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This will always be up and down while there is no dividend and 2020 is forecast to be a down year with no franchise release. After 2020 revenues will pick up again and forecasts for 2022 are set to be almost double 2020 at 120m. Lack of any acquisition will not of helped the sp too but I'd rather they were picky and not spend the cash just because they have it.
This for me is a longer term hold, buying on any dips under £10 when funds available. The company is well managed and growing. Target price of £18 for y/o 2020 but I see no reason to sell then as long as the company keeps growing.

It will be around 29% for sure. I worked out they needed 3-3.5m shares to take them to 30%. With the pound down in value, they will not likely get a better chance to buy STAF.

BUY
Target price 300p | Published price 237p | *Corporate broking client of Liberum
CLS has announced the sale of its entire 10.5% shareholding in Catena via
an accelerated book build, for £113.9m. This is a savvy strategic move, in
our view, increasing the size of CLS’s war chest and allowing management
to further focus on its core strategy of investing in high yielding offices in
the UK, Germany and France. The shares were sold at a price of SEK340
per share, a 7.5% discount to yesterday’s closing price, but 4.8% ahead of
when we last marked the valuation to market in our forecasts on 14 August.
As a result, we nudge up our FY19E EPS and NAV forecasts. Given the
Catena stake was not previously within CLS’s calculated LTV, we expect a
FY19E LTV of <35% (vs 38% previously) and a 15% reduction in net debt,
ceteris paribus. The shares trade on a CY19E P/NAV of 0.69x vs. the
sector at 0.91x, an unjustified discount, in our view.
Sale of entire 10.5% shareholding in Catena AB for £113.9m, ahead of H1 book
value
CLS has announced that it has sold its entire shareholding of Catena AB (CATE SS), a Swedish listed
logistics company, via an accelerated book build. CLS held 3.9m shares (10.5%) prior to the sale. The
sale price represents a 7.5% discount to yesterday’s closing price of SEK367.5, but 4.8% ahead of
when we last marked the valuation to market in our forecasts on 14 August. CLS has realised a gain
of £15.4m, excluding costs, representing an increase in NAV of 3.8p per share from 30 June book
value. The group’s resources have increased by £113.9m.
We nudge up our EPS and NAV forecasts to reflect the sale
As a result of the sale, we make an immaterial change to our FY19E EPRA EPS assumption,
increasing it 0.5% for slightly lower interest costs due to the decrease in net debt, with a flow through
to outer years noting that CLS will not receive a dividend going forward. We also increase our FY19E
EPRA NAV forecast by 0.2% to 327p (from 326p) to reflect the sale, given the shares in Catena had
increased a further 5% since we last marked CLS’s stake to market in our note on 14 August (read
here). While the sale represents an increase in EPRA NAV of 3.8p per share ahead of 325p June
book value, our forecasts include a more cautious view more generally on the macro outlook in H2.

Burford Capital’s (BUR) extended rebuttal of Muddy Waters’ short-selling note continues today, with an extended chronology of its investment in Napo Pharmaceuticals’ litigation against Salix Pharmaceuticals. One of the litigation funder’s earliest investments, the case has been the subject of investor inquiries following what Burford describes as “inaccurate and misleading” reporting by Muddy Waters. The group also said it plans to “provide a further presentation on other accounting and disclosure matters” in a forthcoming update, news which appears to have pushed the shares higher in early trading.

Reaction so far – governance changes

Burford has announced several responses and corporate governance changes following the MW report and investor concerns criticisms. They are material and have been made swiftly.
• The company was already looking for a US listing on either NASDAQ or NYSE and hopes to achieve this by Q1 2020. It notes that no such business has listed in the US before and suggests that if a US listing cannot be achieved, it would seek to move to the main market of the LSE.
• The company does not see that disclosure would be improved by a move to the main market, however it is looking at a Nasdaq/NYSE listing. In the company’s opinion, the short attack would have been the same had the company been listed on the main market.
• New CFO. Jim Kilman, ex Vice Chairman of Morgan Stanley Investment Banking. He has been working as an adviser to the company for the last three years. He will fulfil this role for up to two years while a more permanent CFO is being recruited. Mr Kilman spent 32 years in banking, including senior roles at Goldman Sachs, ABN AMRO and PaineWebber, and retired in 2016.
• CFO Elizabeth O’Connell will become Chief Strategy Officer.
• Two new independent directors are to join the board as soon as they can be found. One existing will then leave at the next AGM, and a year later the Chairman will also leave.
• The CEO will join the board.
• Another member of senior management may join the board.
• The board may further evolve as required by the new listing venue.

Our view: This clearly shows many rapid steps in the right direction, and we believe that the company is committed to making further changes. This is consistent with the company’s decision to proceed with a US listing.
We have taken a detailed look at the listing requirements for NASDAQ and conclude that Burford should meet all the requirements from a financial perspective. Based its current size, it would also appear to meet the liquidity requirements. The table below details the main corporate governance requirements and compares these with what Burford has currently committed to and what further steps might be required.
We believe it is worth dwelling on the appointment of Mr Kilman. He was an MD of PaineWebber by the time he left in 2000, then spent six years at ABN, two at GS, and eight as Vice Chairman of Investment Banking at MS, heading investment banking for diversified financials. Since retiring in 2016, he has been running a Family Office Merchant Bank and he has been advising Burford, including on the conduct of a capital structure and listing review for the company, which is discussed in the 2017 annual report.
Mr Kilman has clearly had a successful career and will have deep knowledge of Burford’s business. He is now choosing to become CFO, with all the responsibility that the role demands, for a defined period while an external candidate is sought.

Suggestion that auditing is poor
Muddy Waters: “BUR repeatedly dropped the name of its auditor, Ernst & Young, in its responses. First, we have repeatedly witnessed “Big 4” auditors issue unqualified opinions on companies that turn out to be frauds.
Management prepares the financial statements – not the auditors. Second, because BUR mainly deals with Level 3 assets, there is very little its auditor will do to ensure the valuations are grounded in reality. Auditors are not experts in litigation assets, and they will defer to management judgment. We have long believed that Level 3 fair valuations are a license to print non-cash profits. The collapse of Noble Group shows that even Level 2 valuations are subject to significant abuse. The bottom line is that history shows us that auditors do not prevent aggressive marking of Level 3 assets, and BUR’s auditor is not required to ensure that BUR’s non-IFRS IRR and ROIC metrics are not misleading.”

Our view: We believe that this is dealt with above and that the company has gone as far as it can to explain its valuation process.

Suggestion that most of the Petersen gains have been pulled forwards
Muddy Waters: “We suspect that most – if not all – of the gains on the Petersen case have already been pulled forward through previous fair value gains. Management had an opportunity to address this suspicion on the call, and yet utterly failed to do so. An analyst from Peel Hunt asked management to “give us more guidance as to what Petersen is on the books for”. Here and again later in the call, Chris Bogart demurred, stating that such information would compromise “attorney work product”. However, management did confirm that 52% of the core litigation assets consists of Fair Value Gains, which means that BUR has already recognized profits equivalent to a 108% ROIC on its investments.”

Our view: This point has some potential validity. While Burford reports FV unrealised gains net of transfers to realisations, we are unable to see the gross value of unrealised gains in any period, and we do not know the value at which Petersen could be held on the balance sheet. Mr Bogart stated on the call that Petersen has had an impact on the fair value of the balance sheet. Historically, Burford has stated that it carries investments ‘well below’ market valuations, but a secondary party transaction is one of many inputs that would impact the carrying value.

Why do BUR’s cash flows not tie to its investment performance table?
Muddy Waters: “An analyst pointed out on the call that BUR’s cash flows show far greater realizations than does the investment performance table BUR presents…… We call upon BUR to reconcile cash flows to the investment performance table for historical periods and going forward.”

Our view: Since 2017, the cash flow statement is consolidated with third party entities. Not all income is picked up in Investment Realisations. Some investments will have an interest component that runs through a different line item, including in Note 7, Investments, and interest will sometimes be accounted for in Note 8, Due from Settlement of Investments, as well. The company is working to provide additional disclosure here.

Our view: Burford has always been clear that ROIC on specific investments exclude any portion of central costs. The complexity of trying to attribute central costs in this manner makes such an approach completely sensible in our view, and as a result it is how we model the business from a capital deployed and revenue perspective. Our forecasts for the group obviously include an estimate for central costs, which we estimate grow at a similar rate to additions.

“BUR is arguably insolvent, as its debt and funding commitments greatly exceed the $880.3 million adjusted invested capital”

Our view: Burford had approximately $400 million in cash and cash equivalents as of 5 August. In addition, in note 20 of the 2019 interim report, Burford notes it expects less than half of the $773m core litigation finance and new initiatives commitments to be drawn during the next 12 months. The Sovereign Wealth Fund structure is also being used, further reducing the calls on Burford’s balance sheet, since Burford only contributes a third of the capital but receives 60% of the profit.
In addition, the assertion also misses investment outcomes and Burford’s access to debt markets. Burford’s debt matures 2022-2026. 0.3x net debt to equity is low historically, and the company would be happy with it being higher. 0.42x is the highest it has gone. The company does not guide to a level because it has not needed to do so.
In a worst-case scenario, Burford could slow growth during a period or access debt markets. It is more likely that current investment outcomes and current cash will be able to match any future liabilities, however it remains the case that we cannot know the timing of settlements or of litigation outcomes.

“BUR’s governance strictures are laughter-inducing”
Muddy Waters: “The CFO is the wife of the founder / CEO. Under the best of circumstances, this should alarm investors; however, with a company that consistently books non-cash accounting profits, it is unforgivable. In a situation so ripe for abuse, the very least the company could do is to have an independent CFO. (The CEO has sold a total of £59.4 million of stock.) BUR has cycled through four prior CFOs or senior finance managers.”

Our view: There are three criticisms here: that a CFO/CEO relationship is suboptimal, that the CEO has sold stock and that there have been frequent changes of senior financial management. More generally, it is true that Burford’s governance has been profoundly different to many other companies and subject to much criticism. We deal with the governance improvements below.

2012 move to IFRS9 was contrived to bring in fair value accounting
Our view: LCM and IMF Bentham, with their Australian backgrounds, are on a cash cost basis, but Manolete, Burford and Vannin are on IFRS9.

Technique 4: “choosing its own cost denominator in a case with a recovery when the total cost is much greater”

Burford: “No one buys 200 shares of stock, sells 50 of them, and measures the profit or loss on the sale of the 50 shares against the cost of all 200, yet that is what is suggested here.” This is also addressed on p.12 of the 2019 interim report.

Our view: We believe that Burford’s treatment in this situation is entirely appropriate. By allocating the same proportion of the costs incurred in the case as that which was realised, it provides investors with a fair assessment of the returns that are likely to be generated on the proportion of the investment not yet sold and still on the balance sheet.

Technique 5: “delaying recognizing a trial loss for two years”
Muddy Waters: The initial report claims that Burford did not recognise a loss for two years after it was incurred, however, in the same short paragraph it says that the August 2016 judgement was appealed.

Our view: The case cited was under appeal. Consistent with Burford’s treatment for all such cases, this was not concluded as there was a chance that the verdict could have been overturned and that it could have led to a win. In our view, this treatment appears entirely fair.

Technique 6: “keeping trial losses out of the “Concluded Investment” category”
The report suggested that a case was lost but kept out of concluded investments. The report has the wrong investment. Burford points out that the case cited was never even on the balance sheet.
It is then suggested that a class action against RCR is not ongoing. It is, as a cursory web search shows.
Furthermore, it is said that there have been negative developments on some Hausfield LLP cases that have not been appropriately marked down.
Burford’s answer is that the matters are ongoing and that the defendant, VW, has already paid out $30bn in settlements related to the subject matter of this litigation.

Our view: These factual inaccuracies have been shown to be incorrect and hence would appear to disprove the point.

Technique 7: “failing to deduct various costs against recoveries, including the very operating expenses associated with the investments themselves.”
Burford: From the conference call: “Our investments table is cash on cash and not conceived to include overheads.”
From the response: “when Burford recognizes a realized gain, it also reverses prior unrealized gains associated with the realized gain. This is straightforward accounting and, as the report itself admits, occurs to “avoid double-booking”.
A recent example of us describing this process in depth was in our 30 May 2019 RNS concerning our Teinver investment.”

Technique 2: “counting as “recoveries” awards or settlements with uncertain to highly unlikely collections as equivalent to cash returns when calculating IRR”

Muddy Waters: The essence of this argument is that Burford's client in a 2009 case received land in settlement. IRR was reported as 51% in 2013 and then 47% later. MW contends that an appeal is ongoing and that final recoveries remain uncertain, intending that the reader believe this is both negative and typical.

Burford: From the investor call: “We’ve had $1bn in proceeds and right now have less than $1m of non-cash proceeds on our balance sheet. A matter is only ‘concluded’ where there is no litigation ongoing, nor any appeal.”
From the response: “IRR fell from 51% to 47% owing to the timing of payments. ROIC rose, but MW does not mention this."

Our view: The case highlighted by MW has been a concluded investment since 2016 interims, in which report it was discussed. The company is clear that “It is false that Gray’s bankruptcy estate is suing Burford. Gray itself did bring an attempted shakedown action against Burford in Arizona; that action was stayed and Gray has not attempted to pursue it elsewhere”.
Although the fact that not all realisations are cash may surprise some investors, the magnitude of those that are not does not in our view present a significant issue. If the best a shorting report can find, in suggesting that recoveries are questionable through not being 100% cash, is a single investment from a decade ago, we would argue that this has not been shown to be a material concern. Ultimately, management has proved that it has been able to achieve attractive risk-adjusted returns for investors from such moves.

Technique 3: “misleadingly representing investments that BUR inherited from acquisitions as favourable IRR”
Muddy Waters: Muddy Waters suggests there is a case which came in with a corporate acquisition and where the company booked returns which do not include the acquisition cost.
Burford: “The investment cited in the report is a post-acquisition matter. The report is simply wrong in its facts".

Our view: It would appear that management have provided the correct cost figure for the cash-on-cash investment table, whether the cases were acquired or not. In the specific case highlighted by MW, it would appear that they have referenced the wrong case number.

Burford’s RNS of 2 September gives much new detail on the investment, including that:

• In 2011 $1.5m had been spent on funding Napo and this was the carrying value. The funding agreement included a dispute between Napo and Glenmark as well as that with Salix.
• In 2012 there was a tribunal interim decision which led to Burford increasing the carrying value to $9.4m (of which 4.5 was the deployed cost, the rest an unrealized gain.
• In 2013 the concluded investment table had Napo in at a 50% discount to the value of the minimum entitlement
• In 2014, after becoming a senior secured creditor to Napo, the concluded investment table had Napo in at a 30% discount to Burford’s entitlement
• 2015 no change to carrying value despite a running 18% interest rate on the credit
• 2016 no change to carrying value despite the entitlement rising. Discount at which it was carried was then up to 58%.
• 2017 Napo is now an equity holding in Jaguar. IFRS accounts are marked to market, but the concluded investment table was not, since it is not a mark-to-market document.
• 2018 IFRS accounts are marked to market, but the concluded investment table was not.
• 2019 Jaguar holding written down in H1. ROIC shown as 18%, but would be 27% if including the sale of some Jaguar stock in 2018.
It is important to remember that the short report attacked Burford's treatment of the Napo case as "Categorizing a Loss as an Investment with Significant Return”. This was their #1 accusation. This new disclosure explains that this was precisely not the case, in that the investment was not a loss, and that it was at all times subsequently carried at a substantial discount to Burford's entitlement.
This case is only 0.8% of Burford's recoveries at its current carrying value, so is a small matter from a September 2019 perspective, but these disclosures also make clear that even from a 2012 perspective, there was process and
prudence behind its valuation.
The RNS is explicit that the reported ROIC (balance sheet, since inception) of 76% at the end of 2017 and 85% at the end of 2018 would have been 1pp and 2pp lower, respectively, if the Jaguar holding had been marked to market.

Technique 1: “categorizing a loss as a win”
Muddy Waters: “BUR first disclosed Napo as a “Concluded Investment” in its 2013 Annual Report, and claimed a total recovered of $15.8 million on a $7.4 million investment, which was purportedly a 113% ROIC. However, the case had not yet concluded. It reached a jury verdict in 2014, and BUR’s client, Napo, actually lost the trial when the jury returned a verdict in favor of Salix.”

Burford: The initial rebuttal stated “The Napo investment did not come from Invesco. We got our principal back in cash and then some equity in the company which has been marked to market. When we thought the equity would have no value we wrote it off.” Subsequently, the company has given a 3500 word disclosure of the Napo investment which explains why the case became classed as a concluded investment in 2013, and gives the carrying values of the investment at each date.

Our view: MW’s analysis is of the wrong settlement, and there was a settlement in 2013 (see link on left). In return for its work on this case, Burford received its initial investment in cash, plus shares in a quoted equity.
Recording this receivable in the context of a concluded case seems reasonable treatment to us. The fact that the value of this equity holding later fell in value is a separate and later issue and was clearly highlighted in the 2019 interim report on page 8, note 6 and on page 24 of the 2017 Annual Report.
Wrapped up in the criticism of the accounting treatment of this matter is an allegation that Burford somehow conspired with Invesco to get them to invest $3m in a Napo capital raise. This seems to make no economic sense for an institutional investor, nor career sense for a portfolio manager. In any case, Burford was a secured creditor and Invesco an equity investor.
The MW comment of 26 August highlights the Glenmark case, which is linked to Napo. MW does not suggest Burford did not receive a settlement in the form of Jaguar shares, rather they suggest that, given that the shares have since fallen and the position of Jaguar three years later, it must have been obvious that the shares were worthless at the time. This is a different
argument to the initial MW report, and so, as we have stated, reporting a settlement of quoted equity seems reasonable.

“High dependence on four cases”

Muddy Waters: “BUR has been highly reliant on only four cases for its monetizations, showing that its broader portfolio has lacked strength. Through manipulating ROICs and IRRs, BUR portrays itself as a business that derives profits from a broad range of cases in its book. The reality is that BUR’s profits are much more concentrated, and have really been dependent on just four cases that have generated approximately two-thirds of its net realized gains since 2012. We calculate that during this time, the remainder of the Concluded Investments generated a combined ROIC of only approximately 19%.”

Burford: “If one were to remove (nonsensically) our best four results and all non-cash realisations, Burford’s litigation finance returns would still be 33%.”

Our view: This is obvious. The company had already disclosed returns ex Petersen and ex both Petersen and Teinver. We wrote about this on 12 July. In our view, this analysis only has any utility if one believes that the business of litigation has changed such that Burford will never again make outsized returns. We have seen no evidence that this is the case.

“Burford deliberately misleads investors with net realised gains”

Our view: In the original note, MW stated that BUR misleads investors about its fair value accounting by conflating two distinct concepts: realized gains and net realized gains. We believe that the two concepts have been known to investors and that the flow of investments shown on note 7 in the 2018 annual report correctly reflects the movement in investments held on balance sheet.
The process was again explained in detail in the 30 May RNS re Teinver. It may well be that this is in some places not understood, but that happens when a company lacks similar quoted peers. We see nothing to support the idea that this disclosure is designed to mislead.
On the investor call, management disclosed that fair value mark-ups represented 52% of the carrying value of investments at the end of H1'19.
This number is for core litigation finance only, and we note that Petersen is likely a significant part of this. Whilst some might see this as a risk, we note that 40 investors have now helped Burford de-risk the Petersen case and help to validate its valuation.

Detailed assessment of Muddy Waters reports
We have previously summarised our analysis of the points discussed by Muddy Waters. In this section, we provide a more detailed assessment of each of the points raised in the reports, outline Burford's rebuttals, and give our analysis.

“Fair value accounting is being used to inflate the value of the company”
Muddy Waters: “Thanks to a light disclosure regime, the esoteric nature of its business, and unethical behaviour by its largest shareholder, Invesco, it turned Enron-esque mark-to-model accounting into the biggest stock promotion on the AIM. This has all recently changed though. Just this year, BUR began publishing more detailed investment data. This data proves that BUR has been egregiously misrepresenting its ROIC and IRRs”.

Our view: As the company said on its investor call arranged immediately following the publication of the first MW note, it provides IFRS financials as well as cash-based investment performance information. They have provided these cash-based performance figures for the 10 years Burford has been listed.

It seems fair to us that, if you have sold a 10% interest in a matter at a $1bn valuation, you carry your remaining interest at above the $17m you originally invested. We note that it is common practice for private equity firms to use fair value accounting with Level 3 assets in a similar manner. The company stated in its 2017 annual report that only two investments that had been written up, amounting to 0.2% of total write-ups by dollar value, have ever turned into a loss.
An outline of the fair value adjustment process is given in great detail on pages 58 and 59 of the 2018 annual report. A fair value write-up is only made if there has been an external objective event to justify such a write-up, and many investments will not have a write-up through the entire life of the case, as only one judgement will be made.

In the same report, the auditors detail their work:
• For all investments where there had been a change in fair value, the auditors tested the assumptions, performed external research on the status of litigation, obtained supporting documentation, considered any relevant secondary market trading and challenged management’s judgments.
• Independent counsel was hired by the auditors to check the company’s valuation process Burford is a complex business, and the company reports are necessarily long, but this auditors’ report is essential reading.

Run-off valuation
Given the current investor concerns over the sustainability of Burford's model, we believe it a worthwhile exercise to value the company based on the assumption that the current book of investments is placed into run-off and no further additions are made after 2019. Although this is in no way our expectation, the conclusion supports our view that the current share price fails to reflect the group's positive market position and suggests an asymmetric risk-reward profile for those investors
building positions at current levels.

The key assumptions within our run-off valuation are:
• Following additions in 2019 in line with our forecasts, we assume these investments deliver a return profile of 0% in 2021, 35% in 2022 and 65% in 2023. This compares to less than two-year duration for completed cases.
• We assume a 50% ROIC for all investments. We assume the same return profile for new initiatives and cash management investments.
• We assume no fair value movements and only record income when it is realised according to our assumptions.
• We assume no interest income.
• Balance sheet investments: The split of deployments in 2019 from th balance sheet is $417m of the $1bn total investments. In 2020, we adjust this number by multiplying it by 55%, as in the recent call with investors following the short attack, it was disclosed that of the total $1.6bn investments held on balance sheet, 45% were fair value gains, so the returns are only generated from the cash investment.
• Sovereign Wealth Fund: The income generated from the SWF includes the annual $7m running costs paid to Burford and the income received from the portion of the SWF capital that is effectively Burford's.
• Funds business: All funds are expected to be deployed and performance fees returned by the end of 2023.
• Operating expenses and finance costs: We assume full run rate costs for 2019 and then flat costs for 2020. In 2021 and 2022, we halve operating expenses and assume no further operating expenses from 2023 onwards. We assume the repayment of bonds as they mature and the expected finance costs associated with the current bonds in issue.

DCF-based methodology gives TP of £26

We continue to believe that given the inherent variability in Burford's cash flows on an annual basis, a DCF-based valuation is the most appropriate. The key assumptions that drive this valuation are:
• ROIC of 60% from now to 2022, 50% thereafter
• Assume additions of $1bn in 2019, growing at 25% p.a. over the 2019-25 period. Thereafter, we assume that additions grow at a terminal rate of just 2.5%.
• We use a cost of debt of 6.4% and cost of equity of 10%, giving a WACC of 9.9%
As with most DCF valuations, the result is most sensitive to the assumptions that drive the terminal value. In this respect, we highlight that our long-term growth rate looks very conservative, and given industry dynamics, our medium-term assumption (25%) looks achievable. With respect to our longterm ROIC assumption, we continue to believe such returns are achievable and note that the company has earned a 98% ROIC to date on completed investments, and 60% if you exclude partial realisations. Even if Petersen is excluded, ROIC would still be an impressive 59%.
Figure 15 presents the implied valuation under a range of assumptions for the long-term ROIC and growth rate. We note that given the current share price, investors do not believe that the company will be able to achieve future returns anywhere near the levels achieved historically and that growth is anticipated to decline materially despite the positive market backdrop. In fact, we analyse in the next section a run-off valuation of the current investments, assuming no further additions after 2019. Under this scenario, it returns a fair value of 821p, higher than the current share price.

Burford has the ability to generate significant cash
Given our outlook for investment growth, a key question is how this growth will be funded. Our growth forecasts can be achieved without the requirement for external capital. Our model uses a three-year duration for investment returns and capital is returned using the following profile: zero in year 1, 35% in year 2 and 65% in year 3.
Burford balance sheet commitments as of the end of H1’19 stood at $773m, and the company has stated that it expects less than half of this to be required within the next 12 months. Our forecasts include $417m of balance sheet deployments in 2019 and $733m in 2020, which will contain the $773m of current commitments (less than half are expected within the next 12 months) and a portion of new investments. Our total deployments including SWF, balance sheet and BOF are $1bn in 2019 and $1.25bn in 2020.

There is of course a trade-off between increased investment and cash being generated, but as can be seen, we do not believe that the group would need to raise debt based on our current forecasts and that our growth profile is fully funded by the profile of future realisations. However, if balance sheet deployments did increase in 2019 to similar levels as in 2018, we would expect that the company would have the ability to raise debt given its current net debt to equity of 0.3x, which would imply upside to our forecasts.
The biggest risk to this forecast is of course that the duration of investments increases beyond that assumed. Although this is something that investors should be aware of, we note that the current average duration for investments is under two years, materially lower than the three year duration which we assume. This is a major point – we have a cash cycle that is far longer than the company is achieving and has achieved.
We expect that in the longer term Burford will reach maturity with a very large amount of investments that will generate significant free cash. In the next section, we outline our forecast free cash profile, which is the basis for our DCF.

Strategic capital relationship
Some 27% of the total capital provided by the Sovereign Wealth fund contributes to revenues for Burford due to the fact that Burford receives 60% of the profits for providing only 33% of the capital. We assume, as with all of Burford's investments, none of the return in year 1, 35% in year 2 and 65% in year 3. This compares to the 1.5 year average duration of an investment for all of Burford's historical investments. We use the same ROIC assumptions as for all our investments: 60% from 2018 to 2022 and 50% from 2022 onwards.
Burford will also receive a priority distribution in an expected amount of c.$7m annually.

New Burford Opportunities Fund
The Burford Opportunities Fund has raised $300m and will invest in 25% of the sum of new investments found and made by Burford, over a maximum investment period of three years. We forecast that this will be fully invested within two years. The company will earn a 2% management fee on the whole amount of investor commitments and 20% of the profits after an 8% hurdle rate. Were a ROIC of 60% to be earned on that capital and the $300m to be committed in the next two years, as we believe probable, with an average investment duration of 1.5 years, then Burford would earn $6m a year times four, plus (60%-8%) x ($300m-$24m) x 20%= $29m, so a sum of $53m.
BOF investors include 40 Burford employees who will be able to share in the results of their litigation case selection. This is a meaningful element, substantially securing important staff to the business for many years.
Investments are allocated using a formulaic approach between balance sheet and funds to ensure no conflicts of interest.

Historical third-party funds
Burford acquired Gerchen Keller in December 2016 to create its third-party funds business. Funds under management are shown below. While these are our expectations for the current funds, it is likely that in 2020 or onwards further funds could be raised as the BOF becomes fully invested. We do not forecast further fund raises.

We expect third-party investment management to generate $7.6m in operating profit in 2019 out of our forecast for group operating profit of $374m. It is for now a small portion of the group total; however, this capability gives Burford a potential for scale which is a competitive advantage when agreeing to portfolio cases with law firms and corporates. The company
consistently communicates the range of its products as being designed to accommodate the range of a client’s needs for financing and ancillary offerings.

We model the sources of capital being made from 2019 onwards:
• 33% (66% of 50%) of investments being made from the SWF
• 42% being made from Burford's balance sheet
• 25% being made from the Burford Opportunities Fund (BOF)
Once the $300m BOF fund is fully invested, we assume Burford allocates a further 25% to its balance sheet (2020 onwards).
The diverse range of funding not only reduces the cost of capital for Burford but also allows it to be less reliant on capital markets. Given the uncertain outlook for markets in the medium term and the demand for Burford's litigation finance, we believe it is sensible to have this range of funding sources. Furthermore, once the SWF is funding deployments, it should
alleviate concerns raised regarding liquidity.
We anticipate that the $1.6bn will be invested within two years despite longer investment times for both the strategic capital relationship and the Burford Opportunities Fund. We are comfortable with this assumption given the growth characteristics of the industry and the rapid uptake of litigation finance.
Investment additions set to grow meaningfully
We believe the most appropriate way to model Burford is to view investment additions (new investments made each year) and the total portfolio in the context of the industry as a whole. As we explain above, this is an industry that can grow over 3x in the medium term, and it is likely that Burford will grow faster than this because of its leading market share and innovative approach to portfolio investments. We forecast the total portfolio – which includes all investments managed within investment management, Burford's balance sheet and the Sovereign Wealth Fund – to grow from $3.9bn at end2018 to $5.2bn by 2022. We also expect additions to grow from $1bn in 2018 to $2bn in 2022.
We then allocate these additions to each funding source according to Burford's formula, shown in the chart below.

Burford balance sheet
Some 42% of the next $1.6bn investments will be funded using Burford's own balance sheet. We expect that as the Burford Opportunities Fund is fully invested, Burford will continue to invest using its balance sheet, growing from 42% of new investments in 2019 to 67% in 2021.

Litigation Finance survey shows no slowing of uptake
This view of industry growth is supported by the output of the latest Burford Litigation Finance Survey. In 2018, 70% of respondents indicated that their firms had used litigation finance. This 70% is for firms, not individuals. It does not mean 70% saturation but that this risk-reducing, fee-accelerating mechanism had been used at that proportion of firms, to some smaller or larger degree. We expect that the next leg of growth will come as more individual partners at law firms suggest such finance to their clients.
Secondly, there has been no slow-down from respondents believing litigation finance is growing and becoming increasingly important. Over 70% of the 495 respondents indicated that litigation is growing.

Funding structure highlights ambition and supports ROIC
This outlook for demand for financing appears to have been in part met by an increase in supply. Perhaps unsurprisingly, the largest player in the industry Burford has been a clear beneficiary of this capital, and in December 2018 it announced a superior new funding arrangement to facilitate its next $1.6bn in litigation finance investments. $300m will come from Burford’s balance sheet, recently strengthened by the $250m equity raise in October. $300m will come from a new private fund, which includes investments from employees. Finally, a new strategic capital relationship with a Sovereign Wealth Fund (SWF) has been created to make $1bn of investments, of which Burford’s balance sheet will fund $333m.
Following the strategic capital raise, we believe it is sensible to model the total investments that Burford is able to make and allocate this to the funding source via the formula that Burford has outlined.
The strategic capital relationship with the SWF highlights the impressive returns that Burford is able to generate, as the SWF would not be willing to accept 40% of the profits and provide 66% of the invested capital if returns were not acceptable on that basis. We expect that if one SWF is willing to accept these terms, there may be more large pools of capital that would be
willing to invest on these terms to receive an uncorrelated return with an investment duration of less than two years. This has the potential of lowering Burford's cost of capital in the long term, which we do not forecast.
The fact that Burford gets 60% of the profit for 33% of the investment would turn a 60% ROIC investment into a 108% ROIC investment and effectively acts as leverage to the balance sheet investments. Furthermore, this deal is not just straight profit addition but could be the start of something more, since it is stated that the partner is looking to make further investments with Burford.