Burford Capital Limited (BUR) Q1 2025 Earnings Report, Transcript and Summary

[Starts Abruptly] -- and I will be your conference operator today. At this time, I would like to welcome everyone to the Burford Capital First Quarter 2025 Financial Results Conference Call Audio Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Josh Wood, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. It's great to have many of you join us both in person and via webcast for our 2025 Investor Day last month. We certainly appreciate you spending time with us today to discuss our first quarter results. On the call, as usual, we have our Chief Executive Officer, Chris Bogart; our Chief Investment Officer, Jon Molot; and our Chief Financial Officer, Jordan Licht. Earlier this morning, we posted a detailed earnings presentation, which we'll refer to during the call, and also filed our Form 10-Q, both of which you can find on our Investor Relations website. Before we get started, just a reminder that today's call may contain forward-looking statements that involve certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed during the call. For more information regarding these risk factors, please refer to our earnings materials relating to this call posted on our website and our filings with the SEC. We'll also be referring to certain non-GAAP financial measures during the call. Please refer to today's earnings materials and our filings with the SEC for additional information, including reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I'll turn the call over to Chris.

Thanks very much, Josh, and welcome, everybody. We're very happy to be here, able to talk to you about a strong first quarter. I'll make three points about the quarter. We had robust new business in the quarter. Sometimes for us the first quarter can be seasonally slow. We often have a very busy December, as we did last year. It can take a little while for the law world to get back into gear. But this year we saw really a robust volume of new business, tripling definitive commitments, doubling deployments. And part of this is because, as we talked about at Investor Day, some of what we do is sort of bread-and-butter litigation, and some of what we do relies on something big and chunky occurring. And those don't come along predictably or reliably every quarter. But this quarter we did see the launch of a new U.S. claim family. So we're excited about that, and that certainly drove some but not all of the activity during the quarter. We also saw very strong realization and cash generation activity. Realizations were up significantly compared to either of the first quarters in the last two years, $163 million. That means over the last four quarters we have brought in really a very significant amount of cash. And as Jordan will talk later, we're sitting on a meaningful amount of liquidity, which positions the business very well indeed for new business and new flows out of the business as the year continues to build. And then in accounting terms, even though we watched the cash more than the accounting numbers, we saw revenue up significantly year over year. Significantly in this context for capital provision income, a 5x increase compared to the first quarter last year. And also an increased contribution from asset management income. So all in all, we're really very pleased about that. And in strong quarters like this especially that we get to really remind everybody that we don't look at this business on a quarterly basis. So while we're happy to be here talking about this quarter, the simple reality is that the cycle of this business is longer than three months. So we focus first of all on cash, but we also focus on longer term arcs of business performance than on quarter-by-quarter numbers. And so I would be saying the same thing to you if this had been a down quarter, a bad quarter, which it clearly was not. We're thrilled with how this quarter went, especially for a first quarter. But that doesn't mean that I would be any less happy about the business and where the portfolio stands, and Jon is going to talk more about that, if the quarter had been lackluster. And you obviously saw in this quarter somewhat fewer unrealized gains, for example. And again, we don't read anything whatsoever into that. Just a couple of other points before I turn you over to Jon, one of which is you'll notice with Jon and with me just giving you some highlights, letting Jordan really walk through the numbers for you and then take your questions. We're also conscious that we have started doing this just before the U.S. market opens, and we've changed the timing of our release to try to maximize both markets trading, especially given how much liquidity has moved to the U.S. market. We're sitting now at something on the order of 85% of our trading volume happening in New York instead of in London. So we're really trying a variety of experiments to see what works best for people in both markets. And before I turn you over to Jon, just one other point that I'd like to make, given that this is AGM season. You will have noticed perhaps that we put out an additional proxy release a few days ago, maybe a week or ten days ago, and that was on the back of ISS coming along and recommending that shareholders vote against the re-election of two of our directors, representing two-thirds of the audit committee. As we laid out in those materials, ISS is just wrong in our view, both factually wrong and wrong in the application of even their own standards. And we'd ask shareholders who are capable of making their own decisions as opposed to simply taking the ISS recommendations to look seriously at that material. I can't imagine that anyone thinks it's in shareholders' interest or the company's interest to eviscerate the audit committee here. And while you're doing that, we also would appreciate your support in terms of the discretionary compensation recommendation. ISS doesn't like carried interest, which we believe actually is very aligning with shareholders. Because we don't get paid until the company does, we get paid only when the cash comes into the business, which we think is actually an excellent way of aligning employees and shareholders. But for their own reasons, ISS doesn't agree with that. So we've got a couple of recommendations there that we'd appreciate shareholders taking a look at and reading that proxy material. And with that, Jon Molot.

Thanks, Chris. Thanks to you all for joining. As Chris said, it was a very strong first quarter. Typically, there's much more that happens at the end of the year than the beginning, but we see this quarter outperform the last couple of years' first quarters. And I think that is emblematic of the trend that I've talked about on these calls successively, that after a period post-COVID where I was happy with what was in the portfolio, but you didn't see things moving through and producing cash results, we now have seen in successive quarters the portfolio performing. You're able to see about its quality what I've been saying for a long time. And now we've had a stretch where the portfolio really is performing. And I'm very pleased about it. In particular, it's maybe worth mentioning something I talked about on Investor Day that the diversification of the portfolio is not just across the risk metrics that we've talked about in the past, diversity of jurisdiction, subject matter, type of counterparty, all those various things that make a balanced portfolio, but also in terms of duration, risk profile, and size. And we often will invest in more moderate-sized, high-octane [ph] matters early in litigation or at the start of litigation where there's the potential for truly outsized returns, but those also take some time because they go through the litigation process. But those are counterbalanced by we also will do deals with corporates where we might put out a lot more money on a shorter-duration, lower-risk basis. And one example, which we talked about on Investor Day, is we had concluded in the first quarter a $100 million investment that we put on less than a year ago that ended up generating $125 million, and that ROIC is lower than our average, but it's about a 40% IRR. We're very pleased with that because you can then recycle that capital into new deals. So we're happy to have both, and the market very much appreciates that we can do both. We can really offer capital to meet companies' needs, and it benefits shareholders because we have both the high-octane, higher-risk matters, and the lower-risk, shorter-duration matters that can really churn and compound the portfolio. I guess I would say on the YPF-related litigation that we're still awaiting oral argument on the appeal that's fully briefed. There are pending recognition and enforcement actions in various jurisdictions around the globe. You're going to continue to hear noise out of Argentina if you pay attention. There are people within Argentina who will say we should postpone payment and look for mechanisms to do that, despite President Malay's clear indication that Argentina is trying to turn over a new leaf and be a responsible actor in the global economy. Making significant progress on that front, since we last spoke, the most notable development on the economic front is that the IMF package that we expected would be approved and was indeed concluded with lots of fanfare and other deals and announcements surrounding it, and that was positive. I thought it was notable that the Argentine press actually picked up on the description and discussion of our litigation in the IMF package. There was reference and discussion of both our matter and another matter that's about 10% the size of ours that the UK Supreme Court had affirmed a judgment in favor of creditors against Argentina. The IMF package reflects an agreement between Argentina and the IMF that these debts, these litigation debts, will be treated as an obligation of Argentina and has to be addressed. The one that's already been affirmed by the UK Supreme Court, that's final and has to be addressed now. And ours, when and if the appeal is concluded, it says it has to be addressed. And that was on one of the Argentine papers above the fold on the front page, second only to news about the Pope, who was, of course, Argentine. So summing up, the quarter was a very strong one, as Chris said. We saw both money going out the door and money coming back in. We've seen progress, and we're very pleased to have a first quarter, which can traditionally be slower than others, performing well. Now to unpack the numbers behind that sort of sentiment and broad discussion, I'm going to turn it over to our CFO, Jordan Licht. Thanks.

Thanks, Jon. Good morning, everyone. So I'm going to start on page 9. This is our total segment. When you look at total segments, this is a combination of the principal finance segment, which invests on behalf of our balance sheet, and the asset management segment, which invests on behalf of third parties. We'll go through each of these segments in greater detail. I'm going to cover four primary things today. First, it's going to be on how the existing business has progressed and the new business that we put on. We'll talk about income from asset management. We'll cover our expenses and then finish up with a discussion of liquidity and capital. Overall, $0.14 per share, which compares favorably to a negative $0.14 in the same period last year. The main driver of that difference is realized gains as well as unrealized gains, and I'm going to dissect that further when we talk about the portfolio. Jumping to page 12, Jon referenced the diversity, and I think those pie charts on the right of the page actually highlight that, whether it's diverse in terms of our exposure by geography or diverse with respect to asset type. The piece on this page with all the different numbers that I focus on as well is the $511 million. That's the middle red bar right on the bottom of the left-hand side. What that represents, ex-YPF is the fair value uptick associated with our portfolio, ex-YPF. That's hovered around a third of deployed costs. What that means is that should we continue to progress, given our historical returns, there's significant more revenue and opportunity associated with the book. Let's unpack that $3.6 billion a little bit more, jumping to page 13. Top of the page starts with revenue, and you'll see we had a nice first quarter topping last year's first quarter with $35 million of net realized gains. Favorable interest rate movements in this quarter. There was approximately 20 basis points of improvement in the discount rate that we used to present value the portfolio, and that compares to a 19 basis point increase last year. The current average discount rate is approximately 6.7%. That's the rate that we used to discount the cash flows associated with the assets. The bottom of the page is the bridge. It takes you from the end of the period, so 12-31-2024, through to the end of the first quarter. Deployment's healthy at $126 million. Those are the existing cases. We've got $61 million associated with the passage of time. I spoke about the change in discount rate. Milestones and other impacts, that's both the changes of assumptions inside the models, milestones, as well as the unwind of unrealized gains that move into realized gains, and then realizations, $163 million, which Chris and Jon alluded to, a great start to the first quarter. So with that, let's go and actually talk about putting the money out the door. Page 14 highlights the definitive new commitment. As Chris mentioned, we had a great first quarter. This quarter had $158 million of new definitive commitment, and that compares quite favorably to $55 million that was in both the first quarter of 2023 and the first quarter of 2024. You'll see the different colors. There's no specific target that we're looking for in a particular quarter, but you can see a healthy range of activity and new cases that we put on in this period. The $158 million sources from two places. It's exciting to see $103 million of newly originated matters, and then $55 million that's also new matters. They happen to come from discretionary portfolios that we've established where we had to find and source a new case to add to the portfolio. And so that totals the $158 million. And then if you look at our total of where we sit today with undrawn commitments, we've got just shy of $800 million of definitive commitments outstanding on the existing book. Overall, on the right-hand side, you then also see we've got plenty of capital and liquidity to continue putting money out the door, and we put out $130 million in the first quarter. But enough talking about putting money out. Let's talk about bringing money in. And on page 15, you see the highlight of the $163 million in realizations. First piece, and Jon mentioned it, and we actually mentioned and discussed it with you, I think, briefly at Investor Day, which is the conclusion of an asset that had a quick turnaround. It was an asset that was originated in last year, a large size, $125 million group-wide, and for the balance sheet, that represented a $19 million gain. And that's exciting to see a quick IRR of 40%. Obviously, when you have quick turnarounds, high IRR, you are going to see a slightly lower ROIC, and we would expect that. And as you can see, the implied ROIC fluctuates from period to period. But overall, $163 million of realizations for the period, and that's not just made up of one asset. Overall, seven assets generating $5 million or more, and three of those generating $10 million or more. I'm going to skip forward now and talk briefly about managing the money on our balance sheet to managing the funds. If you look on slide 21, asset management income was $14 million versus $7 million quarter over quarter, so a nice improvement there. Cash was $7 million versus $4.5 million. I think the big takeaway here is that during this first quarter, the first time we actually started to crystallize performance fees from the Advantage Fund, that was a fund that stopped investing a little over a year ago, and then now as those assets are starting to mature, we can start to recognize some of the performance fees associated with that fund. Looking to capital, liquidity, and expenses, page 23 is the bridge that walks you through where our cash sat at the end of the year to the $548 million that we currently have at the end of the quarter. You see also in one of the bullets we have $103 million due from settlement, so we are sitting in a very healthy liquidity position. As a reminder, though, we do have $123 million of debt maturing in August and we have ample cash available to pay that down. The bottom of the page, it's nice to see steady cash flow quarter after quarter coming from our assets, and in particular, seeing the $258 million to kick off of first quarter, obviously that compares very favorable, not quite as large as the third quarter, but still a great quarter overall. On page 24, I walk through our expenses. Expenses were higher first quarter compared to first quarter of last year at $40 million. A couple of reasons for that. First is the carry, the long-term incentive compensation. The accrual of that is going to align neatly with the movements in fair value, and in a period in which we have much higher revenue, you're going to see that number higher, and so on a comparative basis it's not surprising to see that as a larger number compared to the first quarter of the previous period. We also have a slight uptick in G&A. I don't want people to walk away with an expectation that that increase is going to continue. There are some items that are not expected to reoccur in subsequent quarters. And then finally, we did have a bit more in case-related expenditures, which we're not able to actually capitalize into the asset value of our portfolio, and that's going to be episodic by nature. Page 25 rounds it out with the maturity schedule. Ample room within our covenants. We also have ample cash to address the 2025 maturity, and so we're sitting here in a great position to continue growth, continue the momentum that was built this quarter in terms of new business, and I appreciate your attention. With that, I hand it over to Chris for some closing remarks.

Thanks very much, Jordan. I'll pick it up on slide 26, where we summarize a number of things about the business that I won't necessarily take you through point by point, especially since we spent quite a lot of time with you on these points on Investor Day. But since we have had Liberation Day that occurred the afternoon before Investor Day, and we've seen lots of market turmoil since then, I would just underline a couple of points about Burford's interesting business. Not only are we not negatively affected by things like tariffs and the other economic dynamics that are going on, these are the kinds of periods where historically Burford has seen some real benefit. The simple reality is that when businesses are under stress and when there is market turbulence and liquidity uncertainty and all of the other things that we see happening today, those are times when a couple of things happen that are good for us. First, businesses are even more unwilling than normal to write big checks to their lawyers. And so the kinds of capital solutions that we offer are especially appealing to businesses in these kinds of time periods. We started Burford in 2009 because law firms were overrun with requests from their corporate clients to do something about their fees in the financial crisis and in that time of compressed liquidity. And we've seen that dynamic repeat itself cyclically a few times since then. The other thing though that happens when businesses are under stress is that they feel pressure from you, from their investors, to do things like make their numbers and continue to grow and do all of the other things that unlock bonuses and drive corporate behavior. And what that does inside businesses is it can cause people to cut corners and to make bad decisions when they're under stress. Those bad decisions in turn often turn into opportunities for later litigation and arbitration. And we've seen that throughout our history as well. We are one of the few companies that actually enjoys the kind of period that we're seeing out there in the markets right now. And I just sort of underline the fact that Burford's business is really built to deal with adversity, deal with it and flourish in it. We're long-term players. We're here to stay and we're excited to be able to show you quarter on and quarter on our ability to continue to make progress towards the goals that we enunciated just last month at our Investor Day. And so with that, we'd be happy to take your questions.

[Operator Instructions] And your first question comes from the line of Mark DeVries with Deutsche Bank. Please go ahead.

I had a follow-up question on Jon's comments on YPF. You alluded to the IMF agreement that they had. Is that agreement or the dispersal of funds contingent upon them addressing the YPF settlement or is it more just kind of a conceptual idea that they put out as a priority that should be addressed at some point in the future?

The general IMF policy is that they don't do a program if there are outstanding debts due that are noted in the agreement and that they're not engaged in reasonable dialogue in order to address and solve. This is generally for the IMF, it's not a condition of disbursement that you have already resolved the debts, but you have to be working in good faith to resolve them as a condition. And what the program says that is true right now for the one that's been affirmed by the U.K. Supreme Court and that will be true when and if ours is affirmed by the U.S. appeals courts. So I don't know if that answers your question, but it's somewhere between the two things I think you laid out as possibilities.

Then just turning to the new commitments in the quarter, there was a pretty significant quarter-on-quarter change in the distribution and wristbands in the new commitments. Can you provide some qualitative insight into the types of business you added in the quarter relative to the last few? Is it related to Chris's comments about the launch of a big U.S. claim family, or are there some other forces there?

I think that's certainly part of it, Mark, and I would say without looking at the data that I don't have in front of me, I think that's no doubt a significant part. But, again we're providing these as sort of an effort to give people a little bit more insight because as we said at Investor Day, we don't think that you can treat all commitment and deployment dollars equally any longer. And so we're trying this out with you, and we'd welcome feedback on it, by the way. We're trying this out with you as a way of maybe trying to give a little bit more nuance. But as with all of these things, there's sort of a limit to how useful it is in this aggregate way because you do see differential performance within those bands. As Jon pointed out we had a large matter resolved very rapidly. That certainly performed differently than the way that we would have originally modeled it to have performed because we would have expected it to have been outstanding for longer, and it would have had both a different risk and return characteristic. But what you're seeing there with quite a lot of comparatively low modeled risk activity, some of that is certainly due to the fact that the new claimant's family comes with sort of a cross-globalized portfolio style approach.

Got it. Thank you.

Our next question comes from the line of Alex Bowers with Berenberg. Please go ahead.

Just one for me. The uptick in the unrealized gains from YPF-related assets during the quarter, I guess aside from sort of technical factors like the discount rates or the passage of time, were there any other contributing factors to the uplift in the valuation for those cases? Thanks.

The only other factor was the dynamic that I think we actually mentioned at investor day as well, where when you look at the Eaton Park side of the YPF transaction, Eaton Park obviously was the former New York hedge fund that is now in liquidation. And as that liquidation has progressed over time, you have seen our interest in the Eaton Park corpus continue to grow. And so during the period that grew from, I believe, 72% or 73% to 82% now. And so because of that growth in our interest in the Eaton Park activity, we will have seen an increase in value because of that. And actually, if you look at the consolidated numbers, you'll see an even more significant dynamic because that reached the point now of us actually having to consolidate it into our consolidated numbers. But, of course, that doesn't matter in the Burford-only outcome. But in true economic value, we have, in fact, taken now another, in round numbers, 10% of the Eaton Park entitlement. And that drives an increase in the balance sheet value of YPF in total.

Thanks. Just a quick follow-up on that. Did you have to pay for that increase or was it just part of the kind of liquidation process?

No, we pay for it as it happens, but we pay roughly around carrying value.

Okay. Thanks very much.

And our next question comes from the line of Randy Binner with B. Riley Securities. Please go ahead.

Hi. Thank you. I'm going to try to just clarify a couple of the previous questions, if that's okay. So on the new claim family that was part of the commitments, I didn't track in the answer. Is there a particular litigation type that that was related to, or is that more like a structural family?

So when we talk about claim families, again, because we have the handy resource of the Investor Day materials just behind us, you'll recall that we described the world as sort of falling into two buckets, the single case bucket where company A is suing company B and the issue doesn't really relate to anybody else or instances where there is multi-party litigation. An example of that is the publicly acknowledged cases that we're doing in the food proteins area where the U.S. government has found a price fixing conspiracy among proteins producers, meaning that many proteins buyers have claims for an overcharge. And we sometimes call those claims families because they're the same kind of claim being brought by a number of different parties and there is a degree of efficiency for us to put those claims together. We get to go to a number of those proteins buyers, use the proteins example, and say to them, look, we are already in these cases, we know them well, it's easy for us to add on the next marginal buyer, if you will. But those things, we can't create them, and they don't necessarily happen on a regular or recurring basis. Life being what it is, there is always somebody doing something naughty. And as we showed you in one of the charts for Investor Day, we tend to have between zero and two of these larger, chunkier, multi-case things happen in any given year. We didn't have one last year at all. And so what I was highlighting is that in the first quarter, some of the business that we wrote in the first quarter was for a new claims family. And that's an area where we'll now continue to watch that space. And if we continue to gain conviction and like what we see, it's also entirely possible that we'll put more capital to work in the same area as time passes.

Okay, that's really helpful. I appreciate that. And so I think the somewhat related follow-up I have is just looking at the new business slide, the slide 14 of the deck that you shared. I think it was good news that the commitment number was high at $158 million, but you had deployments that effectively offset that. And so the portfolio didn't grow in the quarter. And so I think the answer to this is somewhat obvious, but I'll ask it anyway, is that at some point, these commitments just offset deployments and we actually have a higher base. Is that the right way to think of getting to that goal of, I think it was doubling that portfolio by 2030? Is that the right way? Or more stuff comes in-- yes.

Yeah, sure. And that's why, if you think about this on a long-term basis, we're always thrilled to have the cases turning and the realizations coming in. But when you have periods with particularly high levels of realization, as this one was, then, yes, you may well have a period where the portfolio as a whole doesn't grow very much. Imagine a world when, if YPF comes in one day, that's a period during which one would expect, presumably, the portfolio actually to shrink. And that would be, from my perspective, an entirely happy outcome, even though we would then have to go back to growth.

Okay. Very helpful. I appreciate it. Thank you.

And there are no further questions at this time.

So I think that given that we took three hours or four hours of your time only a month ago, we, I think, have exhausted the webcast and telephone questions. So if anyone has further follow-ups, our IR team would be delighted to speak with you. But otherwise, thank you very much for your time and attention, and please give us some feedback on this new, more streamlined format and on some of the ways that we're presenting data for you. We're always happy to hear that. But until then, thank you all very much for your time and attention.

Ladies and gentlemen, that concludes today's call. Thank you all for joining us.