U.S. Markets closed

Edited Transcript of BUR.L earnings conference call or presentation 25-Jul-19 1:00pm GMT

Half Year 2019 Burford Capital Ltd Earnings Call

St. Peter Port Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Burford Capital Ltd earnings conference call or presentation Thursday, July 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher P. Bogart

Burford Capital Limited - CEO

* Elizabeth O'Connell

Burford Capital Limited - CFO

* Jonathan T. Molot

Burford Capital Limited - CIO

================================================================================

Conference Call Participants

================================================================================

* Jonathan Rodgers

Engadine Partners LLP - Partner & Head of Research

* Julian Roberts

Jefferies LLC, Research Division - Equity Associate

* Melwin Mehta

Sterling Investments - Managing Partner

* Neil Thomas Welch

Macquarie Research - Analyst

* Trevor Richard Arthur Griffiths

Nplus1 Singer Capital Markets Limited, Research Division - Generalist Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [1]

--------------------------------------------------------------------------------

Thanks very much, Jordan, and hello, everyone. Good afternoon in the U.K., and good morning in the U.S. Thanks for joining us for Burford's Interim Results Call for 2019. As usual, with me on the call are Jon Molot and Elizabeth O'Connell, Burford's Chief Investment Officer and Chief Financial Officer, respectively. And all 3 of us are going to speak to various portions of the presentation, and then we'll be happy to take your questions. We'll be working from the slides that were posted on the website this morning, and we'll turn the pages and discuss some of the key messages around the business.

We're obviously very pleased to be presenting such a terrific first half of the business. Really, the business performed extremely well during the first half of 2019. The numbers on Slide 2, while I could go through them in detail, they really do speak for themselves. And they reflect not only our continued growth and market position, but they reflect ongoing significant market activity in the legal industry generally. It's a theme that we have been sounding for a number of years, and it's a theme that is clearly continuing and accelerating, which is the legal industry-long, a cash-only business starting to become a user of capital. And so when you look across those numbers, what you really see is proof of that concept.

I'd particularly highlight the fact, in addition to all of the accounting metrics, significant growth in income and profits. Portfolio returns have ticked up again, but we don't consider that necessarily a trend. At the same time, it's pretty clear evidence that we're not seeing any pricing compression in the market either.

And I must say, as we think about being potentially in the late stages of a frothy market, it's awfully nice to have our cash flows be entirely uncorrelated from either market conditions or economic activity. If anything, we are to some extent enthusiastically awaiting a downturn so that we get some incremental insolvency business, which has been in short supply given the paucity of business failures recently.

Turning to Slide 3, which highlights the continued and very substantial growth in investment commitments and deployments. So commitments really rose by a striking amount to an unprecedented level for us. And we believe that, that puts us far and away in the leadership of the industry. In fact, we think we're probably doing in 6 months what some firms have done in their entire existence.

Deployments, as always, lag commitment somewhat. As just one example, the $130 million portfolio that's mentioned above the graphs was closed in the first half but doesn't get -- have any deployments in it, and that's exactly how the business has always run. While this -- while these numbers are terrific from our perspective, we would remind you that we've always said that these are just one indication of growth, and that indication can be imperfect. And the reason for that is our dependency on deal structure. We don't have a one-size-fits-all deal structure. It's not the case that you simply come in with a case, and we finance it for you the way that some businesses do, and you'll see when we talk about the diversity of what we do, just how broad the range today is.

But let me give you a real example of what I'm talking about there, and I'll use Petersen, a case that most of you are familiar with, as an excellent example. Our commitment to Petersen is very small, less than $20 million. But if the only thing we did for all of 2019 was to do 5 more Petersens, we would commit and deploy less than $100 million, and I would not be more thrilled. So these are important indicators of growth, but they are not beyond the end all.

That being said, we're delighted to grow these numbers, and we're pleased that we're continuing to do so. And rapidly growing the business with commitments and deployments requires external capital as the duration of our assets is such that we can't finance organically all of that high level of growth. But that, from our perspective, is a very good thing. We would much prefer to have higher growth in this business, which we then need to finance than lower growth that we can finance entirely organically, even though we already are generating lots of cash.

Elizabeth will talk a little bit more of a capital structure later, but we have multiple choices that we continually evaluate, although we don't expect an equity issuance to be among those choices anytime soon. We have long been users of moderate leverage. We sit today at a 0.3x net debt to equity ratio, and we would expect to continue to be a user of debt on the balance sheet.

But on top of that, our Sovereign Wealth Fund deal really permits us to take advantage of the structural leverage embedded in that deal where we're paying in 33% of the capital, and we're getting 60% of the profits. So that, that was a deliberate choice so that we actually don't need to deploy as much balance sheet capital to generate the same or better returns from across those deals that we have historically.

Turning to Slide 4. This is a slide that you've seen before. We've simply updated it with H1 numbers. And I -- the reason that we have it in here is really to emphasize the breadth of our business. This is not just litigation funding. We have a core litigation finance business. It represented last -- in this current period, 51% of our new commitments. In the -- in fiscal year 2018, that number was 50%. So we're at about the same rate.

And that remains the economic engine of our business today. But the fact of the matter is that we do a lot more than that. We're a full-fledged financial services provider to the legal industry. And that is increasingly how we engage with our clients.

On Slide 5, you see a snapshot of the current investment portfolio along with some statistics on the side about our growth. And again, what this demonstrates is a combination of scale and evolution. We're not just doing one thing. We're not just doing that single-case financing business, although that's an important business for us, and it's a business that we will always devote attention to. But as you can see from these numbers, it's dwarfed by some of the other things that we do, which not only permits us to grow and expand the way that we have been but also contributes to just our having a very widely diversified portfolio.

As you can see from the side, we continue to grow the team. We have some degree of operating leverage in the business, but the reality is that this is a human-intensive and capital-intensive business. As we continue to grow, we will continue to add to our terrific team of people now located around the world in 6 offices. We've reached something around 60 lawyers and 120 people. And that's really an unparalleled competitive advantage for us.

On Slide 6, we have from time to time shown you the results of the market research that we do. And that market research we do for a couple of reasons. One is to inform ourselves about what's going on in the market, but it's also so that we can publish market research that will let lawyers and other potential capital users realize that they are not doing something that's unusual or esoteric any longer. The litigation finance, legal finance is very much in the mainstream of the legal industry today.

And we expanded that research this year to include CFOs and corporate financial professionals, and the results of that research are really striking. The whole research deck is available on our website if you're interested. But just looking at the left-hand graph, 95% of corporate CFOs are likely to recommend litigation finance as a solution to what they perceive as a pernicious problem, that of managing legal cost and legal risk in a world where those costs and those risks continue to rise. And so I commend the entire research team because it really does give a window for the blue sky version of this business, where we think we're heading over the next 5 or 10 years, which is towards a much greater level of ubiquity with respect to the use of capital in the legal industry.

And turning to Slide 7. We've just called out a few specific things here that I'll discuss. First of all, we announced previously that we had made another sale of a tranche of our Petersen entitlement into the secondary market that we have been trying to develop. And that was for several reasons. One of them is simply prudent portfolio and liquidity management. As Petersen's value continues to rise, trimming our position seems to be an entirely prudent thing to do.

But we're also excited about the broader benefits of building and developing a secondary market for litigation risk that we can use more broadly than just with Petersen. And the fact that we've now had 40 different institutional investors participate in the Petersen process in various ways I think is very significant for us.

I would just add a footnote about Petersen. We're obviously thrilled with the developments in the case since we last talked to you. As we expected, the U.S. Supreme Court declined to hear Argentina's and YPF's further appeal. And so the case -- so that issue, jurisdiction is now -- under Foreign Sovereign Immunities Act, in the U.S. is now firmly decided, and the case has been returned to the trial court for further proceedings.

But what that means is that Petersen is now going to be a more traditional piece of litigation, complete with all of the twists and turns and filings and motions and decisions that go along with any piece of complex litigation. And those are not things that we're going to be in a position to discuss publicly. Doing so would give too much of a public window into the litigation strategy that we're pursuing. And all we can say is that nobody can read the tea leaves by reading court filings and trying to extrapolate from a single filing, what's going on in the case. And so we regret that we won't be able to sort of hold people's hands as we walk through that process, but we will obviously update the market as to any material development.

We'd also call out a new portfolio transaction that we did during the period, $130 million portfolio transaction with a major global company. And we're calling this out not nearly because it's large, although it's not the largest portfolio we've ever done, but because it's so -- it has such a degree of innovation associated with it.

We have actually now spent a year or more working with this client, hand in glove, developing a new model for a particular kind of litigation financing. And unfortunately, confidentiality precludes us from saying anything more about it except that we're excited about having developed this, and we believe that it's a template that we can now use with a number of other firms to develop yet a new ancillary line of what we do, a new subset, if you will, of portfolio financing. This was a transaction that we did collaboratively with the client. It wasn't a competitive process. And we're very excited about its prospects.

And finally, I'd just call out what has been happening with asset recovery, which started really for us as a fee-for-service business. We migrated it to a business that took some risk on its fees, effectively becoming a contingent provider of services. And just as the core litigation finance business has gravitated from single cases to portfolio arrangements, it's fascinating to see the asset recovery business following suit with 2 significant commitments during the period to 2 portfolio-style investments as opposed to simply single binary risk.

And with that, I'll turn it over to Jon to talk about commitments.

--------------------------------------------------------------------------------

Jonathan T. Molot, Burford Capital Limited - CIO [2]

--------------------------------------------------------------------------------

Thank you, Chris, and thanks to everyone for joining.

As Chris said, we're very pleased to be presenting our results for the first half of the year. It was a fabulous 6 months on -- by any metric, and I'm going to spend a little bit of time talking about commitments, what we've added to the portfolio that we'll use to generate profits in the future. We'll talk a little bit about the existing balance sheet portfolio, and then spend some time on the harvesting of profits that's happened over the last 6 months and what our track record looks like.

So in terms of commitments, if you turn to Slide 8, the following slide, this is the slide we've done year in, year out. And I'd say there's 3 takeaways. The first and most obvious one is the headline number. That has commitments in the first 6 months of 2019 of over $750 million compared to an already impressive $550 million-plus last year, same period. It's just a testament to the robust demand in the market for our capital and the ability of our team to meet that demand.

And as Chris said at the outset, and I'll talk a little bit about that a couple slides down, that growth in investments has not come along with the sacrifice of returns. Anyone on the team will tell you that we are very rigorous in our risk analysis and pricing, and we're not going to reduce return demands simply to meet competition. And I think that this is the sign that the market demand is expanding rapidly enough that, even if there are competitors, some of which -- there are new entrants; sometimes they fall away; and sometimes they stay in place -- that there's enough room in the market. And we're able to see robust demand at the same pricing that we've been able to enjoy in the past.

I'd say the second key takeaway from this slide is when we break it down by segment. And if you look at the first 2 categories: single-case finance and portfolio finance, which are our historical core business that have driven our returns in the past, those with the high-octane presettlement investments, those 2 segments are up significantly by close to 50%, going to $80 million-plus in single case and $300 million-plus in portfolio finance. Those are very large increases. And we're very pleased with, as I say, the demand for our capital and our ability to put out that capital at very attractive deal.

The third thing I'd say is that the performance in the other segments is very strong as well. Chris mentioned the asset recovery portfolio we did, and we do think that is a harbinger of additional opportunities that the asset recovery team is working on, where it just makes sense. There are major financial institutions that are owed money and have trouble tracking down the securing assets, then that's something we can help with on risk in a broad portfolio basis.

Complex strategies has put out a lot of capital. Post-settlement is up, and that's an area where we've maintained very good relationships with law firms that meet our capital. The only segment which we told you would likely be down and is not driving our business is the legal risk management. We've said for some time now that we have that line of business because it facilitates the core business, that there could be an affirmative case where, in addition to financing the affirmative litigation, the clients need some risk management to account for adverse costs, and we make that available to facilitate closing the deal. We don't necessarily see that as a business driver. So we're very pleased with the headline number and the components that make up that headline number.

If you turn to Slide 9. That now is looking at, okay, we've had 6 months more of adding good investments to our portfolio. Where does that portfolio sit? You can see we have a portfolio and balance sheet that exceeds $2.4 billion across all segments. It's widely diversified. So there's no one component. The portfolio is at the largest component single case. It's next at 17%. But that's a widely diversified -- each portfolio [is first], and then you've got numerous portfolios in there. So we're pleased with the size and makeup of the portfolio. And you can see that roughly similar to what has been in the past, the portion of the portfolio where the dollars have already gone out and dollars remained to be drawn, we're just very pleased with how that portfolio looks. And that's what's going to generate our profits in the future.

If you turn to Slide 10. This is, well, what have we done in the past, looking at how the last 6 months has affected our track record, and we're extraordinarily pleased with this as well. We always provide 3 core metrics, which are IRR, return on invested capital on an absolute basis, and duration. And as we've said in the past, the IRRs and the durations have remained roughly consistent from period to period. Ticked up a little bit the IRR to 32%, but it's hovering in that 30% range. And the duration ticked down to 1.7, but again it's hovering in the same range it has been.

The return on invested capital has gone up to 98%. As Chris said and we've said consistently, we don't necessarily see that as a trend, but there's an upward movement. We've always said that the hardest thing to predict in this business is timing. We can look at a case and make the call on whether we think it's a good case and it's likely to win. But whether the defendant will come around to seeing it through the same lens we do and would settle the case and on what time it will take for a defendant to do that, that's much harder to predict. And we always underwrite based on the merits, thinking if we have good matters, that going to trial will produce good outcomes, then some of those will settle because the defendant will see it to some way. Some of them will go to trial. And we're -- we've built the portfolio so that we can be largely indifferent to that and generate similar IRRs regardless.

I will say, though, and echoing Chris' point earlier that the uptick in return on invested capital just reinforces what I said a couple of slides ago, namely that we've been able to grow this business dramatically over the years and not sacrifice returns, right, that there's not a downward trajectory in returns associated with growth. And the team well knows that this is our driving impulse here that we are growing the business, meeting the demand of our counterparty clients, but we are always doing it with rigorous attention to maintaining our return levels.

So if you turn to Slide 11, that's the one that provides some further granularity on our track record and how we've performed by investment vintage. We provide this same slide every period and/or every year, and we're providing it in a half year period as well. You'll recall that we have more granular information still on our website we always post, which breaks it down case-by-case without identifying characteristics, but it breaks down individual cases, which is just too cumbersome to include on a slide of a slide deck or on a page of our midyear report.

There is -- the only additional information we've provided for your convenience is we've always broken it down by concluded investments, ongoing investments and partial realizations. One could have done the math, and people did from the website to figure out, of a partial realization, how much of the original commitment went to the portion that -- of a portfolio, for instance, that was resolved and how much went to cases within that portfolio that remained outstanding, and we've gone ahead and broken that down for your convenience. [Here, you see] you don't have to transfer back and forth between the website, information in this slide.

So for instance, if you look on the slide at the 2017 vintage, you can see there are 3 partial realizations. Those are 3 investments where there could be a portfolio of investments and one or more of the cases within the portfolio have resolved and others continue on. So there, you see $22.2 million of what we invested was invested in the cases that resolved, and that generated $33.2 million of recoveries. $109.4 million of the -- invested at $120 million that's been committed remains outstanding on matters that have not yet resolved or are still subject to litigation.

Another example, 2014. You look there are 4 partial realizations. $11.9 million went into the portions of those investments that had been resolved, generating $23.9 million in recoveries, and there's still $25 million of investments of an original $36.5 million committed that remain outstanding on ongoing matters.

And the way we handle partial realizations is just the way any of you would. If you bought 200 shares of stock in a company and you sold 50 shares, you would say, "Of the 200 shares, I sold 50. What did I pay for those 50 shares? How much money did I realize upon sale of those 50 shares?" And you take a profit or a loss on the 50, leaving the 150 outstanding.

Same thing for us. If you have a portfolio of a number of lawsuits being litigated by a company or a law firm and you've committed, say, $30 million to that portfolio, and let's say, one of the suits, you spent $5 million on that. And let's say it resolved, and you ended up with $10 million from that suit alone with everything else remaining outstanding, you would compare the $5 million we invested in that suit to the $10 million you had realized and take $5 million you would treat as profit from a realization event, and the remainder would stay outstanding. You would not, by any means, say, "Oh, you got in $10 million, but your original investment was $30 million, therefore, you lost $20 million because only one of the matters that you spent $5 million on had resolved and the rest remains outstanding."

So I thought it was worth just breaking down how we do partial realizations. But you can see there's a great deal of information about our performance in the past, and that's the breakdown of how we end up with those headline numbers of a 98% return on invested capital and a 32% IRR net of all losses, and that's on $1.2 billion of recoveries, right, which generated profits of $573 million across 99 investments. Then here, you've got the breakdown of them with the website providing more granular information.

So that's a bit of information about the new investments we've put on, the nature of our existing portfolio and our track record to-date. I, of course, focus on putting the capital out and bringing in profits. But I'm going to turn it over to our CFO, Elizabeth O'Connell, to make sure we have the capital available to deploy.

--------------------------------------------------------------------------------

Elizabeth O'Connell, Burford Capital Limited - CFO [3]

--------------------------------------------------------------------------------

Thanks, Jon. And as Jon did say, he does focus on the investments. You've just heard him talk about our results and our opportunities. And I will spend a few minutes now on how we finance those investments.

Turning to Slide 12. This slide provides the highlights of our funds business. Burford's the largest investment manager in this space with $2.8 billion in assets under management across 8 separate funds. In this period, we closed our $300 million post-settlement funds. Just as a reminder, Burford's balance sheet does not invest in this fund given its return characteristics. And we announced at the end of last year the path to financing the next $1.6 billion in core litigation finance investments. And as you've now heard from both Jon and Chris, we've seen growing demand in our core litfin business, such that 39% of that $1.6 billion has been committed after just 7 months of investing. The $300 million Burford Opportunity Fund, that's our 2 and 20 fund, is now 63% committed. And the $660 million Sovereign Wealth Fund is 27% committed.

Slide 13, this is our cash waterfall charts that we've been including in our slides for a while. And the chart shows Burford-only cash has moved over the last 6-month period, and it excludes any third-party interest cash that appears on our cash flow statement in our consolidated results.

The key message to take from this slide is that Burford's balance sheet is in a strong cash position. We had $297 million of cash heading into the second half of the year.

And I'm going to walk you through the chart. The inflows of cash are the black bars, and the outflows of cash are the red bars. Starting on the left-hand side, we started the period with $277 million of cash. The balance generated $184 million of cash from investment activity and from income from other segments. We had outflows of $36 million to operating expenses and $38 million to interest and dividends. And we deployed $198 million to investments.

We closed the period with $171 million of cash after accounting for a net change in receivables and payables. And as you already heard from Chris, in early July, we received $126 million of cash from investment receivables. This was simply a timing issue over period end. Adding these proceeds to our ending cash balance has us holding that $297 million of cash heading into this -- the second half.

And my last slide is Slide 14. It's a slide you've seen before. It's simply a recap of our capital structure. This slide shows how we capitalize the business and finance our new investment. And we continue to think through the optimal structure for financing these new investments. You'll note that we have a low net debt to equity ratio, and accessing incremental debt is certainly a possibility for us. We're also enthusiastic about the economic structure of our Sovereign Wealth Fund -- our sovereign wealth arrangement and the synthetic leverage that, that arrangement provides. And we continue to consider private fund capital for appropriate strategy.

I'll now turn it back to Chris, who will conclude our presentation, and then we'll open it up for questions.

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [4]

--------------------------------------------------------------------------------

Thanks very much Elizabeth. And I think at this point, given that I promised to be short, and it wasn't as short as I would have liked to have been, why don't we go straight to Q&A. So anyone who would like a question, we'd be delighted to have it.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Julian Roberts of Jefferies.

--------------------------------------------------------------------------------

Julian Roberts, Jefferies LLC, Research Division - Equity Associate [2]

--------------------------------------------------------------------------------

I've got a question on Petersen as a proportion of the investments data provided in Note 7. Net realized gains are just under $140 million. Am I right in thinking that Petersen is $98 million or so of that? And total realizations are $317 million, and I think Petersen's $100 million of that. And therefore, can I reach a first half return on invested capital number by dividing -- excluding Petersen, by dividing $139 million minus Petersen into $317 million minus Petersen?

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [3]

--------------------------------------------------------------------------------

Elizabeth, do you want to do that?

--------------------------------------------------------------------------------

Elizabeth O'Connell, Burford Capital Limited - CFO [4]

--------------------------------------------------------------------------------

I'm sorry. I was dropped off the call. I've just joined, so I didn't hear Julian's question. I apologize.

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [5]

--------------------------------------------------------------------------------

So I think the short version of the question in here -- why don't I take it, Julian. And Julian, we're happy to have Elizabeth talk to you off-line about the precise computations, but we've been -- but we've certainly been clear that when we have a realization that we show it as realized gain. So absolutely, some of the realized gain that you're seeing there is definitely attributable to the sale of Petersen, which we sold and got cash from irrevocably in June. And so in terms of the computational of that though, lest I get out over my skis, why don't I let you and Elizabeth do that off-line.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Trevor Griffiths of Nplus1 Singer.

--------------------------------------------------------------------------------

Trevor Richard Arthur Griffiths, Nplus1 Singer Capital Markets Limited, Research Division - Generalist Analyst [7]

--------------------------------------------------------------------------------

In relation to the innovative $130 million portfolio deal, I mean what your narrative and the wording in your report suggests fair bit of IP is embedded in this. And I just wondered how have you sought to protect this so you can use this again and again, but there your clients who may use this can't share it to your competitors?

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [8]

--------------------------------------------------------------------------------

So we are very pleased with the portfolio that we've developed. The -- I think the simple reality, like any corporate finance transaction and an investment banker would do is that it's pretty difficult to protect the IP, as you call it, in a formal sense. And so the best way to protect it is not to publicize the details of it too widely and to go and implement it with other people, which is exactly what we're doing at this moment.

And does that mean inevitably this will come out into the market? Yes, yes. I think that it does. And I don't think even that that's necessarily a bad thing in much the same way that we originally invented and introduced portfolio financing for the litigation finance industry generally. And now it's a widespread tool used by a number of people. But we certainly had a head start on it, and I think the same thing is true here. So that's really the best answer I can give to that.

--------------------------------------------------------------------------------

Jonathan T. Molot, Burford Capital Limited - CIO [9]

--------------------------------------------------------------------------------

I might reinforce that this is a perfect example of where our counterparty client has looked to us for smart money. I don't think this is the sort of arrangement that someone simply coming along and saying, "I'd give you the same $130 million on slightly cheaper terms," would have satisfied the client's needs. We're adding value beyond just the financing we're making available. And that's why I do believe, as Chris says, it's something we can replicate with other clients. And to the extent it gets out in the market, it's likely to inure to our benefit because, if others try to replicate it, I think the clients are still going to come talk to us about it, and they'll find that we can meet their needs better than anybody else.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question comes from Neil Welch of Macquarie.

--------------------------------------------------------------------------------

Neil Thomas Welch, Macquarie Research - Analyst [11]

--------------------------------------------------------------------------------

If I may, I'll have 2 questions. The first is, at the Capital Markets Day last year, you talked about the geographical development of your opportunities, in particular, the liberalization of legislation in Hong Kong and Singapore. And I would be interested to know how that region is doing but also how that opportunity is starting to play out, particularly in the context of about where you grow you're off of it? That would be helpful. That's one. And the second, I just wondered whether you might update us on any changes in terms of what might be litigable the regulatory background. Yes, I obviously noticed the Australian Law Reform Commission report in relation to last 4 transactions there. But I wonder, were there any developments that were either positive or a little concerning that you might want to bring to our attention?

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [12]

--------------------------------------------------------------------------------

Sure. Thanks, Neil. So on geographic development, Asia -- to start with Asia, which you asked about specifically, Asia has been very interesting for us. You're absolutely right that Singapore first and then Hong Kong liberalized their regimes so that arbitration matters in those jurisdictions are capable of taking on financing from people like us. And we responded to that by -- and we were involved in trying to make that happen. And we responded to it by opening an office in Singapore and having someone on the ground there.

The interesting thing has been -- so these are markets that not only have just been able to do this with people like us but have never before had any sort of capital or legal risk arrangements in place. There are no contingency fees, no DBAs, no CFAs there. And so those markets, in terms of direct utilization of capital have, as we suspected they would, been quite slow to have an uptick. We've done some business there, but it's not needle-moving business.

But what has been most interesting, though, is that we've actually done more business now from Asian clients using our capital in other jurisdictions, principally the United States, than we probably have in Asia itself. And so an unintended but very welcome consequence of setting up shop in Asia was increasing our profile there so that we are financing Asian companies on inbound litigation into the U.S.

We're also separately doing a fair bit more in Europe than we have historically. And that really is down to the continued growth that we've put into the -- our hub office in London and the team that we've developed there. And so I think those are areas that you'll see continue along with Australia, of course, where we have -- where we are active in the Australian competitive mix today.

As to regulation, the answer is no, not really. The -- there's -- of course, law goes through a fair bit of internal self-examination about broad questions that usually relate to things around access to justice. And this is not just unique to Australia, but other jurisdictions do this as well because, of course, courts and policymakers are concerned about what you do about the fact that litigation cost keeps on rising. And it really makes it extremely difficult for smaller firms or individuals to bring what I'll call normal cases. Our market is at the larger and more complex end of the legal spectrum. And so that -- those issues don't really affect us so much. But my gosh, it's pretty darn tough if you're a small business in the U.K. to figure out how to afford to make use of the English courts. And so a lot of the regulatory activity that you see is around those kinds of things.

When it comes to litigation finance itself, the clear trend in litigation finance globally is to recognize it as a necessary and important part of civil justice. The realization now that affirmed, just looking at Burford alone, the fact that we're writing more than $1 billion a year of new business in the legal industry, that's a fair bit of money. And that's money that the legal industry is excited to have as part of the availability of bringing things into the mix.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Jonathan Rodgers of Engadine Partners.

--------------------------------------------------------------------------------

Jonathan Rodgers, Engadine Partners LLP - Partner & Head of Research [14]

--------------------------------------------------------------------------------

I've got 2 questions, Chris. I might just do them one by one for clarity. Firstly, on asset recovery, which is 15% of commitments this half, if we look at the data in the 2018 annual report, it looks like a very high-return business. I think you reported 75% return on capital, 167% IRR but on a very small sample size of investment. Given that you continue to put reasonable commitment amounts into this, could you help us understand a bit better the pricing structure or targeted IRR just so we can understand the likely dynamics as that business continues to grow?

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [15]

--------------------------------------------------------------------------------

Did you say 2 questions? Or just...

--------------------------------------------------------------------------------

Jonathan Rodgers, Engadine Partners LLP - Partner & Head of Research [16]

--------------------------------------------------------------------------------

Well, I -- and the second one is around the participation in the legal firm, which you talk about in the half year report within asset recovery. Just if you could give us a bit of more information about that, what sort of sector that could be or geography, why you sort of went into that structured arrangement, whether they become a sort of preferred partner in new direct business to them, what the sort of terms are for how long the arrangement lasts, and I guess, ultimately, why?

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [17]

--------------------------------------------------------------------------------

Yes. So let me comment, and then I'm sure Jon will have something to say about these as well. And I'll take them in reverse order. The -- I think when you think about the participation of the legal firm, it's just another example of the breadth of capital solutions that people are looking for in the market. And from our perspective, it's us coming along and saying, "What are the best ways in which we can take our capital and make profitable use of it at the same time to develop client relationships?"

So the law firm arrangement there, there's -- I'm constrained in what I can say because, as you saw in the footnote, this is subject to regulatory approval, and it's confidential at the moment. But the fact of the matter is that we're able to not only provide financing to somebody or to their clients, but we're also able as part of that sometimes to get an equity kicker from that process as well. And you saw us do that not only in the asset recovery space, but we also mentioned that we've done that in the core litigation finance space. We gave some financing to an early -- relatively early-stage technology company that has, in our view, a meritorious dispute. And because of the relative dynamics, competitive dynamics in play there with the financing, we were able to structure an arrangement that gave us both a litigation financing return and also an equity return in the future.

And as to pricing, what I think Jon will tell you is that we priced a risk in asset recovery in the same way that we do in the core business. But Jon, you can...

--------------------------------------------------------------------------------

Jonathan T. Molot, Burford Capital Limited - CIO [18]

--------------------------------------------------------------------------------

Sure. So on asset recovery, it is -- it can be a very high-octane business line, very similar to presettlement litigation. And it depends, as Chris says, on the risk profile. Just as in a single-case presettlement litigation finance deal, there will be a variation of the terms depending on whether this is at the outset before any suit has been filed versus there's already a judgment, and we're financing it or monetizing it subject to an appeal. So very different risks.

You could imagine an asset recovery scenario where a judgment has not only been won but the assets have been identified and even frozen, and there's some battle, and there's fee fatigue and a desire for quick cash by the judgment creditor, and they would like to sell it at a discount. But more frequently, usually, if people wait that long and they're just waiting to get paid and it's pretty certain they're going to be, they're not looking to take a discount to us. They would settle -- sooner settle with the defendant.

More often, it is going to be higher octane. It's going to be very large potential recoveries that hinge on the identification and freezing of assets being able to pierce the veil for some corporate entities, that sort of thing. And therefore, we can command returns for those kinds of deals that are very similar to what we can in the high-octane single-case presettlement investment.

And the trend toward portfolios actually helps to defray the risk, to spread it across the portfolio. And it stands to reason that, in some cases with asset recovery, you have a single judgment creditor who's at a loss of what to do on this particular matter comes to us both for our expertise and our capital. But you can imagine someone who is a repeat judgment creditor or financial institution that people default across a large book of loans and wants a solution that's going to cover a wide swath of its business, and that's what we're gravitating toward.

So I would say even though it is behind in terms of size, the core litigation finance business, it does have some similar return metrics to that business -- say in contrast to post-settlement, where we've said from beginning those are lower risk, low return, and that's why we don't use balance sheet capital. It's all fund capital for post-settlement. Whereas asset recovery, it's the opposite. It's all balance sheet capital.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from Melwin Mehta of Sterling Investment.

--------------------------------------------------------------------------------

Melwin Mehta, Sterling Investments - Managing Partner [20]

--------------------------------------------------------------------------------

Again, I can -- all I can say is a very good performance, really. There's little fault to find here.

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [21]

--------------------------------------------------------------------------------

Thank you. We appreciate it.

--------------------------------------------------------------------------------

Melwin Mehta, Sterling Investments - Managing Partner [22]

--------------------------------------------------------------------------------

And as you already have a Jon in your life, I'm searching to find my Jon and fast now, but let's see how that goes. I'm delighted that you share my enthusiasm of joining the [first 300 company], not before too long. And I have to read it twice to really confirm with my eyes, clearly. But as I go about talking of various businesses, including both the -- to especially people in the London market, I often kind of get a few pushbacks. And I need your help to counter that pushback for the next time I get one. One I often get is that the -- if the management is really serious on playing that big game, why not really be listed on the main market? And how do you think I should reply to them next time I get this question?

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [23]

--------------------------------------------------------------------------------

And what's the other pushback so I can do them all at once.

--------------------------------------------------------------------------------

Melwin Mehta, Sterling Investments - Managing Partner [24]

--------------------------------------------------------------------------------

Well, and the connected, really, question is it would probably be that the CEO and the CFO are being on the Board because often that is kind of -- that is taken as a kind of normal thing.

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [25]

--------------------------------------------------------------------------------

So anticipating that question because, sometimes we get it from people as well, we actually have a couple of pages in the interim report, pages 13 and 14, that touch on just those issues. And let me give you a -- let me refer you there for the full argument, but I think the short answer is that we don't perceive an actual benefit, especially one that outweighs the cost of making that market transition. And that's not only our view, it's also a view taken by a number of our advisers.

What we have said, and I think it's important to bear in mind that, while Burford is listed in London and has a significant European presence in a London office, the majority of Burford's people and income comes from the United States, where there are obviously, first of all, a set of active securities markets; and second, a somewhat different approach to Board structure and governance. And there are also tax issues to take into effect.

So on the market question, the short answer is I think we would be more likely to consider a second listing on one of the U.S. exchanges, either NASDAQ or the New York Stock Exchange, than we would on the London main market, just purely from a dispassionate cost/benefit analysis.

And as to the Board, that really is a combination culture and tax. There is a cultural difference between English companies and American companies. English companies have a Board structure that has, generally speaking, a number of operating executives that sit on the Board, and American companies do not. We inherited our Board structure from a time when the public company was a separately managed fund. It had a Board of entirely independent directors. That Board works well. And it doesn't feel like there's any reason to change it. And as we set out in the discussion, there are also some constraints in our articles that are tax-driven around changing the composition of the Board if you add Americans to it. And again, it's just not something that we think warrant the cost of the benefit. Jon and Elizabeth and I participate fully in all of the Board meetings. But the question of whether we should be formal members and with the tax result that, that might incur is probably not in the best interest of the business, in our view.

--------------------------------------------------------------------------------

Melwin Mehta, Sterling Investments - Managing Partner [26]

--------------------------------------------------------------------------------

Well, you know we listen enough to know that we -- both of us, we are not designation hungry. And as long as the team players know what jobs they're doing, that's the key for the whole thing, which I'm -- which I've got no doubts in my mind that's the case here. But the reason I bring this up is somehow, I don't know, there's a feeling that -- is Burford trying to hide something and stuff? Why is Burford -- there are questions in investors' minds. And I'm not -- and I really -- you know me by now that I'm not talking of shop price one day going up and one day coming down. That will take care of itself. But in terms of the brand of the company, the perception of the company, it kind of tends to be lingering on.

--------------------------------------------------------------------------------

Christopher P. Bogart, Burford Capital Limited - CEO [27]

--------------------------------------------------------------------------------

Well, I certainly appreciate the comment. And it's -- as you can tell, it's something that we've studied quite carefully. But it's a not insignificant undertaking to add a listing. And given that, first of all, we try to direct as many of our resources as we possibly can to running the business and making profits in it, that's really a key driver for us in considering these kinds of issues. And so when we look at something that has a degree of what I'll call conventional wisdom or mode of appeal to people but doesn't seem to be born out in actual economic benefit. I think our reaction to that is that we would rather husband the money and devote both the money and the effort to increasing our profits than to sort of -- just sort of giving in to that mode of appeal or conventional wisdom.

If you look at Burford's numbers, we operate at an extremely high operating margin because that has always been our collective operating philosophy. And I think much as I occasionally hear the sentiment, although frankly, as we say in the report, it's pretty rare for me to find an institutional investor who says, "I'd really like to buy Burford stock. The thing that is preventing me from doing that is the fact that it's listed on AIM in the main -- instead of the main market." And that really doesn't happen in my dialogue with investors. And if you look at the level and quality of our disclosure, it's main market quality. There's nothing that we would be adding to our disclosure, frankly, if we were listed on the main market compared to the disclosures that we give today.

I am being told that, for an interim call, we were -- we have somewhat run over our allotted time and that the expectation was that we would do this in something more approaching 45 minutes. And so I think, at that point, I will apologize to those of you who have questions still to be asked and, instead, invite you to pose those questions directly to us. And as you know, we're always happy to be responsive to those questions.

But for now, I would thank everybody very much for joining us. And again, we couldn't be happier with the first half of 2019, and we're excited about what lies ahead for the business. So thank you all very much.

--------------------------------------------------------------------------------

Jonathan T. Molot, Burford Capital Limited - CIO [28]

--------------------------------------------------------------------------------

Thank you.