Burford Capital Limited (BUR) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to today's Burford Capital 2020 interim results conference call. My name is Jordan and I will be coordinating your call today. [Operator Instructions]. And now, I am going to hand over to Chris Bogart, CEO, to begin. Chris, please go ahead.

Thank you very much, Jordan. And hello everybody. Thank you very much for joining us today for this call. As usual, with me are Jon Molot, Burford's Chief Investment Officer and my partner and cofounder and Jim Kilman, our Chief Financial Officer. This is a very exciting day for us. Not only do we get talk to you about some terrific results, but we were also able to announce this morning that we are done with the U.S. listing process. We have, in U.S. securities parlance, gone effective with the U.S. Securities and Exchange Commission as of yesterday afternoon and that lets us have a little period of mechanics now and then our shares will start to trade on the New York Stock Exchange on October 19, in addition, of course, to continuing to trade in London. So that's the end of a long and multi-month process and we are very pleased with the outcome and I will talk a little bit more about it in a moment. But turning to Burford and what we have been able to accomplish, I am looking at slide three. And really, if you look at the vignettes on that slide, the numbers really speak for themselves here. We had a great half year, really sort of the best in our history for investment performance. And before I even turn to some numbers, let's just set in context what has happened here. Burford has obviously been on a growth trajectory for a number of years. But starting in 2016 was when you really saw a big sharp uplift in our ability to upsize the portfolio and develop a large and robust portfolio of litigation assets. And obviously, within that period, since litigation is not the world's fastest process, we just like you have been waiting for the investments in those vintages to start to produce. And what you saw in the first half of year is that they really delivered. And they didn't just deliver, what they did was underlined our ability to produce outsized returns over and over again. Looking just at one group of related cases. We produced $423 million in group realizations. That's a 56% IRR on those investments, return on invested capital of 194%. And that just feeds into what is now an 11-year track record at Burford. And within that track record, we have now generated more than $1.6 billion of investment recoveries and that is in our core litigation finance business. That's not including any of the other adjacent strategies like complex strategies, for example, that we also run. And on that $1.6 billion across 11 years, we have produced very consistent IRRs, right now at 32% and our nominal returns actually went up to 97% return on invested capital. And so to underline the point that this is the way this business works, this combination of settlements and outsized wins accompanied by a few losses, we now have 23 separate investments in our history that have produced more than 200% return on invested capital. And we have done all of this in this six-month period without any contribution, without a single dollar contribution from our YPF related assets, really showing the depth and breadth of the overall business. And these are not just paper gains, this is cash. Our cash balances have gone up. The large case wins that I refer to have been paying steadily. We have got receivables in the second half that have been paying steadily. And just as a reminder, this is very characteristic in litigation for you to win something and then for there to be a period of time to get the cash. But 85% of the time, our receivables pay within six months. And in fact, if you look at the receivable balance at the end of last year, the end of 2019, virtually all of those receivables are all paid now. So we have got increases in profitability, increases in cash and more cash coming in the door. Before I turn you over to Jon to hear about the portfolio and our progress in more depth, let me just touch on a couple of non-financial issues. So, as I said earlier, we are very excited to be done with the U.S. listing process. And I think there's no real debate that the combination of the SEC process and the New York Stock Exchange process is the most rigorous regulatory process in the world. So that's a significant check for Burford. And I think that we are excited not only to have been involved in that process, but with the opportunities that we think await us being able to access the domestic investment capital in the U.S., which has not historically been able to buy Burford stock. So we are excited about what that brings us in the future. And as you saw, we have expanded our investor relations team to take advantage of that. In addition to Rob Bailhache who has been with us in various capacities for years, we have added Jim Ballan in the U.S., a long-time specialty, finance, investor relations and sell-side analyst. And so, for those of you in the U.S., we hope that you will work with and get to know Jim. And as I said, the trading starts on October 19. For those shareholders who have seen the various communications about the mechanics involved in this, I frankly have to apologize on behalf of the stock exchanges. As a former tech executive, I have been pretty taken aback at how cumbersome and archaic these processes can be. And we regret the fact that you need to go through a little bit of complexity now yourselves for this to happen. And we also regret that the language describing this process is not quite our usual crisp, clear prose, but rather was frankly foisted on us by the exchanges. So all I can say is, you know, we think the long term benefit here dramatically outweighs the short term inconvenience that you will experience. But we do apologize for the fact that there is a little bit of inconvenience along the way. And with that, let me turn you over to Jon Molot to talk about the portfolio.

Thanks, Chris and thanks to all of you for taking the time to speak with us. As Chris says, we are really pleased with being able to report these first half results to you. And I will be speaking to slide four to begin with. But I do want to step back and echo something Chris said, which is we are now 11 years in and we have produced on a fairly consistent basis, very attractive, risk adjusted returns, right. Our IRRs have hovered around 30%. We have had returns on invested capital that are quite attractive and we have told people in the past we will tick up or tick down depending upon the duration of matters, right. We end up with higher returns on invested capital when things run long and end up going to trial and either produce big wins or, as Chris says, occasionally losses. And we will have lower returns on invested capital, but still quite attractive ones with attractive IRRs for the matters that settle earlier on. But we have generally produced consistent results from period-to-period such that no one period after 11 years can you say, oh, that was a fluke. We have enough realizations that everybody understood this is the nature of the business. And I think probably the other thing that investors would have recognized is, we have grown significantly over the past several years from 2016, 2017, 2018, 2019, we have put out much more capital. We have grown the team. We did it to meet demand because law firms and corporate clients needed our capital. And the legal services market had previously been ignored by the capital markets. So we saw tremendous opportunity and we added people. But we did it in a very careful way to target the same risk adjusted returns to make sure that in meeting the demands of our clients, we were able to include in our portfolio of assets opportunities that were just as attractive as the ones that had come before it. And I have been very confident of that process and the team and have said as much on these calls twice a year. But I could understand that for investors, the question they would like to see answered is, okay, you have grown the business quite significantly. We love that. Are you able to generate the same level of returns on this larger asset base that you have historically been able to provide? Have you had to sacrifice quality? Is there some sacrifice in the team? Were you able to really keep up that level of returns just on a broader scale? And I think the answer with these results is a resounding yes. And if you look at slide four on the upper left, you see the acceleration of realizations which has been going from 2016 through 2020. Each first half, it's been a larger pool of realizations than the one before. And if you look on the lower left, you see that those larger sizes of realizations have translated into larger realized gains. And it's a significant uptick from 2019 to 2020. The first half of 2017, 2018 and 2019 were quite impressive. We are very pleased with them. But you look at the realized gains just for the balance sheet, putting aside the group for the first half of 2020 and it's a big step-up from prior years and we are really quite pleased with that. On the upper right of slide four, you can see a little bit of what I described as how the portfolio has grown and have we seen realizations from those larger pools. And just as you would expect when you look at that slide, of course, you are going to see a larger portion of the 2015 vintage generating returns than you would of a later vintage, right. As you as to more recent, less mature vintages, you are going to see a larger portion of the deployment still outstanding. With the earlier vintage, you see a larger portion of the vintage has concluded and generated realizations with the one caveat which I will return to or one exception, which isn't a caveat, it's a positive that 2019 has already, right, the vintage of investments put on in 2019 has already delivered substantial realizations to you, our investors, in the first half of 2020. And I will get back to that in a few minutes. In the lower rate of slide four. I think it's important to note the composition of income from our capital provision assets, right. We have heard investors who have been very impressed with our results in the past, but they really wanted to see large realizations and they wanted to see it from non-YPF assets. And if you look at the composition of income in the first half of 2019 broken down into how much was realized versus unrealized, how much came from YPF related assets versus non, you see the balance there. If you look at 2020 in the first half, zero came from YPF assets. It's all from non-YPF assets and the vast bulk of it is from realizations as opposed to fair value adjustments, right. You have got $251 million and $65 million of that's fair value and $186 million of it is realized gains. I would like to say, though, that $65 million in fair value adjustments is nothing to sneeze at and it's something that I am quite pleased about. When we put out an RNS in April, just updating the market on progress in our cases, we pointed out we had already enjoyed some successes in cases, a portion of which were in matters that were very close to being final and therefore could lead to realizations quite rapidly. And indeed, that's come to pass. We have enjoyed those realizations in the first half of 2020, but there were many others that we said we have enjoyed successes that could be trial wins, but there will be an appellate process. And we were very pleased with the progress of the portfolio in those cases, but we did not expect final realizations during this period. And so the fair value adjustments, we have said repeatedly over time, only take into account a fraction of the income we would realize when those matters concluded, if they concluded successfully. So the fact that we have progress in cases, trial wins and such from matters that are not fully realized is a positive, not a negative. But of course, investors wanted to see realized gains and we have delivered there as well. So we are just very pleased with how the portfolio has performed in the first half of 2020. Turning to slide five, there's a little more granularity on the breakdown of where the realizations came from. On the left side, you see it broken down group wide and on the balance sheet and you see a further breakdown between realizations from our capital provision direct portfolio and the capital provision indirect portfolio. And it may be worth a reminder on capital provision indirect that we have long said that the capital provision indirect portfolio is a not as long term. It's a shorter term or medium duration asset class where we have much greater control over the progress of the litigation and over the ability to settle. And we were able to, on four assets which constituted about 70% of the portfolio of outstanding cash as of December 2019, turn those into cash, demonstrating the medium term liquidity from this strategy, which we have always said was there and we have been able to show. Turning to the right side of slide five, you see further description of those 10 related assets that Chris noted at the outset where we enjoyed a great deal of success. It was across 18 different cases. We did speak about this in a prior call and included it in our prior disclosures that we had made a concentrated bet on an asset where we had very high conviction and we are very pleased that that has resolved favorably in a complete win and that has generated $423 million of realizations group wide, of which $279 million is realized gain for the balance sheet. That's $266 million of realizations, $172 of which is gain. And mind you, the balance sheet numbers don't take into account that on the additional $100 million-plus that the funds would have earned, the balance sheet and you, our investors, would earn performance fees which is a positive. And I think it's important to see this as yet another example of what we have been saying for some time that outsized returns are not a one-off in this business. They are part and parcel of the business model that when we take matters into our portfolio and we have a diverse array of matters, we don't know whether any particular matter is going to be the one that settles early, delivers a decent return, we can recycle that capital and move on or whether it's going to go the distance, in which case if it wins, it could mean a much, much larger return, a home run or it could mean, in a smaller number of cases, a loss. All we know is that when we take these matters into our portfolio, we negotiate deals and price them in such a way that the returns are going to be attractive for early settlements and we are going to share in truly outsized returns for the matters that go the distance. And so when we have a matter that generates high returns, Chris mentioned before, just the number of resolutions we have had that have generated returns on invested capital greater than 200%, that's not a one-off. It's not like the diamond in the rough. It's not that we happen to have found a particular opportunity and will we be able to find it again? That's not at all the way it works. That is just part and parcel of our portfolio. When we underwrite a matter and price it and negotiate the deal and decide to include it in our portfolio and put capital out, we go through all the possible permutations. We model out all the things that can happen in the case, ranging from the very high-end recovery to the complete loss to the settlements in between. And we know that the high-end returns are one of the possible scenarios. And we have enough matters in our portfolio that some number of them historically have traditionally generated those kinds of returns. So we are very pleased. But this is just yet another example of that fact about our business model. Turning to slide six, I will kind of finish with the question I started with, which is, as you have grown and you have delivered greater returns on an absolute basis, you see on the right slide that we are up over $1.5 billion of realizations from our capital provision direct portfolio alone, are you able to maintain the return levels that you were able to achieve in earlier periods when you had a smaller portfolio? And you see on the left slide, the answer is yes, we are that in fact the IRR ticked up slightly to 32%. But we have had consistent IRRs throughout our history. And the return on invested capital, in fact, has gone up to 97%. So as Chris said, we are just really pleased to be able to report these results. I have had confidence in the portfolio throughout. But I am very glad to be able to show you what I have long known. And just a note, I mentioned on that two slides ago that 2019, those investments we put on in 2019 have contributed significantly to our realized gain in 2020. And just think about that. 2019 was a year when, to the outside world Burford appeared perhaps like it was under siege. There were people that were questioning Burford's business model and potential. Meanwhile, our team was very hard at work. We maintained our relationships with law firms and corporate clients. We continued to put on deals. We maintained rigorous underwriting. We put out lots of money and didn't let the public noise distract us. And there's some irony that during a period when outsiders were questioning whether Burford was doing well, we internally at Burford were working hard and now you in 2020, whether you are a long term holder who held stock and maintained faith or you are new to it, I am really pleased that you have been able to benefit now from the hard work we put in last year. And so, I am just really pleased with the results. And with that, I will turn it back to Chris.

Thanks very much, John, I am going to speak to slide seven and eight, but I am going to do that quite quickly because Jon has largely stolen my thunder. But I think the point to be made here and you have seen these slides before and they just are our effort graphically to illustrate to you what Jon and I have both been saying orally that litigation and the way that we construct our litigation portfolio has a rhythm to it and a set of reasonably predictable outcomes. And so if you look at slide seven, what you see there are those three possible outcomes. We make investments. The capital is deployed and the cases go on and they either win or lose or settle. And those are the only three outcomes. Litigation comes to an end. It's not something that is open ended and the process drives it along. And I think what's notable there is that 90% of the time, 90% of the dollars that we are putting out are generating high positive returns, either because they are settling fairly rapidly and generating nice IRRs as a result and nice but lower returns on capital. Or they are going to trial or some other form of adjudication and winning, which obviously takes longer but generates much higher nominal returns. And 10% of the time, we lose. And that's the nature of the business model. And frankly, that is why our returns are high because there aren't very many capital provision businesses out there where every single investment you make a complete loss of all of your capital is just not only possible, but part of the expected outcome of some portion of your book. And so the pricing for our capital is appropriately high to reflect that risk. And I think people in the legal market understand and appreciate that. Our pricing and these returns are not inconsistent with the historical returns of lawyers who have taken risk in cases. So it's not as though we are doing something that is outside the norm. What we are doing is we are doing it in a repeatable process at scale with professional investment management. And so, if you turn then to slide eight, what that shows you is that when we do lose, we lose very asymmetrically. So our losses are small compared to the wins that are big. And if you look at the right side of this graph, that not only shows you all of the big wins, but if you look at the green shading, those are just the 2020 big wins. So again, to sort of underline the point, this is the way this business works. We will consistently have, in our view, the spread of outcomes over time. Settlements in the middle, losses to the left and larger wins to the right. Now, what makes this business somewhat difficult and we have said this before from a public market perspective, is that we are a buy-and-hold investor. We are dependent on the operation of the litigation process, which does not organize itself neatly for quarterly or semiannual reporting to shareholders. Judges decide things when judges decide things. And we will clearly continue to have terrific periods like we have in the first half of this year and we will also continue to have periods where much less happens. On an individual or even a portfolio wide basis, we are not yet at the stage of being able to have a smooth, predictable outcome as to either timing or merits results. But frankly, that's why we get paid the returns that we get paid. If this business were easy and predictable and smooth, then banks would do it. You wouldn't be generating these kinds of returns and you wouldn't need Burford. So, turning to slide nine, let's talk a little bit about COVID. And I think the thing to start with, with respect to our business and litigation, is to remember that we are not a business like a hotel or a restaurant or an airline where a day without new business means that business is gone forever. A restaurant that doesn't sell a meal tonight doesn't get to sell twice as many tomorrow. But that's not true in our business. Litigation, as I have just been belaboring, is not an immediate and speedy process. And that's true around its commencement as well as around its progression when its commenced. And so what that means is that if you have a disruption to the system, as we have certainly had this year, that doesn't cause litigation that wasn't brought to go away. It simply causes it to be brought later. It is very rare for us to see a case that comes to us and that has to be filed immediately or it will become untimely. In many instances, you have got six years to sue everything. There's no rush. And as investors, we would sometimes wish there was a little bit more rush in the court and the litigation process. But the reality is that there just isn't. And so what we saw earlier this year was, in the first spike of the pandemic, sort of March, April and May, we really saw a significant freeze in activity in the legal system generally. Courts gave in to delay in many cases, not always. We had certainly activity in cases. But there were certainly no trials and lots of cases didn't move forward as rapidly as they otherwise would have. Lawyers had to adjust to a new way of working. And frankly, if you are a lawyer and all of a sudden you are setting up your office in your living room and trying to manage a bunch of cases remotely seeking litigation finance for a brand new case that doesn't need to be brought yet is not going to be the top of thing on your mind. And so, we saw a sharp fall in new business written and we saw fall in deployments on existing matters that was less severe because some of those cases were continuing on. But we certainly saw that number fall because there were also cases that simply didn't do very much and as a result, our capital didn't go up. This is not a bad thing, from our perspective. We actually often make more money when things go more slowly. It can be aggravating, but it doesn't necessarily hurt our returns. It often enhances them when we have time-based multiples involved in our investment matters. And as a new business, I think our view is that when the world normalizes, you will see a return to our historical patterns. When that happens, I think as a matter of some conjecture, if you would have asked me six weeks ago what I thought about the second half of 2020, I would have given you a pretty optimistic answer, because at that point it felt to me just from the sort of fabric of the legal world as though things were coming back. It felt like kids were going back to school. It felt like courts were figuring out how to reopen and conduct trials and it felt like lawyers were going back to their offices. Now, with a resurgence in COVID cases, that picture is less clear to me. And I think you will continue to see litigation delays this fall. But at the same time, you will continue to see progress. We have a case going to trial, I think, in three weeks. But at the same time, we re seeing delays in other cases. And I also think that while I would expect that new business will return somewhat, it would not surprise me if we continue to have a difficult fall on the COVID front that we won't have an immediate or sort of a V-shaped rebound in the litigation process. But as I said before, that's deferral for us. It doesn't mean that that business isn't going to come. And on top of that, we exist obviously in an environment where the events of 2020 are going to produce a very significant volume of disputes for years and years and years to come. And many of those disputes won't even be started for years. This is exactly the experience that we had with the financial crisis. We did quite a lot of financial crisis litigation arising out of events a decade ago. But we didn't do any in 2009. That litigation came in for years and continued to support the business. And I think that we expect to see the same thing here. So certainly, you see these short term impacts on the business but I don't think that we regard those as a cause for any sort of concern over the long term. So with that, let me turn you to Jim Kilman.

Thanks Chris. So turning to slide 10, although Chris and Jon have talked about how this is a period where significant realizations and realized gains drove our results, it's also worth noting that we did have a modest level of unrealized gains during the half as well. As a reminder, we are required under IFRS to fair value our legal finance assets. For a small number of them, primarily our YPF-related assets, we have historical sales-based values to factor into our fair value. Since there were no significant sales transactions or other case developments on the YPF-related assets during the first half, we have not changed our carrying value for them, which remains at $773 million. As a consequence, none of our unrealized gains during the period were YPF-related. Then for the vast majority of our legal finance assets, as we have talked about, we fair value them based on policy prescribed percentage marks, up or down, based on case progress, pretrial rulings, trial outcomes, appeal wins and the like. To provide some more transparency on these fair value judgments on the portfolio, we have included a new table in Note 13 of our financial statements that provide some data on how these policy prescribed percentages have actually been applied. So I would encourage you to take a look at that. As Jon touched on, during the first half of 2020, we did have positive progress in a number of cases in our capital provision direct portfolio, as you would expect, as our portfolio continues to season and mature. This drove $68 million of unrealized gains during the period. Even with those gains though, our total unrealized gain on the capital provision direct portfolio, setting YPF aside, remains quite modest at only 12% of carrying volume. In our 2019 results RNS, which we issued on April 28, we reported on some significant favorable portfolio case progress in 2020 so far. We thought it would be helpful here today to show how some of that progress translated into results during the first half. The table on the bottom right of slide 10 is designed to do that. Focusing on the balance sheet, only amounts for a moment, we said in April that we had final matters that could generate $300 million of ultimate cash receipts and $200 million of income over time. As we emphasized at that time, those are the amounts we expected to receive in total from those matters over their lives. However during the first half, much of that actually happened. From the matters referenced in the April RNS, we had $272 million of realizations, some of which were receivables at period-end, but all of which are on track to produce cash receipts. And those realizations produced $173 million of realized gain. We also said in April that we had earlier stage matters that we expected to ultimately produce $100 million of income. As you would expect, those matters are not as far along. So it didn't produce realizations during the first half, but the progress in those cases did drive $42 million of unrealized gain during the period. So in aggregate, for the balance sheet, the matters we referred to in April generated $272 million of realizations during the first half and $218 million of income. And to be clear, the cases we referenced in April aren't done yet. We would expect to achieve the remaining realizations and income from this group of matters over future periods. Shifting now to focus on cash on slide 11, we lay out our cash generation during the first half of 2020. As noted previously, although we had significant capital provision direct realizations in the first half, many of those were still receivables at period-end. So our cash proceeds from that part of our portfolio in the period were relatively modest at $46 million. But we have been collecting substantially on those receivables as the second half has progressed. However, despite the pandemic's impact on the market environment, we were able to generate $170 million of proceeds from our capital provision indirect assets. We have described these in the past as a medium term source of liquidity for us and they certainly delivered that in the first half. Our total of $224 million dollars of cash receipts for the first half of 2020 was in line with the same period last year and provided significantly more cash than we needed for our expenses and even our deployments in the period. Importantly, however, the large amount of capital provision direct realizations during the first half left us with $281 millions of receivables at June 30. Those have begun to turn into cash. And as that continues, it bodes well for our cash generation during the second half of the year. To recap our liquidity picture, we turn to slide 12, where you see we ended the first half with $262 million of cash and cash management assets. We had $281 million of receivables at June 30 for a total of $543 million of assets that either are cash or would be expected to become cash fairly soon, which is why we feel quite comfortable about our current liquidity position. The total of cash and receivables at June 30 was almost twice what we had a year earlier and 73% higher than our highest previous total for a first half period. And it's worth noting that by September 15 of this year, $86 million of those receivables had turned into cash already and our cash and cash management balance stood at over $300 million. We built up that liquidity without raising any external capital for the balance sheet in almost two years and without issuing any debt since early 2018, which pretty clearly indicates the cash generative power of the business. On the right-hand side of slide 12, we lay out some highlights of our capital structure. We remain very conservatively levered with a net debt to tangible assets ratio of 14%, dramatically lower than our covenant level of 50%. Our debt structure continues to be longer dated than our average assets. Our debt is laddered with our nearest maturity almost two years away and even that could be covered several times over by the level of cash receipts we have generated in each of the last several years. Given our liquidity and our rock-solid balance sheet, we feel quite comfortable that Burford is well positioned for both the opportunities and the challenges that lie ahead. And with that, I will turn it back to Chris.

Thanks Jim. And just to wrap up on slide 13. So as you can tell from that fairly long presentation, we are pretty excited about what has happened so far this year. And we are also pretty excited about the future. We think that Burford is very well-positioned from both a market and a financial perspective, especially considering our cash liquidity and our access to significant fund capital to be able to capitalize on the opportunities that we see ahead. And we are thrilled with where things stand right at the moment. So rather than me rattle alone anymore about our enthusiasm, why don't we pause and take your questions?

[Operator Instructions]. Our first question comes via the webcast from Mike Brooks of Aberdeen Standard Investments asking.

Please, can you provide an update on YPF? What is the potential timetable and scenarios from here and the relevant, if any, from the Argentina debt restructuring?

Thanks Mike. So the YPF cases, both the Peterson and the Eton Park of the cases, are currently pending in the trial court in the Southern District of New York. So that's the Federal Court in Manhattan. And as those of you who have followed these cases know, we have won decisively on the question of jurisdiction for the U.S. courts. That was the important first half of this case and that went all the way to the U.S. Supreme Court. Now having won that, the cases are in, what we would call, sort of a normal litigation posture where they are proceeding through discovery right now. And then after discovery, you will have a period of motion practice followed ultimately by a trial. The court has set a schedule for those cases to move along quite rapidly. And they are moving along as we speak. This is litigation. So there will be doubtlessly be twists and turns along the way. But right now, they are behaving like a normal piece of large dollar contract litigation, which is exactly what this case is. As we have long explained, the litigation judgment or litigation debt is entirely unrelated to the sovereign debt picture, which is a contractual set of agreements between lenders and a country. There is obviously no such contractual agreement in litigation and arbitration. And so the two processes, the two systems operate entirely independently. And so the debt restructuring doesn't have any impact one way or the other on these claims, just as the default prior to the restructuring didn't have any effect and didn't cause us any particular anxiety.

We have another question from Laurence Endersen of Capstrive asking.

Congratulations on your progress. Have you seen any major changes in the competitive environment for litigation finances? Is your leadership position widening?

So it's an interesting question when you look across the market, because certainly there is more capital than there ever has been going into the legal finance market. If you went back some years, much of that capital was coming from small venture capital like players. Some of those players have grown and some of them have struggled and left the market. And you have seen also an attempt to new entry that have been somewhat constrained this year by the pandemic and by liquidity dynamics for their backers. So Burford certainly considers itself to have a very robust market position in the market. And we don't think that has changed. But there's also no question that we will continue to see entry into this market. And from our perspective, that's a very good thing. And we have always taken that position. The reason we think entry is good is because the potential users of litigation finance capital are incredibly diffused. They basically include every law firm and every company that has claims out there in the world. And for it to be a normal and accepted part of your corporate finance practice to make use of this capital, just like in any other area of corporate finance, there needs to be a robust market. If Burford were the only player, a monopolist player in this marketplace, it would not be nearly as large. And so what we have long done is actually welcomed entry. And the most recent example of our industry leadership is that just a month or so ago, we announced the formation of the International Legal Finance Association, the very first trade association for this industry. So we have taken a form of a leadership role. And things like that we think just cement our position in the market, but also normalize the use of this capital broadly in the sector. And we think that's a positive for us.

Our next question comes via the phone lines from Julian Roberts of Jeffries. Julian, the line is yours.

Hi. Thanks very much. A couple from me, it's all right. The first one is, are you able to give us any idea of the credit worthiness of the defendant in the cases behind the newly recognized receivable? And any further expectations around the timing of receipts? I know you have already commented on that. And then the second one, it's obviously to try and help analysts. Is there anything that we can monitor which might give us an idea of the sort of resurgence of litigation funding opportunities for you? Or will we basically just have to wait for the next results? Is there any other indicator we can look at?

So in terms of credit worthiness of the defendant in the related cases, we have been publishing for a little while now that our concentration tables where we talk about the industries that our large cases are involved in and those related cases were involved in the insurance industry. And I think that it's fair to say that we have no concerns about credit worthiness at all in terms of the payers of the judgments there. In terms of timing, this is really just a mechanical question. So we have said that these are a group of related cases. And so what that basically means is that each of the cases is a separate litigation matter pending in its own court. And so what happens after the comprehensive win that we have here is, each court has to deal with its own processes and some of them are faster than others. But there's nothing substantive that stands in between these cases paying and today. So the question is just one of mechanics and it's the speed at which each court process goes through and stamps the various papers and all of the other administrative steps that need to happen. And that's why when we have these receivables after cases resolve that the vast majority of them pay within six months. And indeed, you probably would have seen more of these paid by now if it weren't for the fact that these cases resolved really very late in the first half. So I don't have a precise prediction about timing, but this is not as though there are multiple stages more of litigation to go here. In terms of how to sort of externally monitor the markets, I think unfortunately there really isn't, is the simple fact of the matter. Litigation is a pretty local activity and it's sufficiently diffuse as well in terms of scale. So even if you were to log on to the U.S. court system and watch new filings in a particular court, even that wouldn't help you, particularly because a lot of those filings are going to be in cases that wouldn't be attractive to us as a financing matter. And so you have to really dig in and do a lot of research to figure out, gee, I am seeing now a resurgence in large dollar antitrust cases in the United States, for example, that would be pretty difficult to track on any sort of basis. So, I wish I could help you more with that. But I don't I don't see it, unfortunately.

Thank you anyway. Thanks for the answers.

Our next question comes from James Hamilton of Numis. James, the line is yours.

Thank you. There are two that I would like you to try to help with if you can, please. Firstly, obviously, whilst the pandemic is terrible, my observation is there's an enormous amount of economic disruption. I was just wondering, in terms of quantum, how do you sort of view this versus the disruption that we saw in the global financial crisis? And what I am specifically thinking about in areas is breach of contract where a company A has said, I want X by Y date and for a whole variety of reasons, that hasn't materialized. It would be the first. The sort of second is, if there is a huge volume of litigation finance questions, volumes, would you see the mix out of things like complex strategies where you have a lot of flexibility that you mentioned and therefore over the next few years, the mix of the portfolio might shift? And finally, I don't want to be too greedy. I was just wondering if you could, I appreciate that a huge number of cases settle, but assuming that your cases don't settle and they all went to trial, I am just wondering what sort of proportion of your caseload could deliver what I would describe as an exceptional result, such as the one you have posted today?

So let me start and then I am going to ask Jon also to chime in on this. When you talk about litigation arising from the pandemic, I really think you are talking about two things. They are not just one. One is claims that are actually caused by the pandemic. And James, for example, you referenced breach of contract claims. So certainly, you are going to see lots of litigation that is effectively fault or loss allocation litigation. And I am sure we will see some of that. That's obviously much more widespread than it was in the financial crisis, because everybody has been affected in some way or other by the pandemic, whereas very much fewer, very many fewer people in the global financial crisis actually had a cause of action arising out of something that went awry. But I think Jon will have some further thoughts on that. Before I turn it over to Jon and Jon will also to talk with these other, your other two questions as well. I would just comment briefly on mix and complex strategies and so on. And I think the answer there is two parts. One is, we are obviously very opportunistic. And so if we see a gold rush of opportunities in core litigation finance that we really like, we will obviously allocate capital there in preference to some of the other opportunities that we might see in adjacencies. The other thing going on, though, is the complex strategies business, as we have been practicing it thus far, really relies on not only a robust M&A market, but a robust M&A market with fairly high prices and not so much stress. And so I think that leaving allocation aside, you are likely to see low volumes from us in that strategy for the near term, at least, until we see a return to more robust M&A. I didn't talk about this when I was talking about COVID numbers, but one of the other factors in COVID numbers, of course, for us is, we are also very sensitive to market conditions. So in addition to the legal industry closing down, we were also cautious about both credit worthiness and desirability of matters which caused us to slow our own pipeline somewhat. And that's true in company strategies as well. We are not going to chase an opportunity that we think is potentially unrewarding just for the sake of doing the business. Jon?

Sure. So those are great questions. And to the first one, in terms of mix of litigation and volume and the third and what the return profile would be, I would say sort of following up on Chris' theme that the financial crisis created litigation in two ways. One very specific, right, particularly residential mortgage backed securities that collapsed. There were holders of those that had claims. So if you were an investor in a financial instrument and you were a victim of fraud, you had a claim. And that led to a lot of specific litigation. But there was and I would suppose you would say the comparable category of litigation today would be where there's COVID-related interruption of business or triggering the breach of a contract and there could be litigation over who bears the risk, as Chris says. But then there was a second respect in which the financial crisis led to litigation finance opportunities that I think is the same today as it would have been then and perhaps even broader, as Chris said, because of the greater magnitude of the disruption globally. And that is, people don't tend to sue each other when deals go well. They sue each other when things go badly. If both parties to a contract make money, they are not in litigation. It's only when they don't make money that they are litigating over who has to bear that risk. And when things go badly, not only are there therefore more litigation claims in the aftermath, but companies lack the capital to finance those claims, right. They are busy with whatever their legal budgets are. They are hiring lawyers to deal with corporate matters, defensive matters, regulatory matters. They don't have the budget for the extra litigation. And we have long talked about how it's an accounting matter. Affirmative litigation doesn't pay and the CFO won't want to increase the budget for it because it reduces earnings. It increases expenses, reduces earnings and if you traded at multiple times earnings it further depresses your valuation. So you have got companies who have more claims, they don't have the money to finance them. And then you have law firms who are going to see a slowdown in their corporate work in a routine matter and therefore they are looking for alternative sources of business and revenue to keep their lawyers busy and they need cash. So those two things together mean that law firms are out there trying to win more of the business that corporations don't want to pay by the hour for. And there's more litigation. And that's what we found in the aftermath of the financial crisis. And I think it is beginning to appear now. We are seeing glimmers of it. But as Chris said, the initiation of litigation is not an immediate thing. It's something that happens over time. But we are clearly seeing companies that would not have come to us for litigation finance before. They wouldn't have thought of us as a source of finance. But they are sitting with claims that may be pandemic related or may not be directly related to the pandemic. And they are coming to us for finance because the economic fallout from COVID has hurt their balance sheet, hurt their income statement and they need the money. On the question of returns, your third question, how much will they resemble the returns from this particular set of matters? In fact, it's always going to be the case. The returns on invested capital and the IRRs we have enjoyed from those hand related investments, when we model out any new pretrial matter we are taking, pre-litigation matter at the outset, we are going to look for that level of return where the matter is something that would go all the way to trial. So as I said sort of earlier on, there's going to be a spectrum of possibilities. If those matters settle early, then we would earn lower returns on invested capital but might have comparable IRRs. Where they run longer, we would expect much higher ones. And you make the point that actually if you are someone who thinks I am more interested in absolute returns, it is the case that in downturns, settlements may take longer. People may drag things out because they want to postpone the payment. And that can lead to, in fact, higher absolute returns in the long run. But that's all, again, we are building a portfolio. I can't predict with precision how any particular matter in the portfolio will perform. All I can say is, that's been our experience in the past that within the portfolio, there are going to be matters that will produce those kinds of outsized returns. That's what's happened.

Our next question comes via the webcast from Peter Webster of Janus Henderson asking.

Given the likelihood of dispute inflation linked to pandemic disruption, are you looking to raise more external capital to fund growth?

So I think we are in the same position we have been in for years with respect to our capital structure and access to capital, which is that by having a multiplicity of capital sources, we are comfortable that we are never in a position of being forced capital raisers and that instead lets us be opportunistic. So in addition to the balance sheet, which obviously has today a very significant amount of cash on it and also a significant amount of debt capacity, we also, of course, have our private funds business where we have hundreds of millions of dollars of incremental dry powder available to us and quite likely the ability to access more capital there, should we need it. So, it's not something, it's not as though we view it as a binary issue. We just watch market conditions and act appropriately. But as Jim said during his presentation, we have done what we have done without having to raise any external capital at all for the last couple of years. And so we certainly don't feel any compulsion to do that either.

Next question comes from Andrew Shepherd-Barron of Peel Hunt. Andrew, the line is yours.

Okay. Thank you. Two related questions from me, if I may. On the cash, if you look at the narrowest definition of cash received in the first half, it is basically capital provision direct $46 million. Obviously, if you have got some short term receivables relating to that, if all of those come in, in the second half, on that narrowest definition, how much would that then total in terms of cash this year? And second question is that given what you said about the latest proceedings, et cetera, if it takes time to collect cash, is it unlikely, I am sure it's not impossible, but is it unlikely that we would see further significant cash coming in on capital provision direct cases in the second half? Thanks.

So I am going to the turn the first question over to Jim Kilman. As to the second question, I think the simple answer is that we don't know. We don't know in this period and we don't know in any period. We are, in most cases, there's a pretty short advance period where we know or think that there might be cash coming from a case, there might be a case resolving. And it's just extremely difficult to predict because we are in the hands of both of when judges decide and also when corporate litigants choose to settle. The fourth quarter of every calendar year, historically, this is not even in relation to Burford, historically is a period of active litigation settlement because I used to do this in my prior job when I was the General Counsel of Time Warner. You sort of get to the end of the year and you go dicker with the CFO about how much free cash he had and you would make some settlement offers to resolve litigation that otherwise you thought next year we are likely to go and do something and you try to take advantage of getting out early. And I think we simply don't know in the fall of 2020 what that's going to look like for corporate defendants. So I think it's a wholly unpredictable outcome at this moment. But once again, other than the fact that we are a public company and public investors like to see growth and predictability, frankly from the business' perspective, from a purely cash perspective, it's something that we are indifferent to. We tend to make more money when matters take longer. And so while we are happy for things to settle and go off risk and produce cash, we are also perfectly happy for them to stay outstanding and for our return multiples to keep on growing. And indeed, there are moments in the business where we are sort of crossing our fingers and hoping that something doesn't resolve at a particular point in time, because if it doesn't, then it goes on and it trips another multiple increment. So there is a tension between the market's desire for smoothness and predictability and the way to maximize cash earnings in this business. Jim, do you want to take the first one?

Sure. Andrew, as I think I understand your question, if you take the $46 million in cash that we got from the capital provision direct segment in the first half and I think it is fair to assume that virtually all of the receivables relate to our capital provision direct assets, the capital provision indirect realizations tend to turn into cash very quickly. So if you do assume that all $281 million of receivables come in and you kind of add those back to the $46 million, then you would get, I believe, $327 million that effectively is the cash number, if all of the receivables had paid in the current period. You could also, I suppose, take a look at it and say, the net increase in receivables during the period was $262 million, in which case the equivalent number would be $308 million.

Thank you very much.

Our next question comes from Portia Patel of Canaccord. Portia, please go ahead.

Thank you for taking my questions. I have got two please on capital provision indirect. So the first one is, just turning to cash again. So of the $224 million cash receipts you have flagged, capital provision indirect accounted for $170 million of those. But it's P&L contribution in terms of the realized gains relative to cost seems to be just $3 million. So therefore, should we conclude that the return on the $170 million of invested capital for complex strategies is very low single digit? And secondly, given that the portfolio on balance sheet of complex strategies now stands at $46 million, down from $183 in December and clearly, as you have explained, it's been an important source of cash for you in this half and in recent periods, I would just be interested to know what your expectation of cash to come back from these outstanding complex strategies and investments are? And in what timeframe? Thank you

Sure. So in your first question, you are right. We took a conscious decision in light of economic condition during the course of 2020 to push to resolve some of those matters and we were willing to do so at a discount to their usual historical returns in exchange for getting the capital in rapidly. And that resolved in our minds any concerns in the result of their credit worthiness and so on. So that was a conscious decision, but that's correct. As to the remaining assets, when you say it's been an important source of cash for us, I would probably not agree with that, frankly. What it's been is a place where we have been able to deploy cash with a more predictable, more reliable pace of getting that cash back again at moderate returns, returns that are much less significant than our litigation finance returns, but better, frankly, than just keeping the cash in the bank. And so we have always been in complete control about how much cash we want to put into that strategy. And again, as you can see, we have the ability to get the cash back out of it pretty expeditiously, if that's our choice to do so. So at any given time, we are obviously cash rich right now and we are comfortable with the positions in the remaining assets, so it's not something that we feel any need to raise to do. We will just be opportunistic about getting that cash back in from the investments at the appropriate point.

Our next question comes via the webcast from John Dalton asking.

The retail bonds continue to trade at elevated yield levels. Has there been any thought given to bond buyback or refinancing?

So I agree with you. I think the pricing on the bond is nuts and I actually think they are an extraordinarily good deal right now. I also find the pricing on the screen to not necessarily be reflective of the pricing in the market. And I say this from personal experience, because Jon and I actually bought some of the bonds a while ago and we were consistently unable to lay our hands on them for the prices that the screen suggest they trade at. So I think that's a murky world out there. But as we said in our liquidity discussion in the interim report, this is an area where we are prepared to be entirely opportunistic with respect to our debt capital in both directions. So we are prepared to be opportunistic repurchasers, especially in view of the fact that there's a maturity in a couple of years for one of those bond series. And we are also prepared to be opportunistic issuers, again, depending on market conditions.

[Operator Instructions].

And I enjoyed talking so much that I realized that we have gone now for well over an hour. So if there's one more question, I am happy to take it, but otherwise we can certainly call this to a close and burden you further today.

Our final question comes from David Jones. David, your line is open.

Hello. Good afternoon. What I wanted to ask you, please, is at which stage would you think that Burford would sort of move from continually expanding balance sheets and you using all the cash it gets to invest in more cases? And at what point would you consider producing larger distributions for shareholders?

So thanks. That's a great question. And I think our answer to that really boils down to the quality of opportunity that we see. We have built now over the past 11 years the market leading business with a great market presence in an expanding field. And given the effort and cost that have gone into building our position and the fact that as we have demonstrated and Jon has take you through in detail, we are still able to generate very high returns on capital when we deploy it. It seems a little bit foolish not to take advantage of that market position and continue to grow and continue to deploy capital to the extent that we believe we can continue to make attractive returns on them. So the market is still at that stage and I think we still have the mindset of continuing to take advantage of what we have built and continuing to drive returns for shareholders. But we are certainly sensitive to all of the shareholder dynamics in play here.

And with that, I think given that we are almost at a quarter past the hour, I think Jon and Jim and I and the entire rest of the Burford team would like to thank all of you very much not only for participating in this call today and hearing us out, but also for your support over the last year or so, especially given that this has been a more tumultuous period for various reasons in the global economy and more locally, to Burford. And we hope that the combination of these results and our explanation of the business and the U.S. listing that you are about to see coming to fruition provides people with a strong degree of comfort about what this business is and what it's capable of delivering. And we look forward to continuing to speak with you about the business in the months and years ahead. Thank you all very much for participating.

Ladies and gentlemen, this concludes today's call. Thank you for joining us. You may now disconnect your lines.