Burford: We are the law’s investment bank

Bogart: 2017 was not a one-off

Third-party funder Burford Capital described itself today as “the legal profession’s investment bank” as it recorded a 24% increase in net profit after tax to $328m (£249m).

It has also re-entered the after-the-event (ATE) insurance market, two years after it put the business it bought, FirstAssist, into run-off.

After another year of rapid growth, Burford’s income was up 23% to $420m as 26 different investments contributed realised gains to 2018’s performance, compared to 20 the year before.

It recorded an 85% return on invested capital, up from 76%, as it made $1.3bn in new investment commitments in 2018. Burford told investors that this showed that 2017’s similar commitment level – which more than tripled the prior year’s performance – “was not a one-off event”.

Assets under management in Burford’s investment management business increased 50% to $2.5bn, including the $1bn in new funding backed by a sovereign wealth fund announced last November.

Just over half (51%) of Burford’s investments are in the US, with 27% in Europe. There are 1,110 individual litigation claims underlying the investment portfolio and it is working with 60 different law firms.

No defendant represents 5% of total commitments, no single case capital loss would amount to more than 3% of total commitments and Burford’s largest law firm relationship accounts for 17% of investments across more than 50 different partners.

With the help of a new business development function, the company said it was improving the quality of leads. A new lead generated through business development activity has a 3.5x greater likelihood of progressing to funding than an unsolicited enquiry.

In 2018, Burford considered 1,470 opportunities and closed 87 of them – 5.9%, a notable improvement on the 3.8% in 2017.

Chief executive Chris Bogart said: “The big question this year was whether 2017’s explosive growth was a one-time anomaly. These results show that it was not.

“Burford has committed $2.6bn to new investments in just the last two years, more than twice its lifetime cumulative commitment level prior to that time. That is extraordinary and suggests a sea change has occurred in the legal finance marketplace…

“We also continued to grow so that we now field a team of more than 110, including 55 experienced lawyers, and we have by far the largest capital base in the business to the advantage of our clients and our investors.”

Burford’s shareholders have seen an astronomical rise in their investments in recent years – while the FTSE All-Share Index has delivered a return of 22% over the past five years, Burford has produced 1,394%. The shares were up a further 10% in early trading today.

The company’s accompanying annual report highlighted how it has evolved in recent years, with half of its commitments in 2018 outside of core litigation finance.

“To be sure, we continue to make hundreds of millions of dollars of litigation finance investments each year… but our clients have an ever-growing range of capital and risk management needs and we consider it important to meet those needs broadly.

“Investment banks have their franchises because they address client needs, and an investment bank that was only willing to do the most lucrative equity deals and refused to help its clients raise debt would struggle to lead the field and maintain relationships.

“Burford is essentially the legal industry’s investment bank, and the same rationale applies to us.

“Burford has also increasingly developed its investment capacity for complex strategies, an adjunct to our client-financing business that uses all of our same legal and financial skills without necessarily financing a client.”

It added that just investing in litigation was not “the path to creating the most valuable business we can over time” and also exposed the company to “too much risk and volatility”.

The FirstAssist ATE business has been in run-off since the end of 2016, although it still delivered $10.4m in income and $8.4m in operating profit last year. The business is “slowly drawing to a close”, with just 13 cases remaining in the £250,000+ category.

In all, the insurance business has generated $105m in income and $80m in operating profit since buying it in 2012 for $19m. It has written almost 57,000 policies, of which 77% resolved favourably and 21% suffered losses, with 2% remaining unresolved.

But Burford said “adverse cost risk remains a key issue in the kind of larger complex litigation that is squarely the focus of our core business”, and it was difficult today “to find a path forward on English litigation claims once the adverse cost exposure approaches £20m as there is limited capacity in the insurance market for such claims”.

Moreover, ATE was often a prerequisite in large cases as individual defendants were typically unwilling to take on the kind of joint and several adverse cost exposure that can exist in such cases.

As a result, Burford has re-entered the market with Guernsey-based Burford Worldwide Insurance, its own wholly-owned insurer, having previously had an agency relationship with MunichRe.

This will offer adverse cost insurance globally in both litigation and arbitration. “We have arranged substantial reinsurance capacity for that insurer from leading reinsurers, with Burford taking on 20% of the insurance risk.”

The insurer will only write coverage for matters Burford is financing. “We have high hopes for its future – although economically we are more focused on unlocking the funding possibilities in large-value cases than in making a large profit.”

Burford was sanguine about the notion of new competitors entering a lucrative market, noting that it has “a very significant scale advantage” over the other current players in the market and that all of those players were at least six years old.

“It is rather late now to believe that the market will turn into a ‘race to the bottom’ on pricing. Just as Burford believes in pricing for risk and delivering appropriate risk-adjusted returns to shareholders, these competitors are similarly sensitive about preserving investor returns and pricing appropriately.”

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