Burford Capital

Burford Capital is the world’s leading provider of litigation finance:

1. Listed in London since 2009, Burford has a market capitalisation of $2.5bn and generated $726m in revenue and $576m in operating profit for the first nine months of 2023
2. Revenue and profit have compounded at 44% and 7% p.a. respectively since 2010
3. Led by its founders and renowned in the industry as the innovative thought-leader, our proprietary primary research checks have unearthed a comprehensively positive assessment of Burford from customers, ex-employees, law firms and peers
4.  The company has a proven record of widening its relative competitive advantage and has established itself as the leading operator by revenue, market share, innovation, customer service and underwriting skill
5. As a result of this widening competitive advantage, Burford has the potential for improved returns on capital versus the past, which is not being captured by the stock market at present
6. The growth opportunities are vast and the nature of the business model means that Burford has substantial, unpriced optionality if any of its present or future cases prove to be ‘blockbusters’, such as the recent ruling in Burford’s favour against Argentina regarding YPF; a case that is worth up to c. $6bn to Burford (versus the market capitalisation of $2.5bn)
7. Valuing Burford is an imprecise exercise, but we assess the company to be worth £32-38 a share by the end of 2026, offering c. 200% upside from the current share price of £11-12

Fig. 1: Historical financials

What is litigation finance and what is Burford’s business model? Burford and other litigation finance companies are similar to a lending bank company in that they underwrite risk and provide capital to the plaintiffs up front.[1] Unlike a bank, Burford and peers are not regulated nor does Burford operate with levels of leverage seen at banks. Also unlike a lending bank, Burford’s lending has a performance related component: if a plaintiff’s claim is successful in court or settled pre-trial, the damages awarded first go to repaying Burford’s investment and then are split between the plaintiff and Burford. Burford therefore shares in the upside of any large wins, incentivising Burford to continually maximise underwriting standards and seek out underwriting the most compelling claims.

Prospective claims are generated in three ways. Firstly, from Burford’s own outbound sales team. Secondly, from law firms on behalf of their clients[2]. Thirdly, from corporates directly (rather than via law firms). Outbound and direct are increasingly common channels and underappreciated by investors as a source of competitive advantage versus smaller, less sophisticated competitors.

How does Burford underwrite claims? Claims are initially screened by sales teams, client managers and, increasingly, AI tools, before being passed to underwriters for assessment. The underwriters are ex-lawyers from top-tier law firms who assess the legal merits. Prospective returns and the practicalities of collection also form part of the assessment. Investment committees comprised of experienced managers assess all claims before capital is deployed. Some competitors outsource underwriting (e.g. legal analysis to law firms or financial risk/reward analysis to third parties). Burford’s model of fully in-housing all core competencies means that knowledge continually gained helps improve future underwriting.

Burford focuses on the largest legal claims globally, which tend to be less competitive and therefore offer higher potential returns. In this sense, Burford is similar to a leading investment bank, e.g. Goldman Sachs or Morgan Stanley, in that Burford is able to focus on the high-end of the litigation financing market and has developed a reputation/brand for being the funder-of-choice for large and complex claims.

Very few peers have the means to underwrite large claims in the way Burford does. Most peers do not have the balance sheet capacity to risk underwriting individual cases that might involve $25m+ of capital (some claims cost over $200m). Burford has amassed one of the largest proprietary data sets to support underwriting decisions. Most peers do not have the breadth or depth of Burford’s proprietary dataset in general nor in relation to large, complex claims (which, by definition, are relatively rarer).[3] This means that peers have (i) less ability to correctly underwrite the risks of large cases than Burford, and (ii) less capital to take those risks. Burford’s average claim size has increased as the company has grown in size. We estimate this trend should lead to an increase in returns on capital which is not being recognised by the stock market, as outlined below.

Only 4% of claims that Burford assesses are underwritten. Burford’s portfolio of claims is diversified by number (with over 200 cases currently ongoing), meaning that the impact of any one case not succeeding is normally minimal to the group’s fair business value[4]. Cases are also uncorrelated, with Burford deliberately seeking diversification of geography, sector and type of claim.

Burford, as the leading litigation finance provider globally, is literally expanding the size of the market each period. Every year, there is roughly $800bn spent on legal processes – a staggering figure. Many corporations have not historically funded meritorious legal claims themselves for a range of reasons. For example, because the company’s legal function is seen as a cost, not profit, centre. Or, for example, because investors in public companies do not typically like to see operating expenses increase (e.g. from funding legal claims that may or may not pay out years into the future). Neither do management teams whose short-term bonuses might be negatively affected by the company funding such claims, even if successful. By funding the cases via a litigation finance provider, companies can benefit from a “no win, no cost” payoff profile.

The addressable litigation finance market is very large. Whilst defining the exact market scope of the addressable market is difficult, it’s clear that the TAM is at least 10x Burford’s current level of capital deployment. As such, we assess that the size of the market should present no impediment to Burford’s growth in the coming decade or beyond. From an ESG perspective, far from seeing themselves as merely providers of finance, Burford believe that they are helping fund meritorious claims for wronged parties and, to an extent, therefore facilitating justice in society. We think that’s a fair characterisation of their activities and motivations.

Burford has generated a fairly consistent 90% return on invested capital (“ROIC”). The average case duration is 2.5 years and Burford, on average, generates a 90% return on that capital (i.e. $10m invested returns $19m in 2.5 years, on average). This equates to a c. 30% IRR. This ROIC and IRR is stated before Burford’s taxes and operating costs, e.g. the underwriting team, technology and IT, overheads, etc. When Burford’s operating expenses are taken into account, Burford’s post-tax return on operating capital employed (“ROCE”) – NOPLAT divided by invested capital – is around 20%. This is a solid level of unlevered ROCE for an industrial company and a very high level for a lending business. Burford provide excellent disclosure of every single case underwritten (over 450), allowing us to corroborate these aggregated returns.[5]

We believe Burford’s ROIC has a good probability of increasing in the coming years towards 130%. Average case size has increased over time. As these cases have far less competition, Burford is likely to be able to underwrite them at better economics. Burford is also increasingly underwriting “claims families”. These are collections of claims that share similar characteristics or are directly linked. A law firm pursuing a claim on behalf multiple similar plaintiffs for the same reasons multiplies the potential payout linearly whilst the cost of underwriting the incremental claims increases only fractionally, leading to operating leverage. This ROIC would translate into an unlevered ROCE of 25 to 30%. This is not being discussed by any sell-side analysts and, therefore, we believe is highly unlikely to be priced into the current market perception. The impact of this dynamic manifesting will be material to (i) free cash flow generation, (ii) fair business value, and (iii) the stock market’s perception of the company (i.e. the trading multiple).

Burford has built up a differentiated and resilient source of funding versus competitors. Burford benefits from being able to draw on its own balance sheet, debt financing and a third-party fund management business with multi-year locked-up capital from institutional investors, such as endowments, foundations, pension funds and sovereign wealth funds. Unlike Burford, most peers possess only one source of financing (e.g. case by case financing or balance sheet only); this makes their funding structures less flexible and more fragile. It is easy to under-appreciate the (i) resilience and (ii) ability to capitalise on optionality that Burford has created by structuring its sources of funding in such a thoughtful, deliberate manner.

An increasing percentage of Burford’s claims are not competitively sourced. Burford has an ‘origination’ engine that is far more sophisticated than peers (especially versus generalised lenders expanding into litigation finance), meaning the company generates more and more leads for new claims directly in a way that leads to limited competition. Furthermore, Burford has long-standing relationships with most top-tier law firms who operate as content middlemen that continually funnel business to Burford, as detailed in footnote 2 on page 2.[6] Less competition for claims can benefit both Burford’s revenue growth and returns on capital.

The barriers-to-entry are low but the barriers-to-persistent-and-profitable-scale are high. Given Burford “only” provides financing, we have spent significant time assessing the relative surplus customer utility that Burford generates for plaintiffs and law firms versus competitors and substitute offerings - outlined below – wary that the potential competitive advantages for funding businesses can be relative narrow.

Competition from alternative investment management firms is stable. Generalist lenders (e.g. Fortress, Elliott, Centrebridge or D.E. Shaw) have large balance sheets and can, in theory, hire an experienced litigation finance team. (All the above names have funded litigation finance in some form.) But these teams must have a large network of contacts at law firms and corporates and they must build out client-service capabilities that are far more complex than a typical investing “desk” at an alternative investment management firm. Furthermore, these generalised lenders often lack the long-term commitment of Burford. How probable is it that senior decision makers at Elliott or Fortress close down or constrain capital to the litigating financing business at some point in the future? How committed are these businesses to being a long-term funding partner? Burford’s commitment to solely focusing on litigation finance lending is a genuine draw for prospective customers.

Just as with a Blackstone or a J.P. Morgan, any specialty finance business model requires continual strong execution to keep widening the ‘moat’ versus competitors. This is tougher than it looks and has led to Burford’s specialised litigation finance peers experiencing various challenges in recent years, often involving a combination of struggling to generate sufficient returns and therefore struggling to raise capital, and therefore struggling to invest in the best talent customer propositions. In theory, as a provider of capital, Burford’s services are somewhat fungible. But, as Yogi Berra said, “In theory there is no difference between theory and practice - in practice there is”.

Burford is led by an impressive team of founders who are regarded by many in the industry as genuine thought leaders. The management team own over 10% of the shares, giving them multi-hundred million dollar alignment of interests with shareholders. All our primary research checks have indicated that Burford embodies the culture and behaviours that we seek in a typical  investment: a culture of long-termism, innovation, adaptability and drive. Indeed, we were positively surprised by the comprehensiveness of the positivity we unearthed from our checks – even competitors spoke about Burford’s customer proposition, strategic vision and execution. The quality of the board of directors, controls and governance has improved materially as the company has grown in the last decade.

As an owner-operated business, Burford deploys its own capital and directly links most of employees’ compensation to the success of each year’s claims. This makes Burford more akin to a financial services firm like KKR or Blackstone than a law firm that bills by the hour or a hedge fund where portfolio managers get paid on the success of their individual investments only. Salaries are lower than for law firms, but total compensation can be higher – this attracts bright minds with the appetite for assessing and taking risk. Compensation is linked to the performance of the entire firm’s claims in that year, rather than just the claims an individual underwrites, which incentivises a focus on the team and not the individual. These subtle differences are easy to brush over but, in our experience, are exactly the sorts of small, thoughtful long-termist organisational decisions that high-quality companies make and likely contribute to Burford’s continued outperformance in growth and customer satisfaction versus peers over the last decade.

Burford’s track record here across many dimensions is consistently top decile versus other litigation finance specialists and gives us confidence Burford’s relative competitive advantage is gently widening over time. 1. Burford’s brand / reputation with clients and law firms is best-in-class, which means Burford is almost always shown the most promising potential claims. 2. Burford’s leadership group is in the top decile versus peers for thought-leadership, stability and alignment of interests with shareholders. 3. Burford’s proprietary case data (of privately settled and publicly reported) of cases is market-leading. 4. Burford’s investment in data analytics, machine learning and AI more innovative and comprehensive than peers’. 5. The resilience of Burford’s funding means that the company is able to create funding structures that others cannot. As we assess Burford through each of the dimensions of our relative competitive advantage frameworks, (i) we consistently see top-decile or best-in-class rankings, and (ii) we see evidence of that relative gap widening over time.

Accounting rules make Burford’s profit and loss statement volatile. We think this directly contributes to Burford’s mispricing in the stock market. Burford’s business model is simple: it invests operating expenses in the gathering and underwriting of claims, and then provides funds to a very select number of claims that, on average, generates a 90% return approximately 2.5 years later. Accounting rules mean that litigation finance companies only book revenue when a major and positive legal milestone is reached, e.g. a settlement is agreed or a case is found in the plaintiff’s favour. Each case’s timeline is idiosyncratic, as is the deployment schedule for Burford’s capital on a quarterly basis. Because Burford is continually incurring operating expenses (e.g. employee costs, IT and technology costs, etc.), Burford’s revenue and profit can therefore be volatile. This makes assessing underlying business trends from the reported revenue, profit and free cash flow difficult. Instead, (i) the amount of capital deployed and (ii) the ROIC earned on completed cases are the most illuminating metrics for the health of the business.

We think Burford can grow deployed capital by 10% p.a. for many years without compromising ROIC. When assessing any underwriting business, it’s critically important to be sceptical of the quality of the company’s growth. Any lending business can grow by underwriting bad risk. (Though we would note again that, because of the conservatism of accounting convention in relation to litigation financing, Burford’s P&L statement is significantly less at risk of being superficially inflated by bad underwriting standards than a traditional bank or insurance company). Burford disclosing returns on capital per case each year is very helpful for us tracking whether underwriting quality is deteriorating; we see no evidence of that. In fact, the opposite, as noted on page 3. Additionally, the substantial equity ownership by business’ leaders directly incentivises underwriting standards remaining high.

At least four positive dynamics mean the Burford investment case is inflecting positively here and now. (i) Many legal processes stopped during COVID which slowed case resolution and revenue recognition and free cash flow generation. There will be a bolus of case resolutions through 2024 and 2025 as a result. (ii) Burford’s push into larger claims and claims families should lead to returns on capital through 2024 and 2025 that are above the stock market’s expectations. (iii) A number of Burford’s listed competitors have been struggling in recent years with their underwriting standards, raising new capital and retaining talent, whilst the unlisted competitors do not appear to be growing their deployed capital base in the same way as Burford. (iv) The probable resolution of Burford’s $16bn case against YPF and Argentina.

Burford can plausibly earn $6bn from one claim: YPF. As a reminder, Burford’s market capitalisation is c. $2.5bn or £11 a share. We believe that the core business is worth £20-25 a share and the YPF claim is plausibly worth £10-20 a share and that this decade-long process is moving towards the final innings where Burford and plaintiffs are paid. In 2010, the left-wing Argentinian government expropriated the NYSE listed shares in YPF, an Argentinian oil producer. In 2023, after a lengthy court case, the New York judge ruled comprehensively in the plaintiff’s favour that the Argentinian state had deliberately broken its very clear contractual obligations.

Whilst the YPF case is a large one – the judge awarded damages of $16bn plus interest that accrues each year – the case is straightforward from a legal breach-of-contract perspective. There are still some legal arguments ongoing, but they are broadly ‘delaying tactics’ from Argentina’s US lawyers. In essence, the case has now moved to the “collection” phase – the typical “end game” for litigation financing. Over the last year, two major developments have materially shifted the probabilities of a large payout to Burford. Firstly, the court ruling in Burford’s favour and awarding of the maximum amount of damages. Secondly, Javier Milei coming to power in Argentina in 2023. Milei is a libertarian politician that believes in capitalism, free markets and the need for Argentina to work harmoniously with the private sector and international financial markets.

The probability that Burford will win a $4-5bn cash payout is far larger today than a year ago. 1. Milei has continually commented that Argentina must be trusted to pay its international debts if it is to be able to borrow on sovereign debt markets like any normal sovereign creditor - a key plank of his strategy to turnaround the struggling economy. 2. He has also explicitly acknowledged that Argentina expropriated YPF illegally and that the obligation must be paid: He has even gone so far as to propose a bond to repay the obligation named after the politician that facilitated the expropriation. 3. Burford’s management was in Argentina recently meeting with senior Milei administration staff. 4. For all the noise associated with Argentina’s being a bad debtor country, it actually has a consistent reputation of paying up once legal rulings are issued against it. 5. Repsol, which owned part of YPF when it was expropriated, was paid 50¢ on the $ by Argentina and that was years before the legal ruling in the plaintiffs’ favour. Burford is set on settling for substantially more (50% would be c. $3bn) because of its strong legal position.

YPF is probably worth £15 a share and could plausibly range from £11 to 22 in value. Burford’s share price has risen in the last 18 months as the YPF case milestones have resolved positively. We assess that the share price has risen c. £4 in relation to YPF (out of a £11 current share price). Our modal payout forecast is $4.3bn, which is worth £15 (£11 excluding the £4 in the price) a share. £11 a share in unpriced-in value implies 100% upside to the share price just from the YPF case. A full pay-out is worth £22 a share (£18 excluding the £4 in the price) or 160% upside.

Conversely, YPF is also the most plausible near-term risk to the investment case. As noted, we estimate the share price has risen c. £4 in relation to positive YPF news in the last year. Whilst our assessment is the risk/reward skew is very tilted to the upside, there is still the risk of £4 (or more) retracement risk to the share price. That is 30 to 35% of the current share price. Public market investors can be capricious and we expect they will overreact to any superficially alarming developments regarding YPF. Changes to the case’s legal outcome are highly improbable but possible. Collection of the claim is plausibly a complex process that may take a number of years, which we factor into our forecasting.  

Fig. 3: Forecast financials – base case[7]