals. So the net cost was only about 2 million to achieve that 10 million of annualized compensation expense. The last piece that I want to touch on on this page, you can see, well, two pieces. G&A has remained steady if you look year over year. In fact, slightly lower this year compared to last year. And the last piece is the case-related expenditures ineligible for inclusion. What that is in layman's terms, those are deployments that we no longer believe can be capitalized into the asset. That doesn't mean that the case isn't active or healthy. It just doesn't get put into the asset value and unfortunately comes through the income statement. We talked about that briefly last period in which we had to take, which we reversed previous expenses. So when you look at that 27, or excuse me, previous deployments, when you look at that 27 million in its totality, 25 million of that actually represents costs that would have been directly associated with funding the active portfolio. Finally, I'm going to finish on page 34 just to hit on a little bit of the debt piece and just reiterate some of Chris's comments. We have ample cash and marketable securities sitting at $733 million. Our leverage ratio is outlined on the right-hand side. And then when you look at the debt outstanding, The weighted average life of the debt is 5.2 years, and that compares favorably on a lot of different metrics, whether it's the pace of concluded assets or relative to the pace of active deployments. And as Chris and John mentioned, we're excited and still feel confident in the portfolio and its ability to continue to generate a healthy cash flow to manage through the debt load.

That concludes

are prepared remarks. And at this point, I'm going to hand over to the operator and Chris to open up for questions.

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Your first question comes from Timothy D'Agostino with B Reilly Securities. Your line is open.

Thank you for taking the questions this morning. I guess thinking about the updates regarding the portfolio, whether it be the mining arbitration, the U.S. jury verdict, or the German Supreme Court, while these cases are obviously the timing around, it's very hard to tell. Could you just provide us maybe some color on how you internally think about the timelines of those proceeding forward? Just so We can think about it, you know, till year end and as we look towards the third quarter. Thank you.

Yeah, the purpose of giving those kinds of portfolio updates is really to show people that there is momentum in the portfolio. So to, in other words, to dispel the notion that things are just sort of sitting stagnantly. and as John talked about as well, they're just not. So it's not just those handful of examples, but there is a very significant amount of activity going on across the multi-hundred case book that we have. We're not putting them out there to suggest that those things are the things that will turn into cash between, for example, you said now and the end of the year. Each of those things has some further stages in litigation to go through. But the thing that drives settlements and litigation, first of all, are catalysts. And so it's certainly reasonable to think that as you get catalysts in matters, that also opens the door to settlement discussions in a way that the absence of a catalyst seldom does. It's not necessarily that we have our eyes on those cases that we talked about as settlement candidates, but rather other cases where there are settlement discussions going on right now because there were prior catalysts. This whole thing is a continuum from the beginning of a piece of litigation to the end where there are points along the way that increase the likelihood of resolution. and that's what our business is all about. As you'll remember, we're close to 80% of our matters ultimately resolving by settlement instead of by final adjudication. This is just for common sense. If I'm suing you and I'm looking for a big check from you, the mere fact that I have sued you is not likely to have you reaching for your checkbook in a way that you weren't prepared to just a few weeks before. So something needs to happen in that lawsuit to make you think that your vulnerability is greater than you perceived it to be when you refused to pay me before we commenced litigation. That's what so much of this is all about, is using the litigation process to get to those catalysts that ultimately drive the settlements. A jury verdict is a great example of that. It's relatively uncommon for cases where we win a jury verdict to go all the way to the end of the litigation process and appeal and try to go to the Supreme Court and then enforce against assets and get paid by enforcement against assets. That's pretty uncommon. It's not never, but it's pretty uncommon. What's more common is that that act, that event, will cause a recalibration of the other side's position, and that will drive an economic outcome.

Okay, great. Thanks so much. And if I could just ask a second question. On the streamlining operating costs noted on the save to comp, I guess, is that the start of broader cuts? Like, I guess, do you see more, you know, potential operating cost savings going forward, whether it be through, you know, the senior to mid-management cuts, or is what we're seeing right now kind of, you know, the ceiling of what you plan on doing? Thank you.

Yeah, Burwood's a pretty lean business, and so it's not as though we have, you know, sort of armies of people that You see all these cuts happening at Google and Meta and so on. That's just not the kind of business that we are. We only have somewhere around 160 people right now. And so, no, it's not our intention to engage in sort of serial waves of layoffs. But what we did do here on a one-time basis was you know, we encouraged some retirements, we streamlined a few functions and so on. But I would say the other thing that we pay careful attention to is the extent to which growth requires hiring. And that's a combination of just general operating leverage. And it's also a question of our continuing ability to use technology efficiently. and both of those things enable us to do more with a smaller rate of growth in headcount than might have been the case even just a year or two ago.

Okay, great. Thank you so much for taking the questions this morning.

Your next question. Thank you. Your next question comes from Henry Coffey with Wedbush Securities. Your line is open.

Good morning. Thank you for taking my question. When we talk about cash flow a lot, I was looking at, and I did this in my head, so if I got some numbers wrong, I apologize. It looks like your cash went up significantly, as you pointed out. Your liquid assets went up significantly, as you pointed out. But when we look at net debt, it actually went up over the last six months by about $100 million. Is that correct? And maybe you could comment on what the more sequential March to June numbers look like.

Yeah, sure, Jordan can certainly chime in there. You know, we did issue that in January, though, so looking at December to June numbers is going to reflect that. Jordan?

Yeah, no, I mean, I think there was a lot of activity in the June timeframe in terms of cleaning up the historical UK issuance, and then also doing our issuance in January at that moment in time. And so I think in looking at those numbers, if I recall, I'm doing this by memory. So forgive me as well, Henry, but I think we're around 740-ish million of cash and marketable securities at the end of the first quarter. So, you know, give or take then $10 million difference when you look quarter over quarter. And obviously, then our debt balance would have been the same if you're looking at the end of the first quarter versus the end of this quarter.

Okay, so there's more balance there. And then this is a much more general question that we can get into over time. But, you know, you talk about the annualized return over time of the portfolio. How can we adjust that and I assume that's a gross number based on net realizations. How can we adjust that to account for capital costs, financing costs and the actual administrative costs and direct costs associated with that very large number?

Yeah, I think investors model this according to their own prerogatives, basically. The challenge, obviously, with any business like this, especially a business where a significant amount of our cost goes into making an investment decision in the first place, So we don't play an active role in these litigation cases once we invest in them. We certainly are engaged in a case management and monitoring role, but we're not litigating the cases. And so a significant amount of our human resource activity is sifting through the funnel of cases that are coming in the door and deciding which ones to invest in and making those investment decisions. and then there can be relatively long periods where those cases take no staff time at all. So what that does is create a fairly significant timing mismatch between the incurrence of OpEx style expenses and the cash resolution. And so in a growing business like ours, it's hard to, you know, you can't just look at it on a period to period basis. and that is the easy response as well to the people who come along and say, gee, you don't actually generate that much net profit. You have to look at, you have to sort of assign costs in some methodological way to the back book effectively. Cost of debt is easier because the cost of debt is public. and you can make your own sort of temporal assumptions along the way influenced by the fact that you can do it pretty accurately because we give you case by case resolution data and time to resolution data. I don't know, Jordan, if you want to add anything to that.

Yeah, look, I think the only piece is that if you go to our investor day about a year and a half or two years ago now, we outlined the way in which we think about unit economics. When we're underwriting today, obviously there's a duration associated with the back book in the case that it's taken slightly longer than one would have anticipated. Some of those deals, many of them have protections on the back end in terms of rising multiples or back end fee arrangements or interest rate components and so forth. But duration has extended. That thought process around duration of those go into the underwriting of new cases. And so we do think about unit economics on a very similar basis, on a go forward basis. And so, you know, there is that, that's generally how we think about how to apply the cost of debt and our OPEX into how it flows down into return on equity.

Thank you. Thank you very much. Thanks for the question.

Yeah, I'll jump in here. We do have a question that's come in on the webcast, which I'll pose for the team. Can you confirm that the cost of deployed capital on the pre-pandemic cases means that realizations relating to such have produced little or no net profit?

No, I think that's not. the right way to look at that dynamic at all. If you look at the return profile of those pre-pandemic cases, and you can sort of intuit it from the slide that I had up earlier and you can go deeper into the data if you so choose, the return profile of those cases is exactly comparable to the overall portfolio return profile. So we're not seeing a degradation in ROICs for those cases. We may be seeing a little bit of an IRR degradation just because of the passage of time, and we've talked about that before. And obviously, when you're generating those kinds of high returns, the associated cost certainly does not eat up all of those returns. Our historic weighted average cost of debt is well down in the single digits. So I think it's a quiet August morning here in New York. And I think that brings us to an end of both the oral and the webcast questions. So thank you everybody for your time and attention today. We'll look forward to reporting to you later this fall on not only the third quarter, but on our continued progress with respect to the balance sheet. And in the interim, we encourage you to be in touch with us if you have any specific or individualized questions that we didn't touch on today. Thanks very much and enjoy the rest of the summer, everybody.

This concludes today's conference call and webcast. thank you for joining you may now disconnect.