Burford Capital generating impressive returns

Burford provides finance to companies and legal firms, which are often without the time or the money to pursue civil redress. Within its core litigation finance business, the group produces income. More straightforward is when Burford realises gains on its investments after a case is resolved completely, or settled so management deems there to be no more litigation risk involved with the case. Unrealised gains - for example, where a case may still be ongoing - are determined based on their estimated fair value. Since there is no active secondary market for litigation risk, calculating the fair value of its unresolved cases is more complex. However, Burford focuses on events such as court rulings or settlement offers within the market to try to determine the value of its unrealised gains. Due to the often lengthy nature of litigation proceedings, cases usually generate returns over a number of years from when first financed.

Crucial to Burford making money is its ability to back winners and, in that, management has a good track record. Litigation investment income during the first half of this year more than doubled to $64m (£50.2m), around $15.6m of which was realised gains made on cases. The fair value of unrealised investments jumped to $46m, compared with a $16m reduction the previous year. This uplift was mainly a result of Burford entering the nascent secondary market by selling a portion of one of its investments to a third party. This portion was sold at a gain that suggested the value of the retained investments was worth more than the amount on Burford's books. Burford has since received an approach for another of its investments at a premium to its carrying value. Management has never yet increased the fair value of an investment, only to reduce it later following a realised loss, which offers further evidence that its valuation approach is prudent.

The group took $84m in cash from its litigation finance investments during the first half, which came via investments made since the group's formation in 2009. By the end of 2015 Burford had made 225 per cent in capital returns on investments it made in 2009 alone. During this period the annualised return on average equity was 22 per cent. Given management's impressive track record of picking cases that generate a good rate of return, it bodes well that it is investing record levels in new portfolios of litigation. In another sign of the rapid development of the litigation investment market, much of this investment was in portfolio and complex structures rather than single cases. Last year Burford invested $206m in financing litigation and a further $200m was invested during the first six months of the year. This was financed partly by cash generated from its operations, as well as a $100m bond issue in April. A bond issuance in 2014 raised $90m in proceeds.

Burford's unrealised portfolio is difficult to value and there is the risk it will lose the cash it has invested if a case it invests in is unsuccessful - it has some sizeable exposure to Argentinian debt payment cases. As expected, its legal insurance will soon stop writing new business following reforms in 2013.