Burford Capital (LON:BUR) has announced access to almost $1bn of new capital, which, combined with its balance sheet, gives a new and financially attractive structure for how the next $1.6bn of litigation finance investments will be made. The most significant part of this is a new strategic capital relationship with a sovereign wealth fund (SWF). The SWF and Burford have committed a $1bn pool of capital, with the former supplying $667m. Burford will supply the remaining one-third of the capital, but receive 60% of the investment profits. In addition, 50% of the new investments made will be allocated to the pool over the next four years, or until the pool is invested.
Burford Opportunities Fund (BOF): Burford has also announced the raising of $300m of capital for a new private fund. The launch of this had been indicated previously, with the size being restricted due to the additional capital from the strategic partnership described above.
Capital requirements: In addition to the pool, 25% of new litigation finance investments will be allocated to each of BOF and Burford’s balance sheet. The net effect is that Burford will fund 42% of future litigation finance investments, but receive 60% of the investment returns.
Valuation: Hardman & Co has made significant upgrades to its earnings estimates on Burford, with increased RoIC, lower invested capital growth and less debt issuance. The prospective 2019 P/E of 17.3x is not excessive for a growth company, with a 25.1% 2019E RoE giving strong metrics all round.
Risks: The investment portfolio is very diversified, with exposure to more than 900 claims. However, it retains some very large investments, which means revenue could be volatile. As the company matures, we would expect that to decrease, but not to disappear. The Petersen case shows that this volatility is not simply a negative.
Investment summary: Burford has already demonstrated an impressive ability to deliver good returns in a growing market while investing its capital base. As the invested capital continues to grow, the litigation investment business will continue to produce strong earnings growth.
