Burford Capital Limited (NYSE:BUR) Q2 2023 Earnings Call Transcript

Burford Capital Limited (NYSE:BUR) Q2 2023 Earnings Call Transcript September 13, 2023

Burford Capital Limited misses on earnings expectations. Reported EPS is $0.1 EPS, expectations were $0.32.

Operator: Hello, everyone, and welcome to today’s conference call titled Burford Capital Second Quarter 2023 Results. My name is Ellen, and I will be the call operator for today. [Operator Instructions] I would now like to turn the call over to Chris Bogart, CEO to begin. Chris, please go ahead whenever you are ready.

Christopher Bogart: Thanks very much, and hello, everybody. Thank you for taking a little bit of time to join us today. As usual, I’m joined on the call by Jon Molot, Burford’s Chief Investment Officer; and Jordan Licht, Burford’s Chief Financial Officer. We’ve had a terrific year so far, and we’re excited to be able to tell you about all of the components of it. Julian Roberts, one of our analysts at Jefferies, put out a note a couple of days ago where he said that the success that we’ve been having in the YPF case was likely to overshadow our second quarter and first half earnings, and I am determined on this slide and I’m on Slide 3, I am determined to prove him wrong about that. And the reason I say that is because if you look at the data points on the left-hand side of this slide, which are all of our core second quarter metrics, those numbers are all cash numbers and those numbers all have nothing to do with the YPF case.

Kzenon/Shutterstock.com

These are showing what the core business is doing right now, what we call effectively pillars one and two of our – of the four pillars that we talk about in terms of Burford’s value. And what they show is the business being very strong. And then, on the right-hand side, you see our first half financial metrics, which do have some YPF impact from the first successful YPF decision in March, although not any from the more recent successful decision. But they are much more than that. And those numbers collectively are the strongest in our history. Turning to Slide 4. We just have here a few overall highlights of the business before Jordan takes you into – before Jordan and Jon take you into some of the details. We’ve obviously had very significant revenue growth as the portfolio has come back to life and has started to perform, and again, I’d highlight that that second sub-bullet, where in addition to some gains from the YPF matter, we’ve had very significant income coming out of the non-YPF part of the business.

So, the business really, not to overuse an expression I’ve used before, is today firing on all cylinders. We’ve got a significant amount of new business activity going on, up materially from the last comparative period and on track to do a meaningful amount of business during the course of the year. The portfolio has continued to grow in size. We’re now sitting at a $7 billion portfolio of legal assets. When we think about YPF, and Jon is – Jon the architect of our YPF victory is going to talk more about YPF when we come to a specific slide on it. Let me just make an overall comment. We know that people have lots of questions about YPF and where we stand. And we understand that investors live in a world of wanting to know when and how much.

But as we’ve said before, we can’t answer those questions for you. Both because we don’t know the precise answers today, but also because it’s not in our collective interest to shareholders for anything that we could tell you about our strategies and approaches to be public. It would be value-destroying for us to do that and I think you’ll all understand that, much as you might want answers to your questions. But you’ve heard me say for many years that litigation takes longer, costs more, and produces less than people expect, and understanding that is a core part of our investment process. We look at investments hard and apply those factors when we make these choices. So, a pretty good approach in every litigation case is to assume those principles, including in this one.

See also 10 Best African Stocks To Invest In and 12 Best Affordable Tech Stocks To Buy Now.

Q&A Session

Then when really good things happen like last week’s top-of-the-range judgment in YPF, it’s always a pleasant surprise. Beyond YPF, as we have said throughout this process with the U.S. Securities and Exchange Commission, we thought this was a constructive process. We thought it was one that was going to come out in a satisfactory way and indeed that has happened and the SEC has confirmed that they have completed their review with no further comments. And Jordan will talk later about our liquidity and capital markets access, but we were pleased to have another successful debt issuance during the quarter. And just before I turn you over to Jordan for some details, it’s not on the slides and I’m sort of wary of trend-driven slides. So, you’re not going to see from us every presentation a slide about AI.

But I also wanted people to understand that AI is exciting for us, that we have been active in this area for years, and it’s very much front of mind. And so I thought I would call out today the lead story in Ross Todd’s American Lawyer, which is the – one of the leading industry publications, reporting on an event yesterday that Burford ran for AI in the legal sector, where knowledgeable people came together and likened what was happening with AI and law to the revolution in Quantum Physics. And the reason of course that’s being said is that, with the advent of large language models in a commercially viable way, pretty much everything that lawyers do is a language task in one form or another. We’ve been using and investing in data science for years as we’ve talked about in the past.

We’ll continue to do that, and we’re optimistic that over time, AI will both improve and increase our business efficiency, as well as opening new opportunities for this business to continue to grow. And with that, Jordan.

Jordan Licht: Thank you, Chris. I’m turning to Slide 5. A quick snapshot of the total numbers before we dive deeper into each of the different components. As Chris mentioned, we continue to see momentum in the portfolio. This year is highlighted by earnings of $1.07 in the first half of the year and a book value per share now of $8.87. I’ll hit on a couple of key points here. So, capital provision income is up considerably in the first half of 2023 versus the first half of 2022. And when looking at the quarter, we also see a significant increase period-over-period. Both second quarters in 2022 and 2023 were impacted by the underlying change in our discount rates. As you’ll recall, our revised valuation policy takes into account duration and time value of money, and in the second quarter, the increase in market interest rates caused the overall discount rate of the portfolio to rise 70 basis points which depressed asset values.

To give you a sense of magnitude, isolating that change alone had a negative impact of around $94 million on a consolidated basis, and even when offset by the passage of time, it remained a headwind. However, we are happy to have completed our work with the SEC and progressing our valuation approach to incorporate similar elements of duration, time value that other large firms like Blackstone or KKR incorporate. This is going to create real volatility in our GAAP reporting based purely on market forces that aren’t going to impact anything with the ultimate cash flows of our investments. And unlike other investments in private equity, the ultimate exit value of our investments is not dependent on interest rates or market factors at the time of exit.

Turning quickly to some balance sheet metrics on the bottom of the page. Burford-only capital provision assets are over $3 billion, a significant jump and the highest level in our history and our equity position is just shy of $2 billion. I’m going to move to Page 6 and discuss our new business activity. Again, 2023 has been productive in the first half of the year and as the global leader in litigation finance, we have the ability to support our clients with significant commitments and deployments of capital, whether that’s using our balance sheet capacity or our third-party funds. This is demonstrated in Q2. I want to highlight one significant transaction where we delivered a $325 million commitment to support a portfolio of assets for a Fortune 50 company.

Even absent this deal, we had close to $200 million of capital provision direct commitments in the second quarter. Importantly though, what deals like this show is the continued appetite by large corporates for the kind of financial solutions that we can provide for their litigation portfolios. Moving to the bottom of the Page, we outline our deployments, which highlights our continued build-out of the balance sheet, with $181 million of deployments. And then now, let me turn it to Jon to discuss realizations in the portfolio.

Jon Molot: Thanks very much, Jordan. Thanks to you all for joining. I’m very excited to be here with you. It’s such a great moment for Burford. If you look at Slide 7, you see – really, I have been talking for a while about how we have built up this great portfolio that I have great confidence in, and it – it’s taken time to work its way through with COVID and you just see that we’ve got a record level of trailing 12-month Burford-only realizations, $475 million. And that’s whether you measure this by looking at the period-to-period, so you look at the first half of ’23 versus the first half of ’22, whether you look at it at the trailing 12 months as of now versus a year ago, either way, the numbers are up. We’re just – we’ve had – have a larger portfolio that is producing more cash realizations for Burford.

And if you look at the right side of the slide, you see we’ve done that without any sacrifice in the quality of these matters or in our return levels. We’ve kept it the same return on invested capital, the same IRR from concluded cases even though we have a larger pool of things that has resolved. And that’s all very positive and very much just in keeping with the business plan. If you turn to Slide 8, which is a slide we’ve seen before, but of course is updated with current information. I love this slide because it packs a lot of information in there. The bottom shows you our performance historically. It shows the IRRs by vintage year. The bars on the upper level show you a couple of things. The red bars show you by vintage what we’ve harvested, what the realizations are and you can see over time how those numbers, the larger vintages once we undertook a real growth campaign, has produced more in cash revenues and that really reflects what we saw on Slide 7.