We believe Burford Capital is one of the most misunderstood, high-quality businesses we’ve come across over the last few years. Last week we interviewed the cofounder and CEO of Burford to share insights into the realities of investing in litigation assets.
On the surface, Burford is like any other capital provision business: invest $1 in an underlying asset and receive a cash return on the $1 in the future. It can be compared to VC or PE where the underlying asset is a commercial litigation case instead of a corporate entity. However, there are unique characteristics of litigation assets that make the return profile particularly interesting relative to other alternative asset classes.
The first unique characteristic of investing in litigation is the uncorrelated return profile. Litigation isn’t at the mercy of wider economic performance or the cyclical flows of capital. For example, the underlying litigation of an antitrust or arbitration case has little relation to capital markets. This is particularly attractive to LP’s looking to diversify a portfolio of traditional alternatives.
Secondly, unlike venture or PE, there is a natural exit for litigation investments. A case is either settled before or adjudicated in court. Burford doesn’t need to force a liquidity event by selling the asset. The litigation process provides an automatic exit.
This natural exit makes for a shorter investment period. Burford’s average case duration is ~2 years relative to a 5-7 year holding period in other alts. Around 60% of Burford’s cases are settled before adjudication because it reduces the risk for both parties. Litigation is a process for opposing parties to better understand their relative positions in a case. As more information is presented, both sides better understand the risk each is taking. Therefore, there is a strong incentive for both parties to reach a settlement to prevent a riskier, binary outcome in court. Bogart explains:
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.
The fact most cases settle before court is a major reason why the return profile is so attractive. Burford has deployed over $500m in cases that settled in ~1.6 years. The historical IRR of settled cases is 31%. So Burford earns a 31% return on assets that have a reduced risk profile. Cases start off as a binary asset, but as new information arrives, both parties adapt their position to reduce the risk of a court judgement.
This is very different to the return profile of VC where ~50% of the book returns the cost of capital and ~10% are home runs that drive the IRR. As an alternative asset manager, Burford has a higher average IRR per investment and less need for home runs like a venture fund or high leverage like private equity.
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