Burford Capital Limited (NYSE:BUR) Q2 2022 Earnings Conference Call August 9, 2022 10:00 AM ET
Christopher Bogart – Chief Executive Officer
Jonathan Molot – Chief Investment Officer
Kenneth Brause – Chief Financial Officer
Conference Call Participants
David Chiaverini – Wedbush Securities
Julian Roberts – Jefferies
Andrew Shepherd-Barron – Peel Hunt LLP
James Hamilton – Numis Securities Limited
Thanks very much, and hello, everybody. Thank you for taking some time in what is almost the middle of August to talk about Burford and our interim results. As usual, I’m joined by Jon Molot, the Chief Investment Officer; and Ken Brause, the Chief Financial Officer. The three of us will take turns going through our slides with you.
We promised to do that somewhat more briskly than we did in our annual results call, and then we’ll be happy to take any of your questions. Before we jump into the meat of the slides, I’d also — I’m also happy to report in addition to our earnings on an announcement that we also made today about a new appointment to our Board.
We have — as all of you know, we have been engaged in an overall refresh of the Board. This is the last new appointment that we’re making. So this will be the fifth new director that we’ve appointed in the last two years. And this is a particularly exciting appointment as Dr. Rukia Baruti, who is an experienced arbitration practitioner and the Secretary-General of the African Arbitration Association.
So not only is Dr. Baruti a very experienced and knowledgeable lawyer and arbitration specialist, this represents not only another woman, but a racially diverse candidate to our Board. And this is big news in the legal sector. For example, this is already the breaking news story, the top new story on Global Arbitration Review today, which is the leading arbitration publication out there. So in terms of Burford’s corporate presence, she’s a great addition to the Board as a Non-executive Director. And it’s certainly also an appointment that has made some waves in the legal community that we serve.
So now moving to our results and turning to Slide 3. Fundamentally, we’re going to talk about two key issues as we always do. The new business that we create, which ultimately sets the business up for future profitability and then the progress of that business through the pipeline, through the investment process and, ultimately, the creation of cash gains from it.
On the new business side of the ledger, we were very pleased with the first half. We actually struck a new record for commitments on a Burford-only basis. And as a reminder, Burford-only commitments are the number that we watch the most closely because those are the commitments that will ultimately drive the largest volume of shareholder profit.
We provide statistics for our overall level of activity, which includes the work that we do in some of our lower-returning funds, for example, just as a measure of what the whole business is up to. But in terms of the things that are ultimately really going to drive future profit for shareholders is that Burford-only activity that is the most significant.
And so hitting a new record in new business, even while the legal industry is still recovering from the pandemic and figuring out how to work in a new way, made us very happy. And it wasn’t just a first half record. It’s also the fact that we’ve been able to keep up that new business at a strong pace throughout the pandemic, writing quite a lot of that new business. And part of the dynamic here, as some of you will recall, is that we tweaked our arrangement with our sovereign wealth fund partner so that now the Burford balance sheet is taking 75% of new deals instead of the prior 50%. And so that is driving as well the ability to retain more of those high potential profit deals for the balance sheet. So the other thing that we saw with great excitement, candidly, is that court activity really did start to resume during the period.
Our consolidated income from doing litigation finance, our core business grew 31% period-over-period. That, of course, flowed all the way through the income statement. But what that really represents for us is a sign of life in courts that in many instances have been somewhat more abound and affected by their ability to hold, especially in-person trials during the pandemic. So we’re very pleased with that.
We’re not anywhere close to being all the way back. There are still meaningful backlogs in courts. They vary widely by geography. In the text of the interim report, we gave one — just one example of how great that [indiscernible] can be. In the Eastern District of New York, which is the federal court district that serves Brooklyn and other parts of New York City, except Manhattan, you’re still at about a 55-month wait to get a case from filing to trial, whereas in the northern district of Florida, so the north part of Florida, that delay has really fallen sharply, you’re down to not much more than a year. So we look forward just to continuing to see some increased velocity in the portfolio as court activity does resume generally.
The other things I’d note, just on the P&L side, in addition to the activity that we saw in the first half, we’ve also seen some post-June 30 activity. One of our larger matters had a partial — a level of activity that was effectively a partial resolution of some of what we’re invested in there. And that — even though none of this is in our June 30 numbers, we would expect all things remaining equal to generate more than $50 million in consolidated profit during the second half from that portfolio activity.
And then we have a meaningful discussion in our interim report about some — like many other companies, some noncash items that affected our bottom line profitability for us, a combination of noncash charges and foreign exchange, some interest rate impact, again, noncash and unrealized and some tax peculiarities. And those together reduced our bottom line net income by about $25 million or so.
The other thing is that we have this sort of unusual split of foreign exchange where we actually had negative foreign exchange activity in the top of the P&L, so above the net income line. And then we had quite positive foreign exchange activity because of our sterling debt in the bottom part of the P&L, below net income, hitting just comprehensive income. If that bottom line stuff had been above the line, that would have added another $35 million or so to net income.
So there was a fair bit of foreign exchange activity, again, all of which is noncash. And then in other developments, we’ve raised money $1 billion of external capital this year between a combination of the new debt offering and two new funds that we closed. So on the — both on the fund side, we have significant financial resources there. And on the balance sheet, we have meaningful liquidity available.
And finally, the simple and somewhat unfortunate reality perhaps for the world at large is that economic distress tends to yield a lot of litigation, insolvency and other litigation, and we’re going to, we believe, start to see the impacts of increased interest rates and the decline in government stimulus.
Then turning to just Slide 4. This really just captures graphically the point that I was making earlier. But if you look on the left, this is the total portfolio that we have. That’s been growing even during a pandemic, we’ve got about a five-year — a five-year 20% CAGR there. And the thing that I think is particularly notable is the graph on the right.
So even though we’ve been able to grow the business significantly, more than doubling the portfolio in size from 2017, we have been able to do so while maintaining those consistent returns that we’ve been very proud to be able to deliver.
Turning to Slide 5. This again is just a graphic visualization of what I described earlier on the left with record new commitments for the Burford-only balance sheet. On the right, you see the cash deployment. And those are down a little bit. That shaded area is because we did a deal towards the end of June, a fairly large law firm deal that still has a couple of closing conditions left to satisfy before we actually put the cash out the door. But it’s a — it will be that deployment, presuming that those closing conditions are satisfied soon.
And then finally, I often, as you know, talk to Slide 6 and 7 together and I’m not going to spend much time on them. We use these slides repeatedly to show what’s going on in our business. I would just highlight for you that when we talk about the returns that we’ve been able to generate and we talk about our track record and our performance of generating high and asymmetric returns, we’re now doing that off of almost $2 billion of cash recoveries.
So this is pretty clear evidence that this is a ongoing and repeatable model and that we are now demonstrating a very significant and long-term track record. And I would just emphasize that all of the numbers that we’re providing here are cash-based numbers, there’s no accounting for value in any of these. So that’s almost $2 billion of cash that we brought back in the door with the kinds of returns that you see there and that continuing asymmetric distribution in the portfolio that Slide 7 indicates.
And with that, I’ll turn you over to Jon Molot and go to Slide 8.
Thanks, Chris, and thanks to you all for spending time with us today. On Slide 8, we talk about the timing and process of YPF matters. I won’t talk about substance as is our practice. If you’re a lawyer or you have lawyers working with you, I’d encourage you to just read the brief. The substance is pretty clear if you can wade through all of them because the defendants threw in a lot, but I think it is clear.
So if you look at the timing, discovery is complete as of the end of March. That meant we went through fact discovery, expert reports, expert depositions. Summary judgment motions were filed in April, but both sides, that is defendants filed a motion saying that — asking the judge to enter judgment for the defendant without holding a trial. Plaintiffs filed a motion asking the judge to enter judgment for the plaintiffs without holding a trial. Responses were filed to those motions in May, and then reply briefs were filed at the end of June and that is complete now.
The timing of when the judge will resolve them is up to the judge. She has been attentive and responsible in managing the case, and she will schedule presumably oral argument. Basically she has the option. She could grant summary judgment in full. If she grants summary judgment in full for the plaintiffs, although there will be a right to appeal, the defendants, if they do not post a bond or obtain a stay of execution will be subject to enforcement proceedings. Plaintiffs will be able to begin enforcement following the entry of a final judgment, absent one of those things.
If the judge enters summary judgment for the defendants, there’ll be a right to appeal and it is de novo review. That is the district court decides matters as a matter of law without considering facts or resolving factual disputes. And therefore, the appeals court reviews that de novo that is, again, without any deference to the lower court.
The court could decide instead either to deny summary judgment in full and hold the trial or to resolve some issues at summary judgment and hold the trial on the remaining issues. If there is a trial, the parties have stipulated that the trial shall happen 115 days after the issuance of the summary judgment decision. And that’s pretty much the timing of the YPF matters.
Turning to Slide 9 to give a little more granularity on what Chris described before about the rest of our portfolio, you can see in those red bars what percentage of each vintage of our investments has resolved. And not surprisingly, the older earlier vintages have had a much larger percentage resolve and the younger vintages, the more recent ones have had a smaller percentage of their cases resolved.
If you look at the black bars, this echoes what Chris talked about, the explosive growth that we enjoyed some years ago and the pace we’ve been able to continue to put out capital. The more recent vintages that happened to have a smaller percentage resolved also are larger than the earlier vintages. So it stands to reason that in the coming years, we will expect resolutions from vintages that are larger and have more outstanding. The business has grown and the resolutions will grow as time goes on.
And the weighted average life of our concluded portfolio by realization at least, has remained relatively steady over the past few years, but we’ll talk a bit more about delay. And if you turn to Slide 10, Chris did talk about. We’re very pleased that the pace of case progress is starting to increase. The courts are working very hard to catch up. There still is the issue of criminal trials have to come first and there are backlogs from before.
And remember, whereas the rest of the world always wants to move forward and not have the legacy of COVID hold them back, defendants always have an incentive to delay matters. And therefore, to the extent that they can use backlogs or COVID or something as an excuse, they will use it, but courts have been much better about moving things along.
Remember that none of these delays have impacted the merits. None of our cases have lost because of it. No point it has given up a case. They’ve just affected the duration. And we also have mentioned in the past, sometimes the extension of timing can actually enhance our returns that our deals may be structured to increase our percentage or our multiple as time goes on.
Meanwhile, the fact that there are economic challenges and disruptions that Chris alluded to, that were associated either with COVID or with the withdrawal of government subsidies in the aftermath of COVID, that does potentially lead to opportunity for us that we see because people don’t chew each other when things are stable and going well and growing and deals succeed, they chew each other when something goes badly.
And so a combination of insolvencies or disappointed expectations in deals or bad corporate conduct leads to litigation. And that litigation often needs financing, particularly in times of hardship. So we’re poised right now with, as I mentioned, a very large portfolio of recent vintages that we’ve been able to continue to put out, right, other than that blip in the first half of 2020 when the world shut down and we slowed down, we’ve continued to commit and deploy capital throughout the period.
We have these vintages and they’re poised to move forward as the courts have continued to reopen and move along. And we see plenty of opportunity to put out new capital. We’ve worked on geographic expansion and expanding our product offering. So it’s a very good time at Burford would be my feeling.
And with that qualitative discussion of the business, I’ll then turn it over to Ken to go over the numbers.
Thanks, Jon. And yes, I will now walk through our first half financial results. Good morning, and good afternoon to everybody. And just before I get started, I just want to make it clear that all of the figures I’m going to discuss are on a Burford-only basis unless I state otherwise.
So I am on Slide 11, where we have some key financial metrics. And starting with the income statement. Revenue was strong. Capital provision income rose 11%. That was primarily driven by growth in net unrealized gains, which represented 71% of total capital provision income and is indicative of the increase in court activity. And asset management income rose, I’m going to provide more detail on that topic shortly.
Operating expenses declined from the first half of last year, which, as you may recall, included $34 million primarily related to the conclusion of an asset recovery matter. And these all contributed to a meaningful improvement in operating income, which was $27 million compared to a small loss in the first half of last year.
Despite that strong revenue and expense performance, we had a few other items that went the other way. For one, finance cost increased primarily as a result of having a full reporting period with the debt that was issued in April of last year as well as running with temporarily higher debt balances this half, given the timing between our new issue in April of this year and the repayment of the debt that was due in this month that we repaid in May.
And in what may seem like a bit of an anomaly, although we reported a pretax loss for the period, we reported income tax expense of $8 million as we maintain a full valuation allowance on the deferred tax asset that’s related to disallowed interest expense for U.S. tax purposes.
Our cash taxes paid in the period though were less than $1 million. And we are a global business. And while we do our best to minimize the economic impact of currency fluctuations, the strengthening U.S. dollar did have a negative impact on our bottom line as it did for many other global companies, but had a benefit in comprehensive income.
So our pretax income included noncash foreign exchange costs of $10 million. $7 million that was within capital provision income that generally reflects investments in currencies other than the U.S. dollar or sterling and the rest was in other expense, which represents cross-currency transactional items. Those above the line costs, however, were more than offset by a $35 million benefit from foreign exchange translation and other comprehensive income, OCI, largely related to our sterling-denominated debt.
And also the rise in interest rates that resulted in unrealized losses on our portfolio of marketable securities through which we manage our excess liquidity. So putting it all together, we reported a first half net loss attributable to Burford Capital Limited shareholders of $21.5 million or $0.10 per diluted share, both of which improved from last year.
The balance sheet remains strong with an increase in capital provision assets and ample liquidity to support future growth. And despite the reported loss, tangible book value per share rose slightly from year-end to $6.48.
Moving to asset management, which is on Slide 12. We continue to have success as an asset manager, both in terms of capital raising and income. We closed two funds in the first half, the $360 million Burford Advantage Fund, which focuses on pre-settlement matters and the $350 million Burford Alternative Income Fund II or BAIF II, as we refer to it, which is the successor to our previous post-settlement funds.
And as Chris mentioned, we also extended to the end of next year, the investment period for BOF-C, our pre-settlement strategy arrangement with our sovereign wealth fund partner. That agreement also shifted the asset allocation from an even split to one in which we now allocate 75% to our balance sheet, thereby increasing our portion of these highest returning assets.
Asset management income for the period increased by 45% to $17 million, up from $12 million in the first half of last year. This increase was primarily driven by growth in income from BOF-C as the core litigation finance assets in that fund continue to season. Management fees declined slightly from the prior year period. We continue to earn these fees from BAIF and BOF. But since BOF is now past its investment period, our management fee rate on that fund has declined, and we recognized performance fee income of $2 million from BAIF, of which we had none in the first half of ’21.
Performance fees are somewhat variable period-to-period and reflect both the specific fee arrangement as well as the stage of the fund. So going forward, we continue to be in a position to earn management fees from BOF, BAIF II and the strategic value fund; performance fees from Partner Funds II and III, BOF and BAIF I and II and additional asset management income from BOF-C and the Burford Advantage Fund. And as we mentioned on our call in March, our models at year-end ’21 indicated that performance fees could be as much as $400 million on the Burford-only basis.
Moving to Slide 13 to discuss expenses. Total operating expenses in the first half declined from the prior year period, primarily due to the large asset recovery charge last year. Most other operating expense categories were straightforward and largely unchanged, with the only notable increase, which was a modest one at that, in case-related expenditures that were ineligible for inclusion and asset costs. And these costs are the ones that represent case expenses that are outside of our entitlement.
And we continue to see improvement from an operating efficiency perspective. Operating expenses as a percent of group-wide portfolio continued to decrease and are now less than 2% on an annualized basis.
Slide 14 presents some information about our debt. We continue to actively manage our liabilities, and we maintain our long-held view that while our business should have some leverage, given the variability of our cash flows, it’s prudent to maintain it at a relatively low level. I’d also mention that all of our debt is fixed rate and that our maturities are well laddered with our next debt maturity not until October of 2024.
We issued $360 million of senior notes that had an 8-year maturity and a coupon of 6 and 7/8% in April, just before the fixed income markets became particularly challenging. We were pleased to have an oversubscribed deal which enabled us to both upsize it and to price it at a spread meaningfully tighter than the debt we issued last year.
We used a portion of those proceeds to take the positive economic action of redeeming the remaining GBP 62 million or about USD 80 million of bonds that were maturing this month. We reduced interest costs and negative carry, but did report a small loss on debt extinguishment, reflecting the modest premium paid for the redemption.
All in all, that 2020 bond proved to be a very attractive one for us with an effective cost of less than 3%. We now have just under $1.3 billion in debt outstanding with a weighted average coupon of 6.2% and a weighted average life of 5.4 years. Our net debt to tangible asset ratio of 21% remains well below the 50% covenant level in our U.K. bonds.
And for our U.S. bond covenant, which is total debt to tangible equity, we are currently at 0.9x, also well below the incurrence test levels of between 1.5x and 2x depending upon the type of incurrence — incurrent, sorry.
So wrapping up on Slide 15 with liquidity. Our liquidity position increased to $430 million at June 30, up from $315 million at year-end and consists of just over $300 million of cash and equivalents with the remainder in marketable securities. The increase in liquidity was predominantly due to net proceeds from the debt transactions I just mentioned, offset by deployments that were in excess of realizations in the half. And we are positioned well to continue to deploy against new opportunities, including for the large commitment we made right at the end of the period that Chris addressed. And the yield on the marketable securities portfolio is now about 3.7%, which puts us in a position to earn attractive returns on this excess liquidity.
And with that, I’ll turn it back to Chris for some concluding remarks.
Great. Thanks very much, Ken. And turning to Slide 16. Just really just sort of sums up the points that we’ve made. We’re very pleased with our new business activity continuing during the pandemic. And as Jon and I have both said, we’re excited to see the forward progress happening in the courts as they work to clear their pandemic backlogs and get things back to working as normal and we’re excited about what lies ahead.
And so with that, we are happy to take your questions, which can happen both verbally on the phone lines and also by submitting them through the chat function in the webcast.
While we wait for the operator to organize the phone lines, I will then take a couple of questions that have already arrived from the webcast.
A – Christopher Bogart
To begin, this is from [Triven Grefhouse] who asks the court systems you use must have a huge backlog of cases and there must be some pressure to deal with these. Are there ways of speeding up the court handling of cases and would such measures impact either positively or negatively on your in-force portfolio?
And before I turn it to Jon for his thoughts on that, I would just say that what we are seeing is a real diversity of approaches to deal with these issues that are really all over the map. And you saw an example of this in a case that we talked about at the end of last year, where we had a case that was — still would have needed to wait for a long time to get a trial date. But the judge was sensitive to the fact the case was already old and had been running for a long time.
And so he put quite a lot of pressure on the parties to go into mediation, which ultimately produced a settlement in the case long before it would have been up for its trial slot. So I do think you’ll see — I do see — I do think you see judges paying attention to their dockets like that. Jon, anything?
Yes. The only thing I’d say is there are judges who don’t want to tolerate the defendant using an excuse of something COVID-related in order to slow things down. I think on our end, the main thing is to make sure that our counterparty clients and law firms have a plaintiffs mindset where they are the claimant, meaning that when defendants asked for extensions and delays and postponements, you just have to very rigorously oppose those and keep things moving. And most of our team and the lawyers we work with understand that and that’s how we push it along. And it’s sort of case-by-case rather than a macro level through our very active team.
And it sounds like we might be ready with the phone questions, or perhaps it’s not.
Well, Mark Lauber asks, so far as you are able, would you comment on the fact that both sides and Petersen have requested summary judgment? Are you seeing any signs of a rush to enforcement by U.S. beneficiaries of other judgments against Argentina in advance of a ruling in Petersen, which might reduce the ability to collect in the Petersen case?
The answer to the second question is no, we’re not seeing that at all. As to the first question, and Jon Molot can certainly might come up and fixed as well. But there’s nothing really to comment on with respect to both sides seeking some judgment. Petersen, these cases are not jury cases.
And so the distinction between what the judge does and what the jury does is, it doesn’t exist here. And therefore, the distinction between some engagement and trial is considerably less significant. And so what summary judgment is for, whether you’re a plaintiff or a defendant is to resolve as many issues as you can as a matter of law before you need to go to trial. And so it’s not surprising at all, and it has always been expected that both sides would see summary judgment. Jon, anything [indiscernible]?
I would only add to that that the facts of this case are not in dispute or complicated, right? Everybody knows what the operative document said. Everybody knows what the conduct was. It’s just the legal consequences that people are fighting over. And so it makes sense that the battle over that would be fought before the judge is a matter of law rather than having a trial on the facts. We’ll see if the judge may decide that the trial is needed, but it’s not a surprise at all, as Chris said, that both sides move for summary judgment.
So we’ll see if the third time is the charm with respect to the phone lines.
We now have a question from David Chiaverini of Wedbush Securities.
The first one relates to the new commitment. It was great to see the record new commitment level. Would you say that the top of the funnel is expanding in this environment and could lead to more profitable matters given your ability to be more selective?
We’ve talked a lot over the years about what we call the funnel. And in fact, our desire to have it change its shape a little bit. What we have right now is a lot of stuff that comes in the top and a pretty small amount that ended up coming at the bottom.
And that, while on the one hand, that might seem lovely because it means that we are also very selective and so on. The reality is that it causes two challenges. One is that it obviously takes quite a lot of effort and therefore, cost to winnow through that large volume of stuff that comes in the top of the funnel.
And the other is that it means that we are saying no an awful lot to people that we want ongoing longstanding client relationships with. So we actually spent quite a lot of time — even though it sounds possibly counterintuitive, we actually spent quite a lot of time trying to narrow the funnel. And the way that we do that is we try to educate the market about what is a viable litigation finance matter because a lot of the reason that we don’t end up doing matters isn’t necessarily connected to their quality or their merits. It’s connected to their economics.
What we perceive of as the likely economic outcome of the case, the settlement value of the case or the realistic amount that the court is going to award in a judgment that we’re going to be able to collect. We find that number often to be significantly lower than what the parties start off believing and would like to have. And there’s just not enough room for a combination of the legal fees to take the matter forward and our returns while leaving the client with a desirable outcome. And so it’s not — we’re trying to go for quality and size more than we’re trying to go for volume there.
And I would just add one positive thing, which is I do think the quality of our counterparty is very important. And I think that probably is a positive development, meaning today, there are companies and law firms that some years ago would have seemed like they were not going to look for our financing or need our financing that now are calling us for financing. And that just — that is the most significant expansion of the top of the funnel despite I completely agree with everything Chris said. But that’s the one dynamic that’s a positive one that I think addresses your question.
And then a question on the agreement with the sovereign wealth fund, how Burford is now retaining 75% versus the 50% previously. Just curious as to what the motivation was? Was it the sovereign wealth fund that wanted Burford to take on more risk or did Burford see these opportunities as being very highly profitable opportunities that you guys wanted to share more of the economics with yourselves with? Curious on the background there.
Yes, it’s the latter, really. It was a Burford-initiated change to the arrangement. And what motivated us, as you say, was with the incremental balance sheet capital that we have been able to access, it was a desire to maximize the returns on that capital for equity shareholders.
The other dynamic at play with the sovereign wealth fund is that even though that’s quite a large pool of capital, it was significantly committed at this point, but it — there is a gap because of the COVID slowdown, there’s a gap between commitments and deployments and therefore recoveries in that fund. And so by reducing the sharing mechanism to 25%, we basically got some more diversity into what’s left of that portfolio and also extended its life a little bit. So that was the thinking behind that.
And then last one for me. Jon, you mentioned about the weighted average life remaining kind of steady. Can you remind us what your expectation is for weighted average life on the portfolio kind of going forward? Is it three to four years? Just update us on that.
I don’t think we have projected how changes in weighted average life will change. I just don’t — I don’t think that’s something we’ve put out.
Yes, that’s right — and that’s right, and it’s sort of hard because the dynamics go in both directions. On the one hand, you’d expect to see a lengthening in weighted average life’s from their current level because of the pandemic. But on the other hand, we keep having big things resolved fairly quickly.
So for example, the partial resolution that I’ve already described in one of our large matters that happened last month, that all happened pretty quickly. And so the combination of speed and size, there we will probably drive down the weighted average life a little bit. So it’s sort of a mixed bag at the moment. And as Jon said, we don’t have a forward-looking projection for it.
We have the next question on the line from Julian Roberts of Jefferies.
I have two, if that’s okay. The first one is, are you allowed to tell us what the total number of individual matters in the Burford-only capital vision direct portfolio is? And then the second one is, are you able to tell us any of the characteristics of the 20 cases that saw fair value gains in the period?
The total number of individual matters, I am not sure if we publish that statistic or not. We do publish the number of individual matters with respect to our large positions. I know that. But I don’t think that we go and top them up all the way through the portfolio. But if you look at that, if you take the large matters as potentially illustrative, you’re obviously going to see — there’s obviously a multiple of individual matters compared to what we call assets.
But I don’t know off the top of my head out of the, let’s call it, 200 assets that we have in the Burford-only portfolio, I don’t know how many individual claims they amount to. But there are only hundreds and hundreds in now. As to the characteristics of the cases that did have some fair value change and just for everyone’s benefit, what Julian was referring to there is the fact that we had in the period, in the six-month period, 20 matters pass through a milestone that under our valuation policy triggers a change in their carrying value based on the court activity.
And that’s an entirely formulaic approach. It’s not sentiment or judgment, but it’s a data-driven formula that we use. It’s going to be all over the map is the short answer. The things that trigger a change, there has to be a court action in most cases. So the thing that’s going to trigger a change is a case going, for example, going past summary judgment would be one meaningful change in the life of the case.
So the parties filed some of the judge motions just has occurred in Petersen, the court decides them, and that decision almost always has a meaningful impact in the party’s assessment of where the case is going and the party’s willingness to settle and so on. So that would be an example of one of them. We actually, in a footnote to the financials have a table that shows the individual points in cases that cause valuation changes and we show what percentage of the portfolio, what percentage of the fair value changes are represented by each of those stages. So you can look at that table and get a sense of what has been going on.
We now have another question on the line from Andrew Shepherd-Barron of Peel Hunt.
A couple of questions, maybe three. First one, if I may, is on the Petersen case and the oral arguments, that seems to have been a sort of a recent addition to the time line to the pack. I’m just wondering, can you say more about — I mean when — what is the norm? And I mean, surely, if the defendant is trying to postpone everything shortly, they’re going to appeal to oral arguments. So then how long might they take? And can you just talk a little bit more about that?
Yes, sure. I think when the court — different courts will have different approaches to when they’ll schedule oral argument. There are some who will say, once I have the briefs and I’ve read them, I’d like to hear from the parties and I’ll hold oral argument before I start writing my opinion.
Other times, the court will say I want to get fairly far along with my opinion to realize where I have questions and where I’ve made up my mind and don’t need more information, so I know what — that I can make the oral argument useful. So it just depends — I mean, maybe that it’s not just different from court to court, it could be the same judge in two different cases, may do it differently depending on the matter.
So I don’t think you can read anything into that, and the timing of the oral argument doesn’t necessarily reflect the pace of work by the court. The defendant can — you can’t appeal the oral argument. Basically it’s — the only thing that is appealable is the final judgment of the court, the court issues. So the court — a defendant could try to postpone scheduling and say, I have a conflict that day. Can we postpone it by a few days? But if a court says, I’d like you to show up in my court room on this date and the parties working together and they find a date fairly close to that, the court might say, okay, but I don’t think you can say no when the court says, I want you to show up in my court and argue.
So typically if — I mean, how much notice would a defendant or plaintiff be given by the judge?
Well, I mean, we’ve had circumstances with very minor motions in this case where there’s very little notice, a few days. I think for briefing this long and dense, I think that it would — the court would want to give the parties several weeks would be my expectation. But that’s just the guess.
Second, relating to the court delay question from me. You said in the presentation that you’ve seen the rate of cases picking up now, rate of court activity, I should say, picking up. Can we see that — is there any sort of industry statistics that demonstrate the case conclusions are accelerating? And in which case, is there any reason why you shouldn’t be in line with industry norms?
There’s quite a lot of statistical data out there about activity levels in the U.S. federal courts. And those — that was the source of the timing that I was quoting earlier for time to trial in New York and in Florida. So you can tell how many cases are being filed, which is actually at a comparatively low level right now. You can tell how long each court is taking to resolve those cases and you can compare the rate of activity through the system. The challenge with that data, while it is instructive on one level, the challenge with those data are that they are not specific to the kinds of large dollar complex commercial litigation that we finance. They will include all of the activities of those courts.
And so it’s not — and because the volume of that other activity is larger. In other words, courts do more small matters than they do large matters. It’s not necessarily instructive, but it’s a useful data point. That kind of data does not exist as easily, if at all, in U.S. state courts or in the courts of most other countries and nor does it existing arbitration proceedings.
And so since we finance things all over the world in a variety of fora, there is not a clear — there’s not an easy statistical thing to look at and say, oh, look, we’re seeing doubling of the throughput in 2022 compared to 2020. Anecdotally though, we obviously know that jury trials are resumed in courts and we know that jury trials were not happening previously. And so that in of itself is a significant factor.
And third question, if I may. Can you make any — I mean, focusing on cash proceeds and cash wins and realizations and such like. Clearly, it’s been pretty slow in the first half. I hear what you say about post subsequent events. But could you give any ideas from the existing portfolio, what do you think would be a normalized rate of cash proceeds that you could expect?
I think someone as with that is no. And we’ve talked extensively about that in the past. We showed and Jon, at our Investor Day made a long presentation and unveiled the internal projection activity that we do the internal modeling that we do. And one of the things we said then and have been clear about is while we have a pretty good track record in being able to model outcomes, we don’t have that same ability to model and project duration. There are too many idiosyncratic variables in the mix beyond just understanding generally how long it takes for cases to get through courts.
And so it’s not something that we believe that we can do with the kind of accuracy and reliability that we would be comfortable doing publicly. Would that we could, I would say, would that we could. But on the other hand, if this business were entirely predictable as to both duration and outcome, then we wouldn’t be able to generate the returns that we can, I think, is the countervailing factor.
We now have James Hamilton of Numis.
[Technical difficulty] the math that you expect to deliver a $50 million profit in the second half, I’m just wondering, obviously, reasonable size. And obviously you plan [technical difficulty] $2.2 billion of expected realizations. How does the $50 million fit in relation to its presence in the $2.2 billion, is the first one?
I’m not sure, James, that I’m entirely following your question other than to say that it’s a part of it, but I suspect you’re asking something more thoughtful than that.
What I’m asking is, is it greater or lesser than the expected value of that case in the expected realization number that you’ve provided us or a million or about $50 million is what I’d like to know.
Yes, I understand the question now. So we have not gone and sort of sliced and diced that modeling work publicly by individual cases. But I think it’s fair to say that we are pleasantly surprised by the combination of speed and size.
Okay. That’s very helpful. And secondly, and equally dull I’m afraid. Of the 20 [technical difficulty] valued up, is there any difference in that portfolio relative to [technical difficulty] valued up? And I’m specifically interested in two areas here. Firstly, is there any likely difference between the conclusion value and the valuation uplift compared to what we’ve seen before based on your modeling of these 20 cases?
And also, is it likely that — I appreciate time line, you can’t really forecast, but is it likely, given that there’s already been a case there on decision that the timing gap between when the valuation uplift happens and when the case concludes will be any difference to the history? I’m not asking for actual numbers on each. I’m just saying do these cases look just like the concluded ones?
Jon can comment, but I think the answer is generally yes. If you think about — and we’ve regularly published and we have it in the addendum to these slides in fact. We regularly publish data that shows the average sort of time to conclusion after there have been for value changes and nothing has happened. I don’t believe that cause us to think that that’s going to change dramatically. Jon, anything?
Yes, I think the way I’d sort of characterize it is, some years ago, I think we did start providing disclosure on as all the matters have gone through the process and led to a realization where in the process fair value changes happened and then what was left for realization at the conclusion.
And as Chris said, we found that much more of the fair value adjustments happened because there were more significant events later in the lifecycle closer to the end, but not all of it. And actually, that was so much the case that, as Chris said, we’ve tried to take out some of — as much discretion as possible and just make it pretty rote that you get by a motion dismiss, this is what happens. You get by summary judgment. This is what happens. You win a trial, this is what happens. You lose a trial, this is what happens.
It’s all fairly routine. And that is because in keeping with our past experience when we had used numbers roughly like the ones that are now the formulaic ones, we found that things did move through the process and lead to some fair value gains along the way and left some realizations for the end that weren’t captured in those fair value gains on a fairly predictable basis. We can’t predict for any one matter, as Chris said, but over the portfolio, I have no reason to think those 20 matters are different from the many more that have resolved before that.
So we’ll turn back to the webcast now in the few minutes that we have left. And [Marcel Shaver] asks, what is your asset management strategy going forward? What are the challenges and bottlenecks in growing the private funds business?
So our asset management strategy is to use our third-party funds business as a way of, generally speaking, having line extensions of our core business. And we’ve now got a world where we have a complete offering across the risk and return spectrum of legal finance. So we have different funds that target different levels of risk and return, and those are appealing generally to different kinds of investors as well. And so what you see there is a conscious decision on our part about proper allocation and the use of our balance of capital where we favor higher return activities for the balance sheet capital and we use the funds to augment that.
We’ve been successful in growing the private funds business, but we launched successfully two new funds, closed two new funds this half period. I would say that the — one of the challenges in the private funds business to be perfectly candid is our agreed. There is an institutional sense in the private funds business that even if you can generate high returns, you shouldn’t be paying more than a traditional June ’20 style set of economics and we just don’t think that set of economics is very desirable in some elements in this asset class.
And so we look for alternative structures that enable us to generate more return for shareholders. And you’ve seen us do that with the sovereign wealth fund arrangement. You’ve seen us do that more recently with the Advantage Fund, where instead of a traditional management and performance fee arrangement, we’ll do better than two and 20 economics if we can generate a return more than 12% or 13%. So that’s really the strategy there. And it’s — we value the private funds business and intend to continue using it.
And also from the webcast, [Andre Omechec] asks, can you please elaborate on the expected ROIC differential between larger cases and smaller ones? Can you also comment on changes in competitive dynamics within smaller and larger cases? Jon, do you want to take a whack at that?
Sure, sure. I think what we have found is larger cases have performed well over a certain threshold in part just because they’re being litigated by higher-quality lawyers and often involve higher-quality counterparties of our ilk. And so that’s not only more efficient to put out more capital in one chunk with underwriting, but it also has just tended to result in better outcomes.
And in terms of the question about the competitive dynamics in smaller versus larger, we have found that when there have been new entrants over the years, and I haven’t really noticed an influx recently, they have started at the smaller end of the market, and they have not been institutions of Burford’s caliber and have had a harder time providing a full-service solution to the large companies and leading law firms that are on lifeblood.
There has been — on the other hand, the people who would target larger outlays, sort of a hedge fund model, are more likely to be looking at lower-risk, lower-return portfolios, right? Equity investors generally don’t have the risk orientation we do where we’re willing to take binary risk because we put it in a portfolio to mitigate that risk and we generate higher returns as a result.
It’s just not necessarily the mindset of somebody who comes at it from the hedge fund side where they’re looking for more muted risk. So I’m very happy with where we are in terms of competitive dynamics right now. As I said earlier, we’ve expanded geographically, we’ve expanded our range of offerings and the counterparties who are interested in our capital have expanded as well. But that’s a good question about small versus large. It’s something we pay close attention to.
So I’m conscious that it’s on the hour. We’re going to be able to make it to every webcast question, but we — I’ll squeeze one last one in. So Emmanuel de Figueiredo asked, given the worsening economic situation in Argentina, are you are worried with actually collecting YPF in the advent of a positive ruling for Burford?
So I suppose I’d say a couple of things in response to that. One is — and this is really quite important, and we get this question a lot. There is a distinction between sovereign debt and the enforcement of defaulted sovereign debt on the one hand and stand-alone court or arbitral tribunal decisions on the other. When you’re a sovereign debt holder, you are subject to not only the whole set of terms, which usually include enforcement-related terms, in the documents that you’ve agreed to as part of the loan, but you’re also not, generally speaking, an independent actor.
The sovereign debt holders are acting as a group of creditors. That just isn’t the same dynamic when you reach — when you have a court judgment. If you’re an independent actor, you have an immediate set of remedies available to you, and you are free to go and begin using those remedies as soon as you have an enforceable judgment. And there’s not the opportunity for the judgment debtor to basically use a collection of sovereign debt style roadblocks to block that. That doesn’t mean to say that enforcement against recalcitrant sovereigns is easy. But it’s something that we do and that we have significant experience in doing. And it’s also obviously a key part of our underwriting ability when we take on these cases.
It’s notable that Argentina has in the past consistently paid arbitration and judicial awards, consistently meaning ever since Argentina rejoined the capital markets. And so we’re not going to comment publicly on the specific dynamics of how to enforce against Argentina or what our strategy would be. But we’re not subject to the same macro forces that you might see in play with sovereign debt. Jon, anything to add to that before we close?
No. Just when you ask do we worry about it, we’re — it’s, of course, something we pay attention to, but we — as Chris said, we understand the difference between having a court judgment and being a sovereign debt holder.
And we’re excited about bringing this long-running case finally to an end. We became involved in this matter in 2015. That’s the year that we filed this case in federal court in the U.S. So after a seven-year slog, it’s really quite exciting to be coming close to the finish line, the finish line being in sight now and we’ll see what happens next in that case. So after a long wait, hopefully, there will be some news in that case before too long.
And with that, thank you all very much for your time and attention. We really appreciate it. And obviously we’re always happy to have offline questions about any aspect of Burford’s business. But thank you for your support and patience while we have, in turn, endured court delays in the pandemic and we’re excited that there is light at the end of the tunnel, both in YPF and in the courts in general. So thanks all, and enjoy the rest of August.
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