Investor Dialogue: Burford Capital

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Analyst 1: You had just mentioned that you didn’t like the response that the management team gave to the Muddy Waters report. I reread it a few months ago and I thought, given the time constraints, the fact that it involved the CEO’s wife and all that sort of stuff, that they did a pretty good job in a very limited timeframe. I was just wondering, what in particular jumped out to you that you didn’t like about the response?

Analyst 2: I think the response was quick and comprehensive, as you state. They answered most allegations comprehensively. I had three main questions and I don’t even recall them in detail. I’m happy to share a letter that I sent them. Basically, I told myself, if they respond to these three questions, I’ll stay and if they don’t respond to these three questions, then I’ll leave. They didn’t answer them in a two to three month period post the scandal, so I moved on.

To answer your question more directly, I found the tone quite aggressive in the response and I did not like that.

Analyst 1: You found the tone in response to you aggressive?

Analyst 2: Yes; to my letter. They basically said, thank you for the questions; we’ll try to come back when we communicate with the world. But I did not like how they responded to Muddy. It was defensive and it was almost aggressive.

Analyst 1: It’s the old thing where, if you attack the short sellers, that is the biggest red flag there is.

Analyst 2: Yes. As I said, I haven’t followed it closely so if I make factual mistakes, please correct me, but what I really did not like was, there was the scandal, the stock has fallen and they are saying they might be buying back stock, that they are so convinced that they are buying it themselves. These guys sold a third of their shares – I think £90 million – in that year. Then the scandal hit; they say they are bullish and get involved and one guy buys a couple of hundred thousand. I think Bogart and Molot bought single digit millions and I thought, are you kidding me? That is your conviction?

I checked two months ago and they had not materially increased their holdings and they didn’t repurchase shares. Why is that, if you are so convinced?

Anyone want to share their views on that?

Analyst 3: The beauty – or lack thereof – is in the eye of the beholder a little bit. I was not involved, personally. We had a number of really thoughtful partners that were, at the time. Obviously, having a thousand underlying holdings, as an allocator, you see these types of things a lot. In my experience, there are generally one of two directions that management teams will take. They either become more transparent or less transparent. That was always the lens that I looked through. Granted, I had a little bit of an unfair advantage in that I had known Chris for several years and I had known his wife for a few years and I knew that she was extremely competent. If you looked, on paper – particularly on the financing side – at the things that she had done for Burford, that talked to me about why she qualified for the job.

Besides that, I feel as if you actually look at their responses to Muddy Waters, they went over and above to be transparent. For example, literally putting out an investment table with every line item of an investment. They absolutely do not have to do that.

Analyst 2: That was there before. If I can hop in, another example is the disclosure of pay; their compensation was not disclosed. I suppose they have to do it, now that they are listed in the US, but they did not disclose in the years before and I think there is a reason for that.

Analyst 3: I also came from a world where we paid people way more than the Burford CEO got paid and we were an LP, so that wasn’t really a big deal to me, to be honest. I knew what the aggregate figure was and how they divvied it up between their team; it was kind of up to John and Chris. We had funds that were paying much more than that. I think it was more about finding something to create a narrative around. My general experience – and this is high level, so take it with a grain of salt – is that when you are looking at a public company, you can generally come up with a short narrative because there is incomplete information. The question is, are you going to trust the short seller with incomplete information, pulling together a mosaic theory of, sometimes, very compelling, intellectual and negative information; usually the negative is satisfying, but wrong and, usually, the optimist is not intellectually appealing, but correct.

I think it came down to, do I think they are trying to be more transparent in answering these questions and do you trust the people? Also, there were things that were not talked about as to why the stocks fell so much. I think that part of that was they were priced for executing well. To be fair, looking forward to today, they have executed well. If we go forward another three to five years, they were priced just fine. It’s not as if they were cheap and they fell 70%.

It was the perfect short set up, in hindsight? It was trading at five or six times book; it was listed on the AIM. Muddy Waters spun the narrative, with Woodford at the time, that blew up and killed retail money. There was a bunch of UK retail shareholder money in Burford that Carson knew didn’t understand the accounting, so if there was any whiff of something that didn’t look right, they would just flee the stocks. When I first looked at it, that was what I saw; that this is just the ultimate set up.

Analyst 1: It wasn’t just retail. I knew tons of event books who were saying, my smart friend has a big position in Burford and thinks it’s a compounder; I have 1.5% in Burford, on the thesis it’s a compounder and they’re going to uplist from AIM at some point and I’ll get that pop. I can’t tell you how many friends emailed me. We had talked about it and, as soon as the Muddy Waters piece came out, they were out because they couldn’t understand any of it; they had done pretty much no work on it.

Analyst 3: One of the things that I think is worth mentioning too is that they got a lot of slack for their fair value accounting. There is a lot made up about whether it’s more important to be conservative or right. Forget about whether you can or can’t do fair value accounting. The thing that I thought was just so funny was that I spent all my time on the public side, but I would go to private equity meetings occasionally and, obviously, I spent a lot of time with Gerchen Keller and a few of the other litigation finance players. You go to these private equity AGMs and, particularly for the bigger funds, it’s a bunch of people saying, why aren’t we getting this written up?

You’re telling me all these great things about this business; why aren’t you writing it up? They get pissed off, as an LP, if you can’t go back to your CIO and get a write up and, basically, show what is happening. You had all these public shareholders that didn’t really understand. They have third party investors that need market to market accounting and you are basically saying, no, no; you should just hold this, at cost, for seven years. Good luck with that; that’s not realistic. There is enough there to scare some. By default, you have to have trust in some of these things because they are really complicated. Even if you had all the underlying data and knew everything about every case, many of us wouldn’t be in a place to even underwrite them anyway.

Analyst 2: I would like to ask the group, how do you know that management has integrity? I did a lot of work around the sector, in 2019, to understand the players, the dynamics, the moat. Management is very smart and I think they are very energetic. What they have done from scratch is impressive and admirable. But I could never answer that question as to whether they definitely had high integrity. I still can’t say yes or no. I just don’t know. How do you know?

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