Content Published Last Week

1. Burford Capital: Law Firm Survey

2. IP Investor Dialogue: Burford Capital: Moat, Insurance Risks, Sysco, YPF

3. The Gym Group & Discount Gyms

4. Hilton Grand Vacations: Bluegreen Vacations Acquisition

5. Evolution Gaming: Supplier / Aggregator Relationship

6. DataDog, Snowflake, & DevOps Tooling: a Customer's Workflow

7. Wayfair vs Amazon: A Supplier's Perspective

8. Vistry Group: UK Housing Shortage & Affordable Housing

9. Fortinet: Competitive Landscape & SASE Transition

Burford Capital: Law Firm Survey

As of FY22, Burford Capital sourced 39% of group commitments via law firms and 61% directly from corporates. Law firms are a crucial origination channel for funders; the better the relationship with top law firms, the greater number of high-quality cases originated.

Over the last 6 months, we’ve been exploring the intricacies of the law firm / funder relationship.

How does a law firm choose which funder to work with?

How does a law firm choose which cases to fund and how much to take on contingency?

And is there any adverse selection embedded in the relationship?

We conducted a survey with partners from law firms who use litigation finance to understand how and why law firms originate funding and the process of choosing a funder.

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We share the raw results of each written response and segment the insights into:

1. The biggest risk to funders

2. How law firms choose a funder

3. Long-run growth opportunity

The most interesting insight came from when we asked about the biggest risk to funders and 4 out of 7 law firms stated insurance-type products.

Displacement by the insurance industry [is the biggest risk to funders]. As insurance becomes a piece of the puzzle earlier on, even pre-funding, there is a risk to funders that their margins will be compressed and that alternative funders will feel more comfortable entering the space, even on an ad hoc basis. - Law Firm 2

Although ATE, Work-in-Progress and contingent risk insurance are mature products in legal finance, new, more innovative insurance-type offerings seem to have recently entered the market with the potential to reduce pricing and increase competition for funding. This survey shares more detail on how the insurance market is evolving for legal finance and how and why law firms choose funders.

BUR Investor Dialogue

We also hosted an Investor Dialogue with current shareholders of BUR. We explored how to think about BUR’s moat, the increase in potential competition, and the potential value of its Sysco and related cases.

To date, BUR has invested over $250m in cases related to the potential price collusion by US manufacturers in beef, chicken, and pork markets over the last decade. Pilgrim’s Pride has already pleaded guilty and Tyson has applied for the Corporate Leniency Program. Many believe YPF was a one-off investment. Although it was unique, Sysco and related cases could generate similar net proceeds to BUR across its balance sheet and managed funds.

When we refer to Sysco, we've sent a presentation to a number of people detailing the cases. Burford has about $260 million invested in these antitrust cases. What we covered was only $140 million of that, which is related to Sysco. What we know is that Sysco has approximately $22 billion of purchases related to these cases over an eleven-year period. You can either build up what the damages should be from the bottom up, or you can estimate from the top down and say, okay, $22 billion of purchases. What assumption do you make about overcharges? Based on reading the court cases, it could average anywhere from 10% to 25%, depending on which piece of evidence you consider. You could take the middle of that and say, okay, let's assume 15%. Antitrust cases are treble damages and it's joint and several liability. Just the Sysco claims alone could be looking at 45% of $22 billion. You're looking at upwards of $6 billion or $7 billion of damages to Sysco, and then 30% of that was assigned away to customers. Therefore, 70% would be attributable to Burford, about half. You have to segregate what was on balance sheet versus managed funds. I'm not sure how much was carried, depending on which fund it was in, but you quickly get to a number where, in the worst-case scenario, they can settle tomorrow. - IP Investor Dialogue

We further explore the Sysco case, YPF, and the potential risk to BUR’s IRR’s in this 2-hour investor dialogue.

The Gym Group & Discount Gyms

We curated our existing research on discount gyms and learnings from an interview with the Founder and Former CEO of The Gym Group into an IP Company Profile on The Gym Group and Discount Gyms. We explore how discount gym operators cut costs via better equipment and lease deals and the staffing model:

Low-cost sits absolutely at the core of everything the business does. The facility is designed to be cost-effective to maximize a reduction in energy costs and water use. A key part is actually building it into the initial design. Then there is also the way you operate. An example we use regularly is that most mid-market operators spend 25% to 30% of their turnover on staffing. We spend 6%. Ironically, we do that by partly the way we operate, but also how we use things like CCTV and technology to reduce the staffing requirement. There is a huge focus on providing exactly what the customer wants without spending money on the things they don’t want. That is what a low-cost gym is. It provides excellent gym equipment without swimming pools, tennis courts or retail areas. In our view those all absorb unnecessary cost in terms of staffing, energy and so on. The culture really starts right from the beginning and is an integral part of everything the business does. - Founder and Former CEO of The Gym Group

But the core focus of our research has been to understand the durability of mature gym FCF.

How will mature gym ROIC trend as budget gyms compete heavily in similar markets?

And are there really any barriers to entry to starting a fitness offering that could win share from budget gyms?

One potential insight from the 2014 CMA review of the failed PureGym / GYM merger was how mid-market and premium gyms don’t truly compete with discount gyms. The CMA also excluded small gyms with less than 50 pieces of equipment as it’s not a comparable offering. Both companies reported minimal churn of members to mod or high-priced gyms. The key determinant of competition and site returns was the presence of another discount gym within its proximity (see 99 and 105 in CMA Review).

For example, in Bournemouth, PureGym and GYM each have a site within 13 minutes walking distance. According to the data sent to the CMA, the PureGym site performance was significantly impacted when GYM entered Bournemouth:

Entry analysis carried out by the parties identifies a stark reduction in Pure Gym’s members and membership fees as a result of The Gym’s entry. The rate of price growth at The Gym has further been minimal as it is still charging very low membership fees (£12.99) despite entry having occurred in May 2012. - PureGym / The Gym Group Merger Proposal, CMA

We further explore the durability of mature gym ROIC and the competitive end game in UK discount gyms in this learning journey.

Hilton Grand Vacations: Bluegreen Vacations Acquisition

Hilton Grand Vacations recently acquired Bluegreen Vacations to expand its timeshare offerings. This interview with a former Bluegreen Vacations VP of Sales describes the Bluegreen Vacations business, how it could fit in HGV's portfolio and how the Bass Pro relationship has evolved.

It largely depends on who's involved. You're an intelligent individual. If it says Bluegreen, is that going to impress you? However, if it says Marriott or Hilton or someone similar, there's an instant credibility. I believe that will be beneficial. I'm aware that Hilton Grand Vacation signed a 10-year exclusive deal with Bass Pro. That's a smart move because it secures the golden goose. - Former VP of Sales at Bluegreen Vacations

Evolution Gaming: Supplier / Aggregator Relationship

Evolution uses a network of B2B content aggregators to scale its games globally to smaller iGaming operators. In an interview with a European aggregator, we discuss the dynamics of the supplier / aggregator relationship:

Indeed, it is significantly more expensive to operate a live casino. To illustrate, to create decent slot content, you likely need a team of 20 to 40 people, including support. This team would consist of a few designers, mathematicians, developers, system administrators, support staff, and account managers. Therefore, you don't need a large team. For a live casino, substantial investment is required in equipment, cameras, physical tables, and large spaces to accommodate all the dealers. If a typical slot supplier's Gross Gaming Revenue (GGR) is between 7% and 10%, live casinos would range from 8% for the cheapest ones to perhaps 12% for the more expensive ones. That's the pricing for the aggregator. For the end operator, it would be an additional 2% to 3%. - Current European iGaming Aggregator

The aggregator adds a surcharge of 2-3% of Gross Gaming Revenue for its services. The spread between the most expensive and cheapest supplier can be around 4% of GGR, or 50% higher. The interview goes on to explore if volume is driven by players truly seeking out Evolution games or if it just has been historically more prominent on the operators' front-end.

DataDog, Snowflake, & DevOps Tooling: a Customer's Workflow

Capital One has built a reputation for being a technology-forward organization. A Former Head of DevOps at Capital One discusses how the company strategically chose to build its tooling in-house and walks through how vendors would be selected in a build vs buy decision.

We began our data journey with S3, then moved to Databricks, but the costs kept increasing. My boss at Capital One Software, built the Snow tools internally for Capital One. He then moved to Capital One Software to commercialize a segment of those tools. Currently, at AWS re:Invent, that's what Capital One is doing. They're talking about the Snowflake engagement, the Slingshot tools. It's all about data. It's all about engineering. It's all about doing it on Snowflake. So I think the best way to describe it is Snowflake has only grown in importance and will continue to grow for the foreseeable future for Capital One. In my eyes, we moved off of other tools, and Snowflake is winner, winner, chicken dinner right now - Former Head of DevOps at Capital One

The interview explores in more detail why SNOW is such a critical part of their stack.

Wayfair vs Amazon: A Supplier's Perspective

Compared to Amazon, Wayfair seems more lenient towards suppliers when onboarding and verifying SKUs uploaded to the platform. This could lead to higher return rates and thus higher allowances charged by Wayfair to its suppliers, ultimately leading to higher retail prices for end customers:

Wayfair has an entire incidents dashboard report where customers lodge complaints about faulty equipment, assembly issues, breakdowns, and even absurd claims like furniture causing bedbugs. This dashboard is a treasure trove of information that can be extracted. However, Wayfair doesn't seem to utilize it effectively. They take the supplier's word that they will change their manufacturing process or implement a new picking and packing process if an item has been repeatedly shipped to customers in a damaged state. We pointed out to Wayfair that they lacked a robust incident response system. They were reporting the issues and had the information, but they weren't taking any action. They acknowledged this weakness in their system, but we didn't pursue it further as things were winding down. I'm not sure if they ever addressed this issue, but you're correct in identifying it as a weak link in their chain. - Wayfair and Amazon Furniture Supplier

In this interview, an experienced furniture supplier sheds light on the differences between selling furniture to Wayfair and Amazon.

Vistry Group: UK Housing Shortage & Affordable Housing

Last week we published an interview describing the partnerships model for UK homebuidling. This week, a Former Partnerships Director for Countryside expands on the affordable housing situation in the UK and how homebuilders work with housing associations to deliver mixed-tenure schemes.

There will always be people who need good quality, affordable housing, and there is a massive shortage. However, due to capacity issues I've mentioned before, some housing associations are facing challenges. There are rent caps which have reduced their income. They've been affected by the cost of living issue in the last two years, having to pay contractors and developers more money to complete projects due to increased material costs. - Former Partnerships Director at Countryside

Fortinet: Competitive Landscape & SASE Transition

We've published a series of interviews on Fortinet over the past few weeks discussing the GTM channels, competitive landscape and product offerings. In this interview with a former Major Accounts Executive, Fortinet's advantages over competitors and its competition with Palo Alto are discussed.

I'll tell you, all the Fortinet customers wanted to get rid of Zscaler. They all wanted to consolidate their security mesh under one umbrella. There are a few other CISOs out there who prefer best of breed products, but let's be honest, they want a single point of contact. They want to use either Fortinet, Cisco, or something similar for everything because it's easier and cheaper. Your staff is already trained on it, and managing all these different point solutions is challenging. You have different portals, it requires high resources, and integration is tough. - Former Major Accounts Manager at Fortinet