Burford Capital Limited (BUR) Q2 2023 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to today's conference call titled Burford Capital Second Quarter 2023 Results. My name is Ellen, and I will be the call operator for today. [Operator Instructions] I would now like to turn the call over to Chris Bogart, CEO to begin. Chris, please go ahead whenever you are ready.

Thanks very much, and hello, everybody. Thank you for taking a little bit of time to join us today. As usual, I'm joined on the call by Jon Molot, Burford's Chief Investment Officer; and Jordan Licht, Burford's Chief Financial Officer. We've had a terrific year so far, and we're excited to be able to tell you about all of the components of it. Julian Roberts, one of our analysts at Jefferies, put out a note a couple of days ago where he said that the success that we've been having in the YPF case was likely to overshadow our second quarter and first half earnings, and I am determined on this slide and I'm on Slide 3, I am determined to prove him wrong about that. And the reason I say that is because if you look at the data points on the left-hand side of this slide, which are all of our core second quarter metrics, those numbers are all cash numbers and those numbers all have nothing to do with the YPF case. These are showing what the core business is doing right now, what we call effectively pillars one and two of our - of the four pillars that we talk about in terms of Burford's value. And what they show is the business being very strong. And then, on the right-hand side, you see our first half financial metrics, which do have some YPF impact from the first successful YPF decision in March, although not any from the more recent successful decision. But they are much more than that. And those numbers collectively are the strongest in our history. Turning to Slide 4. We just have here a few overall highlights of the business before Jordan takes you into - before Jordan and Jon take you into some of the details. We've obviously had very significant revenue growth as the portfolio has come back to life and has started to perform, and again, I'd highlight that that second sub-bullet, where in addition to some gains from the YPF matter, we've had very significant income coming out of the non-YPF part of the business. So, the business really, not to overuse an expression I've used before, is today firing on all cylinders. We've got a significant amount of new business activity going on, up materially from the last comparative period and on track to do a meaningful amount of business during the course of the year. The portfolio has continued to grow in size. We're now sitting at a $7 billion portfolio of legal assets. When we think about YPF, and Jon is - Jon the architect of our YPF victory is going to talk more about YPF when we come to a specific slide on it. Let me just make an overall comment. We know that people have lots of questions about YPF and where we stand. And we understand that investors live in a world of wanting to know when and how much. But as we've said before, we can't answer those questions for you. Both because we don't know the precise answers today, but also because it's not in our collective interest to shareholders for anything that we could tell you about our strategies and approaches to be public. It would be value-destroying for us to do that and I think you'll all understand that, much as you might want answers to your questions. But you've heard me say for many years that litigation takes longer, costs more, and produces less than people expect, and understanding that is a core part of our investment process. We look at investments hard and apply those factors when we make these choices. So, a pretty good approach in every litigation case is to assume those principles, including in this one. Then when really good things happen like last week's top-of-the-range judgment in YPF, it's always a pleasant surprise. Beyond YPF, as we have said throughout this process with the U.S. Securities and Exchange Commission, we thought this was a constructive process. We thought it was one that was going to come out in a satisfactory way and indeed that has happened and the SEC has confirmed that they have completed their review with no further comments. And Jordan will talk later about our liquidity and capital markets access, but we were pleased to have another successful debt issuance during the quarter. And just before I turn you over to Jordan for some details, it's not on the slides and I'm sort of wary of trend-driven slides. So, you're not going to see from us every presentation a slide about AI. But I also wanted people to understand that AI is exciting for us, that we have been active in this area for years, and it's very much front of mind. And so I thought I would call out today the lead story in Ross Todd's American Lawyer, which is the - one of the leading industry publications, reporting on an event yesterday that Burford ran for AI in the legal sector, where knowledgeable people came together and likened what was happening with AI and law to the revolution in Quantum Physics. And the reason of course that's being said is that, with the advent of large language models in a commercially viable way, pretty much everything that lawyers do is a language task in one form or another. We've been using and investing in data science for years as we've talked about in the past. We'll continue to do that, and we're optimistic that over time, AI will both improve and increase our business efficiency, as well as opening new opportunities for this business to continue to grow. And with that, Jordan.

Thank you, Chris. I'm turning to Slide 5. A quick snapshot of the total numbers before we dive deeper into each of the different components. As Chris mentioned, we continue to see momentum in the portfolio. This year is highlighted by earnings of $1.07 in the first half of the year and a book value per share now of $8.87. I'll hit on a couple of key points here. So, capital provision income is up considerably in the first half of 2023 versus the first half of 2022. And when looking at the quarter, we also see a significant increase period-over-period. Both second quarters in 2022 and 2023 were impacted by the underlying change in our discount rates. As you'll recall, our revised valuation policy takes into account duration and time value of money, and in the second quarter, the increase in market interest rates caused the overall discount rate of the portfolio to rise 70 basis points which depressed asset values. To give you a sense of magnitude, isolating that change alone had a negative impact of around $94 million on a consolidated basis, and even when offset by the passage of time, it remained a headwind. However, we are happy to have completed our work with the SEC and progressing our valuation approach to incorporate similar elements of duration, time value that other large firms like Blackstone or KKR incorporate. This is going to create real volatility in our GAAP reporting based purely on market forces that aren't going to impact anything with the ultimate cash flows of our investments. And unlike other investments in private equity, the ultimate exit value of our investments is not dependent on interest rates or market factors at the time of exit. Turning quickly to some balance sheet metrics on the bottom of the page. Burford-only capital provision assets are over $3 billion, a significant jump and the highest level in our history and our equity position is just shy of $2 billion. I'm going to move to Page 6 and discuss our new business activity. Again, 2023 has been productive in the first half of the year and as the global leader in litigation finance, we have the ability to support our clients with significant commitments and deployments of capital, whether that's using our balance sheet capacity or our third-party funds. This is demonstrated in Q2. I want to highlight one significant transaction where we delivered a $325 million commitment to support a portfolio of assets for a Fortune 50 company. Even absent this deal, we had close to $200 million of capital provision direct commitments in the second quarter. Importantly though, what deals like this show is the continued appetite by large corporates for the kind of financial solutions that we can provide for their litigation portfolios. Moving to the bottom of the Page, we outline our deployments, which highlights our continued build-out of the balance sheet, with $181 million of deployments. And then now, let me turn it to Jon to discuss realizations in the portfolio.

Thanks very much, Jordan. Thanks to you all for joining. I'm very excited to be here with you. It's such a great moment for Burford. If you look at Slide 7, you see - really, I have been talking for a while about how we have built up this great portfolio that I have great confidence in, and it - it's taken time to work its way through with COVID and you just see that we've got a record level of trailing 12-month Burford-only realizations, $475 million. And that's whether you measure this by looking at the period-to-period, so you look at the first half of '23 versus the first half of '22, whether you look at it at the trailing 12 months as of now versus a year ago, either way, the numbers are up. We're just - we've had - have a larger portfolio that is producing more cash realizations for Burford. And if you look at the right side of the slide, you see we've done that without any sacrifice in the quality of these matters or in our return levels. We've kept it the same return on invested capital, the same IRR from concluded cases even though we have a larger pool of things that has resolved. And that's all very positive and very much just in keeping with the business plan. If you turn to Slide 8, which is a slide we've seen before, but of course is updated with current information. I love this slide because it packs a lot of information in there. The bottom shows you our performance historically. It shows the IRRs by vintage year. The bars on the upper level show you a couple of things. The red bars show you by vintage what we've harvested, what the realizations are and you can see over time how those numbers, the larger vintages once we undertook a real growth campaign, has produced more in cash revenues and that really reflects what we saw on Slide 7. But of course, what shareholders care about is what's still in the portfolio, and Jordan talked about additional commitments and deployments and what's going out now, like is the business generating opportunities and does it have assets that have the ability to generate revenues in the future? And that's what those gray shaded lines are, the gray shaded bars, and you see those are some very large numbers. That is what's out in our assets that we hope will produce the kind of results that the red bars reflect from the things that have already resolved. So, I really do think we've got a great portfolio that just continues to generate revenue and it's doing it at a more rapid clip. Probably some of those gray shaded bars would have turned red earlier had it not been for COVID slowdowns. But now that the COVID slowdowns are behind us and the courts have worked through or are working through their backlogs and processing cases on steady place - steady rate, I think we stand poised to generate more revenues in the future. Okay. Turning to Slide 9, YPF. I would just pause and say how gratifying it is to see the business model work so effectively to vindicate the rights of shareholders, who had a contractual entitlement to a tender offer in 2012. And I think back to speaking for the first time in 2015 to the insolvency receiver from Spain who was charged with managing a company that was the 25% holder of YPF and that clearly had an entitlement to a tender offer to formulaic price in 2012 and a price that was much, much higher than depressed trading price as a result in large part of Argentina's action. And he faced a real dilemma that there was real value for these shareholders and how was he going to actually tap that value. How is he going to do it when he knew it was going to involve years and years of very expensive complex litigation. He didn't have the expertise or the financial resources to fight that fight. So, how was he going to vindicate the shareholder's rights. And he had the foresight and the judge who approved his plan to go ahead and conduct an auction and look for the best partner to finance and manage this really large piece of litigation against a sovereign nation that has great experience hiring top-notch lawyers and using litigation process to delay payment. And I'm just so gratified that he chose Burford, which was I think the only entity out there that combined the expertise in litigation and law with the expertise in finance to bring those two together to put - assemble a top-notch legal team, the best legal team in the world for this case to manage the case, to work with the lawyers in the trenches on every issue year-in year-out down to the final trial result. And for us to deliver this kind of result just really validates the business model and in fact, I was gratified that the judicial opinion did note that of course, when shareholders, particularly they - Petersen and also Eton Park are faced with this kind of litigation adversary and this much expensive risk, they shouldn't be penalized for having looked to outside sources to finance and manage litigation. And so, I'm just very pleased with the outcome here. Now, of course, everybody wants to know what comes next. There are some things that we do know of what comes next. There'll be a judgment entered in short order. There is the potential for appeal and Argentina has already said it will appeal to the U.S. Court of Appeals for the Second Circuit, that's an appeal as of right. But in the United States, Federal Court judgments, once they are final, they are enforceable absent if the defendant posting a bond or obtaining a stay. And after the appeal to the Second Circuit, the Supreme Court has discretionary, reviews a small fraction of cases that where there is a petition for review, and in this case, you'll recall years ago, Argentina did seek Supreme Court review on the issue of sovereign immunity, and the Supreme Court declined review and decided to let the Second Circuit and Judge Preska's decision stand that this case could go forward in the United States. And there was an opinion from the Solicitor General of the United States saying this is something the United States has an interest in being resolved in the United States because it involved New York Stock Exchange shareholders indicating their contractual rights against the entity that issued a - did an IPO and is an SEC-registered company in the United States. So, that we do know is going to happen. As Chris said, we can't really talk to you much more just as over the years, investors wanted to know a lot more about our litigation strategy, what did we expect in terms of damages, how long did we think it would take, what was our - behind the scenes, what was going on in the litigation and we just didn't think it was in anyone's interest for us to go into that kind of detail and the same is true about how we take the next steps toward translating this judgment into cash for Petersen and Eton Park as well as for our shareholders. So, with that, I will turn it back over. Thanks very much.

Thanks, Jon, and I'm on Slide 10. On the top of the page, you'll see a outline of capital provision income which I mentioned is significantly higher in the first half versus last year's first half. And that's true even excluding the impact of YPF. We're approaching double the first half of 2022. Dissecting the number a bit, our realized gains in the first half represented a total of $94 million, which includes $59 million from the second quarter of this year. That compares to $27 million of realized gains in the first half of 2022. On the bottom is our asset management business, which continues to perform and we continue to reap the rewards of using the funds to support both our balance sheet efforts and our clients. While there is movement period-to-period given the waterfall structures and the impact of fair value on the income that's recognized, the cash receipts this year-to-date have doubled compared to last year year-to-date at $23 million. Moving to Page 11, will outline the expenses for the second quarter. At first glance, they seem a bit higher than Q2 from the previous year, but it's important to separate out some of the cash and non-cash expenses. For example, the total comp line looks like it's gone up $11 million, but in cash terms, it went up by $1 million. The rest of this expense is accrual expense driven by share price movement and increases in the asset values of the portfolio. And the annual incentive compensation line is one which will true up at the end of the year. Looking at our G&A expense, it's important and also to note that there is $3.3 million of expense associated with our restatement work and the implementation of the new valuation methodology which isn't money we expect to need to spend further on. I'm moving to Page 12 now. I know there's a lot of information on this page and I'll try and capture some of the highlights. Starting off in the top left, cash receipts here are $247 million in the first half of 2023. That's significantly higher than $99 million for the same period last year. And just looking at that metric in the first - in the second quarter, that's a $150 million. Our liquidity and receivables are in a strong position as of period-end, highlighted by the $441 million of cash and securities, as well as $93 million of receivables. We've talked about these receivables before and as of this call, we can mention that almost 75% of those receivables have converted to cash, including the one longer-dated receivable which had been - which was unusual and which was paid in full. It was tied to some collateral litigation that was unrelated to the case, but that's all resolved. Obviously, we don't intend to hold this much cash or cash near these levels, and we look forward to putting that to work and we're still digesting the bond issuance and the cash realizations that have occurred to date. And the bottom of the page shows our leverage levels. We remain well below our covenant levels. We did redeem our 2024 issuance right after the quarter-end. Just for context, if you looked at these leverage levels, we could probably issue close to $1.5 billion or more debt today and still be within the covenant levels. With that, I will turn it back to Chris.

Thanks very much, and I am turning to Slide 13. You've seen this slide before, we call these the four pillars of Burford's value proposition. The slide is here as a reminder of the components that you get from being a Burford equity holder. And we're very pleased with how all four of those pillars are standing and growing right now. The core portfolio, as I said earlier, is now at - now stands at $7 billion, so that portends a very long future runway and a sizable future runway of potential realizations over time. And notably, we're now at the $2.5 billion mark of having returned cash successfully from investments. And we've seen our returns continue to be strong and stable across that $2.5 billion. So, that's a real track record. In terms of origination, we've done more than $1 billion of new business in both last year and the year before, and with more than $0.5 billion through the first half, which is historically seasonally lower than the second half. We feel good about the quality of our origination platform. Asset management is something that is producing a nice amount of cash for us as well. Half over half, we more than doubled the cash receipts from the asset management business. And I think the YPF assets don't need any further discussion. I will just make one further note about quarterly reporting. And I've said this before, but I will say it again. And I find it always helpful to be saying it on the back of a good quarter instead of a bad quarter. We don't - we can't run the business on a quarterly basis. We don't try to. And by the way, as I've also said for many years, we don't run the business on an accounting basis. We look fundamentally at our ability to produce long-term desirable returns on a cash basis. That's how we run the business. Those are the numbers that Jon and I look at when we evaluate how the Company is doing. I do not in this business get regular weekly or monthly reporting on an accounting basis that shows me how the accounting numbers are looking. So, it's very different than some of the businesses that I've been involved in the past where we really managed to an accounting number. We can't do that here. So, we manage to a cash number and I think that's a satisfactory way of going about doing it. And what that means in terms of quarterly reporting is that some will be up and some will be down, and that doesn't trouble us particularly. And finally, before we take your questions, I'm going to close by turning to Slide 14. We put in this text quotation from Judge Preska's ruling last week in the YPF case. And I'm not citing it here to talk more about YPF, but rather to say that this very perceptive comment by Judge Preska is a good opportunity for some broader reflection about the business and where we're headed. Now, after 14 years, we're at the point of what we do being valued by our corporate clients, obviously, who are now using billions of dollars of our capital, respected by the courts, and frankly, critical to the ongoing evolution of the legal industry as the business of law transforms itself from a pure cash business into a larger and more complex enterprise. And that really portends a very bright future for Burford. And just in terms of scale, the legal industry is absolutely enormous. Just measuring lawyer costs, we're about the same size as global pharma, global pharmaceutical. If you add in judgments and settlements, that takes us far beyond that level. So, this is one of the largest industries on the planet. And Burford in its operation in that industry is barely today a teenager. We are changing this industry. We're in the vanguard of doing so. We're reaping the benefits of it, as you can see, both financially and existentially in with comments like this from very senior federal judges. And we are very excited to see what the next period in our history brings. We couldn't do it without your support. We're grateful for it. And with that, we're happy to take your questions.

[Operator Instructions] I'll now hand back to Chris for any webcast questions.

Thanks. So, we'll start with a webcast question from Graham Birch, which candidly, I should have addressed affirmatively. Graham asks, on the last call you said an exercise would be undertaken as of 30, June 2023 to see what percentage of shares were held by U.S. shareholders with a view to checking whether it was greater than 50%. What was the outcome of this exercise and what percentage of the shares are held by U.S. shareholders? So, that's an excellent question, and the - just the background to it is, that 50% number is what would tip us out of the current category of being what's called a foreign private issuer in the U.S. and into a regular U.S. filer, which would come with some incremental, for example, mandatory quarterly reporting and so on. We did in fact conduct that measurement and while we were very close to 50%, so the number of U.S. shareholders, the percentage of U.S. shareholders now is in the very high 40%s. We were a whisker under 50%, and so we did not trigger that level this year. So, what that means is that for fiscal 2023, we will continue to be a foreign private issuer through the end of the calendar year. This is as time passes, frankly increasingly less relevant because, especially this year, because we've gone voluntarily to quarterly reporting. And I think you will continue to see ongoing expansions in our disclosure as time passes. But in terms of that formal question, we will test again next June. And assuming we do pass the 50% level next June, which I would anticipate given just looking at where the volume of shares are trading today, then we would be - we would no longer have that foreign private issuer status and we would start as a regular U.S. reporting Company for the fiscal year-end of 2024. So, thank you for that question. And now I think we have a question on the phones.

Yes, we have an audio question from Julian Roberts from Jefferies. Julian, your line is now open. Please proceed with your question.

Thanks very much. Can you hear me?

We can.

Great. Apologies if you've already answered this, the first one. But are you able to isolate the fair value impact from rate changes on the Burford-only results? And then I was going to ask a couple of other questions, one, generally on competition, and whether you're seeing any significant changes among your competitors. Another, whether you expect that there will be a broader following of this - of the Judge's choice in the 3M case to require that any funding arrangements be disclosed to her, and if so, do you think that will actually affect Burford's business in any way? And finally, would passing the 50% level have any impact on your thinking about maintaining your technical name?

So, thanks, Julien. Let me take a couple of those, and then I'll pass the remainder off. So, not in any - not in the same order that you asked them. But let me start with 3M. So, for those of you who don't know, there is a very large piece of U.S. consumer litigation against 3M in connection with the manufacturer of allegedly defective earplugs that were then given to military service people and the defect in them caused hearing loss among what is alleged to be several hundred thousand service members. That case has recently announced a settlement agreement and after the announcement of the settlement agreement, and when I'm talking about this case just to set it in motion, all of these are individual consumer actions. So, these are literally the injured service people coming and suing 3M. And because they have individualized damages, this isn't a class action, it's simply a large number of individual cases that are managed together on a consolidated basis. So - and we obviously don't engage in the kind of small dollar financing that you might see given directly to consumers in these cases. What the Judge in that case did, which has I think been slightly misunderstood by the mainstream media, is issued an order focusing on protecting consumers from predatory lending practices. So, effectively she wants to police a world in which some rapacious sort of payday lender-style firm comes in and offers some poor military guy $10,000 for a claim that might be worth $100,000 and they take the deal because they want the money fast. So, this has nothing to do with what we do. This is really fully in what I'd call the consumer protection or consumer financial regulation area. That being said, the broader question of disclosure remains the topic of much discussion and I think we've made our position on disclosure clear, which is that we disclose whenever we're required to do so. That happens in a - certainly, a percentage of our cases, most arbitration matters were disclosed in, all bankruptcy matters. That's why the Petersen case is public, for example. And a variety of other cases. And we think that disclosure when it's accompanied by appropriate safeguards and procedures, which we expect to be able to get in place, is somewhere between a non-event and a positive for our business. Competition, no, I think the short answer. The competitive dynamic is basically the same as we've described it to you before. We sort of divide competition into two buckets, the pure-play litigation finance firms, and then multi-strat firms. That really tends to divide down by deal size, with the pure-play firms doing smaller deals and the multi-strats doing larger deals. And we continue to compete in a robust environment, have for our entire existence, and are perfectly content with the competitive environment. As to any impact on aim, no, we don't have any contemplation at the moment of doing anything different than we're doing today. We continue to watch and watch how the trading and the shareholder base evolves. But as we sit today, we've got significant groups of long-term loyal shareholders in the U.K. and Europe, in the Middle East, and in the United States and we look forward to continuing all of those relationships over time. And Jordan, would you like to take the --

The first question.

First question?

The first question I think was, what was the impact to asset value based off of the change of rate. I have said in my talking points, $94 million on a consolidated basis. That number would probably be in the mid-$60 million range with respect to Burford-only.

Thanks very much, guys. It was extremely clear. I've got another question too, which I think the answer to it would probably be no, I'll tell you, but you'd rather [technical difficulty]. Thanks again.

Thanks, Julian.

Thank you. Our next question comes from Alexander Bowers from Berenberg. Alexander, your line is now open. Please proceed.

Hi, three questions from me. The first one I think might have been answered by Julian's question already to some extent but I'll ask it anyway. Just I guess in terms of competition, are you seeing any change in level of competition for sort of the claims you're competing for and has that had any sort of impact on sort of level of pricing that you offer? The second question, I'm not sure whether you'll be able to answer or not, but I'll ask it anyway. Just on YPF, I'm trying to ask about your appetite to do sort of further sales to third parties. I believe you are able to sell it roughly to 10% more to Petersen's stake and I'm not sure whether it's been disclosed about Eton Park, could be sold down or not, but any more visibility on that would be great. Are you able to provide it? And just sort of lastly on performance fees. I was wondering whether you'll be able to give sort of view as to level of performance fees you expect from the funds. I think that before the accounting change, you used to have sort of probabilistic model, but kind of given out a view of that and sort of linked to that, could you give us a sort of view as to what the impact performance fees are from the YPF outcome potentially? Thanks.

Sure. So, I think all three of us will take those. Jon, why don't - are you willing to talk a little bit more about competition and pricing?

Sure. So, I'm happy to, and I'm actually happy to report that I do not feel like we are in a particularly difficult moment when it comes to price competition. I think that - I've talked about this over the years, that I think that the entry over - the years we've been in business, our competitors have been very good for us because it just has expanded awareness of the market and made this a true market even though we have remained throughout the market leader and sometimes there is sort of a new fund that pops up out there and is the flavor of the month and I've talked about how there'll be a period where all of a sudden we get a flurry of calls that they have been reached out to by this new competitor and then they reach out to us as well and realize actually we're a better fit for them. I think at this moment, if anything, competitors have faced headwinds or some sort of retrenchment. Somehow, a combination of our scope and scale, our expertise and track record, our permanent capital, and our capital structure, all of those things have positioned us in a way that some of our competitors, particularly the ones that are entirely relying on Two and Twenty capital, they just had a harder time keeping up. So it's there. There are companies that sort of are out there. But I just - I haven't found that our counterparties whether law firms or corporates when coming to us are saying, we're going with whoever is cheapest and there is somebody out there that's cheaper than you. That's just has been our experience, that - and they would rather do business with us, and we have to make sure that our deals make economic sense, right? You're never going to go to any business unless you're offering something of value and it's a win-win for both parties and that's always been the case for us. But I'm actually feeling quite good about the competitive landscape at the moment.

Great. Thanks, Jon. On YPF, I think in terms of appetite for further sales, you are right that we've got 11% or 12% left of the Petersen entitlement that we could theoretically sell down. We always look at across the portfolio when we think about liquidity and market opportunities. But at the same time, I think we like this asset an awful lot. The prior sale took us off risk and booked a very comfortable profit. So, even at the current levels of spend in that case, we've already locked in something like a 3x or 4x return, and so, I never say never, but it's certainly not something that you're going to see us doing tomorrow either. And Jordan is going to talk about performance fees, but just before he does, you asked not only in general but about YPF. Just as a reminder, YPF is a balance sheet asset. So, we did the YPF deal before we were in the fund business. And so, there is no participation by firms - by funds like BOF-C. I get a lot from investors a question based on media speculation. And the media speculation is that as part of the 2019 secondary sale, that the LPs in BOF, one of our Two and Twenty managed funds, elected to purchase a part of the secondary offering. The only way that could have happened if it did happen was if the LPs made the decision to do it. We obviously couldn't sell a portion of our interest to one of our own funds and we've never confirmed nor do we have the ability with the fund confidentiality to confirm whether that happened or not. If the media reports are correct, then there is possibly some performance fee potential from a holding of a portion of the secondary sale in BOF. But even if that did occur, it would be far from a majority of the secondary sale. And Jordan, more generally about performance fees.

Yes. Look, I think you're referring to - we don't give guidance, but you're referring to a couple of quarters ago when we gave the overall view of performance fees. I don't see that changing materially or we'll continue to use the funds in the same manner that we have been with the various kind of entry points of whether it's managing the balance sheet with BOF-C or managing some of the lower-yielding assets and opportunities to place that. So - but I don't have a specific guidance number to give you.

And next, we've got a webcast question from Dennis Troy. Chris mentioned Burford is barely a teenager in the litigation and finance industry, does this YPF ruling take Burford into adulthood? And does it meaningfully improve Burford's competitive position for new commitments at all? So, I think the answer is, yes, in the following sense. The - when we started this business 14 years ago, the challenge that we faced then was an educational challenge. People didn't know what this idea was really, they weren't accustomed to using capital like this. And so, the first half of our life, anyway, to talk to the analogy of the childhood years, were spent really educating the legal industry about what they could do with capital and of course, having educated them, then being the capital provider to them. What has happened over time is that the concept of legal finance and frankly our brand has become much more ubiquitous in the legal industry. So, it's rare now for me to meet a partner at a law firm or an in-house lawyer who does not both know the concept of legal finance and Burford. And we've historically released some research showing that our brand recognition in the industry is extraordinarily high leaps and bounds beyond anyone else. And so, basically whenever we have a high-profile event, that further - that is either successful or merely affirming, what that does is it further solidifies in the minds of potential users of that capital that this is a real thing, that we are a real business and this is a real thing. And so, events like the 60 Minutes interview last year which was watched by millions and millions of people did that. The kind of media furor that there has been over the YPF decisions has done that. And even things like the media coverage over our litigation in the food antitrust cases on behalf of Cisco, which was a disclosed $140 million transaction, even that did that because it caused corporate clients to say - to also have a little bit of FOMO, fear of missing out. Gee, my competitors are taking $140 million or now as Jordan said, $325 million from Burford. What am I doing? And I suspect that every day, every time that happens, there are people in the C-suite looking at the General Counsel and looking at the CFO and saying, well, why aren't we doing that? So, that's I think what we're asked. And now, I think we've got another telephone question.

Thank you. Our next audio question comes from Michael Cohen from MDC Financial Research. Michael, your line is now open. Please go ahead.

Yes. Thank you for taking my call, and congratulations on the YPF ruling here in the United States. Both of my questions have to do with valuing the YPF balance sheet asset. One of the greatest uncertainties is collectability. I was wondering if you could talk to any comments with regard to collectability leverage that you could have in collectability from a sovereign nation like Argentina. And then the second will be, how any realization will actually be taxed.

Sure. So, let me give a couple of overall comments and Jordan then can touch on the actual sort of accounting and valuation and tax points. This goes back to sort of what Jon and I were saying earlier, we're just not going to be in a position to go down the road of discussing the substance of enforcement and collectability. We know that people would like us to, but we are very strongly of the view that doing so is a net negative to our position and runs the risk of just injuring shareholders. So, unfortunately, I really can't give you much there, except to say what we've said in the past, which is that Argentina has a long history of aggressively defending itself against litigation for its bad acts, but then has also a long history of resolving and paying judgments and awards that have been made against it after time has passed. Jordan, do you want to - do you want to chime in on the accounting side of things?

Yes. Look, with - I think your question was with respect to tax rate. We don't like to get into the discussion of specific tax rates for a specific asset. So, unfortunately, I'm going to have to leave that one untouched.

And in terms of the valuation?

Is there any comments you could make with regards to tax typically on legal receipts or legal realization tax?

Look, I think overall what we can say with respect to tax that we use a variety of different structures and so forth. And I think what we have said previously is that the long-term tax rate, corporate tax rate overall for the portfolio is in the low teens. And so, we don't get into specific assets. But that's where we expect it to fall out. Obviously, right now, cash taxes has been fairly low.

Okay. That's helpful. Thank you.

Okay. Thanks for the question. Next, we have a webcast question about OpEx, from Rakesh at World Capital. We've seen OpEx accruals go up this quarter. Does this follow the same fair value approach with assets or do they accrue simply based on milestones? The latter, is this how we reconcile a net fair value loss due to the impact of rate rises exceeding effective milestones, the increasing rate of OpEx accruals due to the impact of milestones only? So, Jordan is going to take the portion of the question about OpEx accruals and fair value and so on. I would just add as a preliminary matter. But in addition to this as Jordan is going to talk about, there is also a share price component here. As the - because we operate a deferred compensation plan that allows employees to defer compensation into Burford stock, we - even if we buy in Burford stock to cover the potential liability in the deferred compensation plan, which we have done in the past, the wonderfulness of accounting does not permit us to net those two things. In fact, it's a punitive impact and frankly, I think a particularly dumb accounting approach where when you let employees put cash into your stock and then you buy stock to cover the future liability, the accountants take that and they take the stock that you've bought and put it into treasury and so you don't get the income benefit from the increase in share price. But they do charge you on the P&L for the share price increase because it's going to be owed to deferred comp plan participants. So, even if we are perfectly hedged and if we're not, we're close, there is an accounting negative to us every time the share price rises, which is particularly perverse, given that we want to encourage employees to own our stock, and we also want not to take the naked risk in the market. And Jordan will talk about the fair value side.

Sure. A couple of pieces there. And so I'll try not to go too deep, but answer all of your questions. Generally speaking, when you think about our long-term incentive compensation, there is a lot of different movements into that, but it is generally aligned with the fair value associated with the assets. But I think it's important to note that we did have different -- we use the term carry every once in a while as a synonym, it's important to note that there are different carry percentages against different vintages. So it's not a perfect tie out - and so depending on what vintage is moving and the fair value of that vintage based on milestones and so forth, you won't see a one-to-one necessarily relationship to top line revenue. But generally, that moves with fair value. The other piece that we have is the legacy asset recovery business. As a reminder, there were just two assets that remain in that. And so as those come to a conclusion, we won't be seeing those accruals anymore, and this has to do with the purchase of that business. And then finally, the other piece is with respect to our annual incentive compensation, this is in carry. This is more aligned with cash bonuses. And as I mentioned earlier, while it's an accrual now, we true that up in the fourth quarter based off of both quantitative and qualitative metrics of our employees and then pay that out the following year.

So the next webcast question is from [indiscernible]. How should we think about operating costs over the very long term? Can you detail which costs are fixed and which are variable and how we should think about operating leverage over the long term? Before I let Jordan do that, just a couple of overlay comments from me as well. I've talked about this in the past over time. And I'll just make a couple of comments. One is in terms - the vast - like most knowledge firms like ours, the bulk of our costs leading interest to side are human capital costs. And we have been very careful to structure a compensation system where a significant amount of our compensation expense is both variable and tied to the performance, the cash performance of our investment portfolio, which is why you see this mismatch between cash payments and accrual payments. So for example, if a case is doing very well indeed, and let's take YPF for example, the case is customary judgment now it's passed a financial judgment, but we don't have any cash yet. So nobody is getting paid on the 2023 success of YPF because we haven't generated the cash yet, but we're accruing compensation expense associated with YPF. So we have base salaries, which are obviously fixed cost. But if you are working here in the more senior you get, the more true this is, more and more and more of your comp is going to be performance-based based on cash-driven outcomes until you get to Jon and me, where all of our compensation accept a base salary is totally dependent on the business' cash performance. And in terms of operating leverage, yes, there's some operating leverage both in terms of sheer scale of the business and also in terms of increasing deal size. Our average ticket size in this business has gone up by multiple factors over the last decade. And it - like most investing businesses, it doesn't - it's not a linear function. So it doesn't require 5x as much effort to do a deal that is 5x larger. It requires significantly less effort than that. So that's where we get the operating leverage. That said, as the business continues to expand, you do need to continue to hire more people in the business. There is certainly an element unlike a hedge fund that could double its size without adding any people just by doubling its current physician sizes. We double the size of our business by adding new unique assets, and those do require additional people. So much of my introductory comments.

I think the previous question - the previous question hit on a couple of these elements. So I'll try and summarize it. I mean look, when you think about compensation and benefits, obviously, the salary and you're thinking about projecting the salaries and benefits and annual incentive comp are generally tied to the number of people. Obviously, as I mentioned, the annual bonuses are not given and are tied to the performance of the business, both on a quantitative and qualitative metrics with respect to our employees. I talked about the legacy asset recovery business and we talked about carry, the long-term incentive comp. I think the other piece is just to talk about the G&A. We haven't seen - I mean, obviously, we mentioned the $3.3 million expense this past period with respect to the restatement and moving to quarterly. And so I don't foresee that as repeating itself, and we haven't seen those significantly move year-over-year. And then the final piece is the case related expenditures, and this is obviously a cork in some of the accounting. There are some cases in which those expenses cannot be capitalized into the asset. And so we do expense those. I don't foresee those growing much larger, and I expect those to come down. But it is idiosyncratic. And so what I say today, just like Chris can't predict the outcome of all the legal cases, he can't also predict where there might be expenses on some of them that we weren't anticipating. So - but I see that normalizing more towards levels that we've seen in previous years.

And I think we're close to the top of the hour, but we can squeeze one last question in. So operator, do you have one on the phone?

Our last question today comes from Matthew Howlett from B. Riley. Matthew, your line is now open. Please proceed.

Thanks for taking the final question. Chris and Jordan, I mean, you are having a great '23. And congrats on getting in compliance with GAAP. I know it was not a small task. My question is in terms of - we see all the time this noncore reconciliation where companies tend to back out fair value adjustments or noncash compensation. Has there been any discussion with SEC or internally, whether you would adopt some type of core number where we could look at it every quarter and not see a fair value mark.

Yes. I think I mean, that the another way of saying, hey, can we go back to the old method? Look, at the end of the day, I think we came to the conclusion with the SEC and upon our own reflection is that there is the concept of time value of money and duration associated with these assets. And so it is appropriate to reflect those in the fair values. I know that it then can be frustrating that the asset in and of itself, then is going to experience some change in fair value just because rates change and rates have been more volatile in recent past than they have over other periods. But I'm not sure that going to a method of removing all of the overlays that we just put in is exactly where we want to go when we do believe that duration and time value are part of the asset.

Got you. It was more whether you give a GAAP number, then you give sort of a core number showing the adjustments and give kind of both, but I realize -

Yes. Sort of going back to what I said earlier, like rather than adjusting GAAP numbers, I just look at the cash numbers.

Right.

So when you see us reporting return numbers, realization numbers, those are all cash numbers. And so Jon and I – Jon and I sit and look at cases and we basically are asking, so when is the money coming? Like it's nice that these things happen along the way. But the fact that we - in a random case, the fact that we win a motion is certainly positive for the direction of travel in that case, but it's not until we win the trial and get the judgment paid. That we get the cash, and that's how we think about it as opposed to coming up with another metric. If you don't like the GAAP metrics, which I don't look at the cash. Over time -

Thanks, Matt. I appreciate it. So we're over time, thank you all very much for your attention. If you have questions, and we didn't get to you, please be in touch with us. Always happy to assist. And once again, thank you all very much for your support in what is turning out to be a pretty super fantastic year for us.

Thank you.

That concludes today's conference call. Everybody, thank you very much for joining. You may now disconnect your lines. Have a great rest of your day.