The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
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Burford (BUR) - The litigation finance company is by definition "playing the long game" as their average case takes almost three years from funding to resolution, but many take significantly longer. As a result, earnings in three years really are being driven by the investments being made today. The two senior managers of Burford each own more than $100M worth of stock. They are building an asset management business. Two of management's priorities with long-term implications are to continue to build out both their data science infrastructure - Burford believes that they have the best proprietary data on legal settlements, which improves their case underwriting and thus long-term returns - and their customer base.
Historically, the "deal pipeline" of cases came from law firms looking to get their legal work paid for by Burford so that clients were more likely to pursue their cases. Increasingly, large companies are coming to Burford with cases as a case financed by Burford allows management to pursue a case without hurting current year earnings and their current year bonuses. Burford is currently working with 2 Fortune 50 companies. Working directly with corporates is going to be important for continuing to grow the litigation financing business.
Like the rest of Burford's investor base, I am paying attention to their Argentina YPF case because - if and when they can collect their judgement - the potential proceeds exceed the market capitalization of the company. The developments with the new Argentinian president are incrementally positive for Burford. We are also tracking several other material cases, including Sysco, and any indications of continued progress on the corporate front. As discussed in our investor presentation (to investors only) that accompanied our last letter, Burford's business is one where power laws can come into play. In general, they earn good returns on average for "meat and potatoes" type cases but have the potential to earn incredible returns on a smaller basket of cases which can have outsized impacts on business valuation.
I agree .. this is looking good
$200m loan…
Either they need $200m to pay the bills or they are flying and have a bank load of no brainer opportunities that is all but guaranteed to provide super ROI returns with only single digit % downside to invest in !
We are all banking on the latter .. I’m chilled
The Group operates 3 distinct businesses in THG Beauty, THG Nutrition and THG Ingenuity, each scaled from the UK to hold global leading positions in their respective sectors. In 2021 the Board set out the Group's strategy to provide each division with its own growth and capital platform, through individual public market listings or partnerships, with THG retaining significant majority ownership.
This strategy remains unchanged, with readiness work ongoing to ensure the Group has full optionality. The Group remains on target to deliver c.9% adjusted EBITDA margins in the medium term
Achieving favorable settlement on an assigned award
Following the assignment, Burford’s team pursued the multi-jurisdictional enforcement campaign with proceedings in New York, London and the UAE, involving injunctions in London and the Dubai International Financial Centre (DIFC), while also making new legal precedents in the process.
The complex enforcement strategy required innovative methods to attach various properties and assets. Following lengthy settlement discussions, the debtors settled one of the two awards for $50 million—a positive resolution both for Cessna and for Burford. The debtors—and their counsel—knew Burford, and, recognizing the expertise and resources available, ultimately agreed to settle rather than continue to be outmatched.
The other award has seen a partial recovery too – which is more than the original principal amount of the award – with the Burford team continuing to pursue the outstanding interest due on the award in 2024.
Burford gave Cessna the ability to recover risk-free funds against the outstanding balance of their awards, while at the same time outsourcing the responsibility for managing the enforcement process to an expert team. The assignment gave Cessna the best of both worlds, by allowing the company to retain some of the upside and freeing up their legal team from deploying significant managerial time to what has clearly been a labor-intensive dispute. Lastly, and most importantly, the outcome resulted in Cessna making very significant additional recoveries from the initial capital received.
Following the assignment, Burford took on total responsibility for the multi-jurisdictional enforcement, including appointing and managing lawyers and asset tracing and paying all enforcement costs. The Burford team updated Cessna on developments while removing all costs any distraction from its core business.
How award assignment works
In an assignment, a legal finance provider accelerates the value of an uncollected judgment or award by purchasing it outright, relieving the claimholder of the burden, expense and delay of litigation.
When businesses assign awards and judgments, they benefit from an influx of capital that can be immediately used for other business purposes. That capital is non-recourse, not debt, meaning that the business keeps the funds provided even if the matter loses, protecting it from downside risk in the event of an unsuccessful resolution. Assigning the award also removes enforcement costs from the company’s P&L.
The inclusion of a back-end interest means that the business can still benefit from the upside of any significant recovery from the assigned asset.
Cessna is well-known as an aviation aircraft manufacturer. As many businesses do, one of its subsidiaries found itself with two outstanding and unenforced arbitration awards that were worth a lot of money in theory. But despite their cumulative value of more than $100 million, these unenforced awards remained mere “legal paper” until Cessna partnered with Burford to provide a solution.
Cessna’s experience is not uncommon. Businesses spend millions on litigation and arbitration only to find that winning the dispute isn’t always the end of the process, as they may be left with a judgment or award that still requires further time and money to enforce. In addition to appeal risk, recalcitrant judgment debtors may claim insolvency or move assets offshore, presenting the winning side with the need to invest more time and money to identify valuable assets, gain recognition of their judgment in key jurisdictions, and pursue third parties or proxies that hold the debtor’s assets, as these types of debtors rarely keep valuable interests in their own name.
In other words, turning that piece of paper into cash requires still more expenditure, significant expertise and further litigation, resulting in ever-increased delay in the satisfaction of the award.
Burford routinely helps businesses like Cessna that find themselves in this situation, through a combination of capital provision and asset recovery expertise, enabling the enforcement of these outstanding judgments and awards to recover value that might otherwise be lost. Cessna’s work with Burford illustrates the benefit of funded enforcement expertise, and below we explain how it was able to assign its awards, maximize its recovery and generate immediate liquidity.
The background of the case
Both of Cessna’s awards arose when counterparties defaulted on aircraft leasing agreements made with Cessna’s subsidiary. After winning the arbitrations, however, the awards remained unpaid and with no immediate prospect of cash recoveries, as the judgment debtors were well-connected Emiratis with the majority of their assets in the UAE and refused to pay.
The Wichita, Kansas-based company had only a limited sense of defendant assets available to pursue and faced years of complex, high-cost and risky enforcement proceedings across multiple jurisdictions, some of them not well known to the Cessna in-house team or their existing local law firm. Their goal was to monetize a portion of the pending value without further distraction or spend.
Burford solved this challenge with a hybrid “money now, money later” assignment deal that gave Cessna immediate capital and transferred the cost, time and risk of the enforcement campaign to Burford while retaining for Cessna a back-end interest to ensure a further significant payment in the event of a successful recovery.
None of us know much.. Kelso will likely announce tomorrow that that they have completed the placing to raise a further c£2m and likely also announce after the THg Q4TU that they have increased there holdings.. or maybe not