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Burford Capital: Pioneering Litigation Finance

Co-founder and CEO of Burford Capital

Why is this interview interesting?

  • Litigation finance and venture capital as an asset class
  • Cash flow profile of an underlying litigation case
  • Future IRR’s and the nature of binary risk assets
  • What drives a competitive advantage in the litigation finance business
  • How Burford looks at allocating from the balance sheet and 3P AUM
  • A framework to value litigation assets

Executive Bio

Christopher Bogart

Co-founder and CEO of Burford Capital

Christopher is the co-founder and CEO of Burford Capital, the leading litigation finance company globally. Before co-founding Burford, Christopher held numerous senior executive positions with Time Warner. As Executive Vice President & General Counsel of Time Warner Inc., he managed one of the largest legal functions in the world. He also served as Chief Executive Officer of Time Warner Cable Ventures and one of four senior executives operating Time Warner Cable, with $9 billion in revenue and 30,000 employees. At Time Warner, Christopher played a significant role in major transactions and litigation matters including the $350 billion America Online merger and the acquisition of Turner Broadcasting. He came to Time Warner from Cravath, where he was a litigator representing companies such as IBM, GE and Time Warner. He has also served as Chief Executive Officer of Glenavy Capital, an international investment firm whose projects included Churchill Ventures, a publicly-traded VC vehicle, as well as the Glenavy Arbitration Investment Fund, a pioneering litigation finance vehicle. He began his professional career as an investment banker with what is now JPMorgan Chase.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Can we step back to the early 2000s, when you started Glenavy? What market opportunity did you see at that time?

Glenavy was, at its inception, a technology and media venture capital investing platform and I had come from Time Warner where I first served as global general counsel but later moved into a pure business role in one of its largest operating businesses in Time Warner Cable. Time Warner Cable is the umbrella provider of broadband services and advanced technology and so that was the era of early adoption and great market excitement around concepts like broadband and voice over IP, which today we take for granted. At Glenavy, we used private capital to build a series of technology-focused investments, mostly in Europe and Asia. It was a classic tech venture capital vehicle.

We did that for a while then added some public capital over time. Litigation finance was a hobby that ran alongside my day job, but there were notable parallels. Burford and litigation finance have several venture capital or private equity like characteristics.

Given your experience running Churchill and the VC-like business, how would you compare venture capital to litigation finance as an asset class?

The methodology has a lot in common. In all of those disciplines, you take a large number of potential investments and potential inputs and do a deep dive diligence on them to, ultimately, get a diversified portfolio of a much smaller pool of investments. That is exactly what Burford does; it looks at between 1,000 and 1,500 investment opportunities every year and choose 4% to 8% of those opportunities. Much of what we and technology venture capital firms do is spend time and energy looking for desirable and compelling high conviction opportunities. Obviously, what we do has a substantively different methodology there are many similarities.

How would you compare the cash flow profile?

That is where there are some interesting differences which make litigation finance particularly attractive. Candidly, that is why I ultimately elected to pivot from technology VC. Although I enjoyed technology VC and it was successful for me, there are several structural characteristics which favor investing in this litigation asset class. There is no realistic exit in technology investing – you have to get to an event – whereas in litigation, you do not need to create an exit or sell a business or take it public. The litigation or adjudicative process provides an automatic exit for us in every investment we make. We literally do nothing at all and can be a buy and hold investor and simply ride out the investment until it comes to a natural end. That end is either a settlement – a resolution agreed by the parties which is the majority of outcomes – or a court or arbitration adjudication which happens in a minority of cases.

That end is also not influenced by the market or broader economy. There is no cyclical dynamic that you have in venture capital and private equity of valuations and when you are going to be able to sell at a desirable level. Here the system simply generates those outcomes for you. The other thing about the litigation system is that while it is not speedy, it is also not slow. You do not see the on average five to nine year hold periods that you see in other kinds of business investing. Our mean time to resolution is between two to three years, and sometimes less in settlements.

The final advantage with litigation finance investing is the underlying dynamic of settlement. Litigation settles more frequently than it goes to adjudication. That is not unique to Burford's portfolio; it is prevalent across the litigation landscape. The reason that it happens is that while parties may use the litigation process to resolve disputes, many parties dislike the risk profile of having their dispute adjudicated by a third party. The reason settlements are significant compared to venture capital is that they remove risk from the equation. 61% of our current investments resolve by settlement, which removes the risk and we are paid in those investments. That foundational layer does not exist in a pure equity investment in a VC or private equity world.

From your reports, cases settle in 1.6 years which is far shorter than the seven to 10 year fund life of a VC or private equity firm?

Exactly and the reason that happens is because the catalyst for settlement is often seeing the progression of the case and coming closer to a trial or an adjudication result. Generally, as a defendant, if you are unsuccessful along the way in getting a case knocked out or doing something tactical to limit its value, you are now exposed to meaningful risk so you negotiate a resolution as opposed to throwing yourself in the hands of a judge or jury. The timing means you will realistically settle most cases before walking into the court room for trial.

It’s common knowledge that VCs have seven out of 10 zeros but the 3 winners have to be huge home runs. How do you compare the return profile of VC or private equity versus litigation finance?

We get to desirable returns in a different way because of the structural dynamic of having three possible outcomes of any piece of litigation; settlement, adjudication winning and adjudication losing. Those three combine to generate the desirable returns that we are showing. The majority of matters which settle produce mid-range returns, therefore we do not have the same desire for as many losses as a VC does in order to enable eye-popping returns. Instead, we have middle of the road cases which fuel the business by providing basic returns, and we have a real asymmetry between wins and losses.

When we lose, we lose the capital we invested for legal fees but when we win, we win a share of the ultimate damages. Nobody rational will spend $20 million in legal fees in an effort to win a $20 million judgment. When we go to trial and win, we have a strong performance; we will make five times our money. But when cases go to trial and lose – which only happens 10% of the time – the losses are much smaller. We combine a much less risky diversified portfolio than venture capital do, to generate comparable unlevered returns.

So private equity is somewhere in the middle?

Yes, because private equity relies significantly on leverage to generate returns. The comparison is slightly less apt. We have elected not to engage with that kind of leverage, simply because of the risk profile of the assets, but our returns are on an unlevered basis and are significantly higher than private equity returns.

What is the maximum leverage Burford could achieve?

It is not something I focus on because our approach to leverage has historically been quite conservative, which has to do with the assets themselves. The cash flow streams from these assets are inherently unpredictable on a period-to-period basis and you do not want to have so much leverage on the business that you worry how you will satisfy your debt obligations. Burford is a significantly employee-owned business. The management and employee population, as a whole, are either the largest or close to the largest shareholder in the business. We are conscious of the fact that the more leverage you pile on top of yourself as an equity holder, the more you risk your own position. We prefer being confident in equity value as opposed to maxing out the debt.

Some describe litigation finance as a book of options where some are zero, some positive and others home runs. Do you look at it similarly, rather more like a linear kind of book of assets which grow?

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Burford Capital: Pioneering Litigation Finance

August 2, 2021

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