Burford enjoys opaque income boost

Burford Capital’s (BUR) half-year results contain a glossary, which sets out the meaning of more than 50 key terms. Without this lengthy crib sheet, the litigation funder’s accounts verge on impenetrable, filled as they are with unrealised gains, partially concluded assets and discretionary commitments. 

Even Burford’s revenue figure is not straightforward. The lion’s share of group revenue is ‘capital provision income’. This is generated when Burford invests in legal cases both directly – ie, from its own balance sheet – and indirectly, through funds. The business tops up its income with asset management fees.

Capital provision income grew by 31 per cent to $110mn (£90.9mn) in the first half of the year, as court activity began to pick up. However, ‘realised gains’ – which refer to money gained when a litigation risk has been resolved and cash is imminent – only reached $34mn. This compares to $87mn the previous year, when one of England’s largest divorce cases settled. The rest of the $110mn consists of “fair value adjustments” which relate to cases that are still ongoing. 

Meanwhile, despite a sizeable uptick in Burford’s operating income – which rose from $7mn to $51.7mn – operating cash flow is still resolutely negative at -$141mn.

This highlights one of the main issues investors have with litigation funders: headline figures are often very attractive, but cash is not always forthcoming. Management noted a “pandemic-fuelled slowdown” in cash flow, but insisted it is “just delay; our cases remain intact, and our returns often increase based on the passage of time”.

It won’t reassure shareholders that the ‘weighted average life’ of Burford’s legal finance assets – a metric which measures the length of time from cash outlay to cash realisation – is getting longer, and now stands at between 2 and 2.4 years, compared with 1.6 years in 2017.

The group is still investing heavily in litigation, committing $445mn in the first half of the year, with $295mn coming directly from Burford. While this is less than last year, 2021 included a particularly large $277mn matter which has not been replicated. 

Burford is also attractive because of its defensive position: it should be largely immune to downturns and economic pressures. As it neatly summarises, “while we do not wish to revel in misfortune, the simple truth is that we tend to do well in periods like these, and we have no reason to believe that this downturn will be any different”.

The nature of litigation funding means that investors must grapple with other forms of uncertainty, however. Hold.

Last IC View: Hold, 741p, 29 Mar 2022