The Market for Justice: Burford Capital and the Litigation Finance Industry Custom Case Solution & Analysis

Evidence Brief: Burford Capital and the Litigation Finance Industry

1. Financial Metrics

• Total capital provision assets: 2.2 billion dollars as of June 2019.
• Internal Rate of Return: 31 percent on concluded cases since inception.
• Return on invested capital: 61 percent on 821 million dollars of liquidated investments.
• Unrealized gains: 1.6 billion dollars classified as Level 3 assets under IFRS 9.
• Stock performance: Share price dropped from 13.85 pounds to 6.05 pounds in August 2019 following the Muddy Waters report.
• Operating expenses: 40 million dollars in the first half of 2019.

2. Operational Facts

• Global footprint: Offices in New York, London, Chicago, Washington DC, Singapore, and Sydney.
• Staffing: 130 employees, including 60 lawyers.
• Investment process: Only 4 percent of inquiries result in funding commitments.
• Portfolio composition: Mix of single-case financing, law firm portfolios, and corporate portfolios.
• Listing status: Traded on the London Stock Exchange Alternative Investment Market during the case period, preparing for New York Stock Exchange listing.

3. Stakeholder Positions

• Christopher Bogart, Chief Executive Officer: Asserts that litigation finance is an uncorrelated asset class and defends the fair value accounting methodology as the only accurate way to represent legal asset value.
• Jonathan Molot, Chief Investment Officer: Focuses on the rigorous selection process and the fundamental value of the underlying legal claims.
• Carson Block, Muddy Waters Research: Claims Burford is a perfect storm for an accounting fiasco and alleges that the company manipulates returns and lacks transparency.
• Institutional Investors: Divided between those seeking high-yield uncorrelated returns and those concerned about the opacity of legal outcomes.

4. Information Gaps

• Case-specific probability models: The proprietary data used to assign fair value to pending litigation is not public.
• Settlement duration variance: Lack of granular data on the correlation between case length and ultimate recovery ratios.
• Impact of adverse cost rulings: Limited data on the frequency and magnitude of costs awarded against Burford-funded plaintiffs in different jurisdictions.

Strategic Analysis

1. Core Strategic Question

• How can Burford Capital restore market confidence and stabilize its valuation while operating in an inherently opaque and illiquid asset class?
• Can the company successfully transition from a high-growth alternative investment firm to a transparent, institutional-grade financial entity?

2. Structural Analysis

Porter Five Forces Findings:

• Threat of New Entrants: High. Capital is flowing into the sector from hedge funds and private equity, though Burford retains a first-mover advantage in data and lawyer talent.
• Bargaining Power of Buyers: Moderate. Top-tier law firms have choices, but Burford scale allows it to fund massive corporate portfolios that smaller competitors cannot touch.
• Competitive Rivalry: Increasing. Pricing pressure is growing as the industry matures and capital becomes a commodity.

Value Chain Findings:

• The primary value driver is the underwriting process. The 4 percent acceptance rate indicates a focus on quality over volume, yet the market currently discounts this selection capability due to accounting skepticism.

3. Strategic Options

Option 1: Aggressive Accounting Reform and NYSE Listing

• Rationale: Moving to US GAAP and a dual listing on the New York Stock Exchange increases regulatory oversight and attracts a broader pool of institutional investors.
• Trade-offs: Higher compliance costs and increased scrutiny of Level 3 asset valuations.
• Resource Requirements: Significant legal, accounting, and investor relations investment.

Option 2: Shift to Asset Management Model

• Rationale: Reduce balance sheet risk by using third-party capital for new investments, generating fee-based income rather than relying solely on capital gains.
• Trade-offs: Lower potential upside compared to direct balance sheet investing.
• Resource Requirements: Expansion of the fund management team and investor reporting infrastructure.

4. Preliminary Recommendation

Pursue Option 1. The immediate crisis is one of trust, not operations. A New York Stock Exchange listing and US GAAP adoption provide the external validation required to neutralize short-seller attacks. This path forces a level of transparency that will differentiate Burford from smaller, less regulated competitors.

Implementation Roadmap

1. Critical Path

• Month 1-3: Complete comprehensive independent audit of all Level 3 assets using a Big Four accounting firm to verify valuation consistency.
• Month 4-6: Finalize US GAAP conversion and file Form 20-F with the Securities and Exchange Commission.
• Month 7-9: Execute the New York Stock Exchange listing and launch a global investor roadshow focused on the underwriting methodology.
• Month 10+: Implement a quarterly reporting cycle that provides anonymized portfolio performance data to bridge the information gap.

2. Key Constraints

• Regulatory Approval: The Securities and Exchange Commission may challenge the specific application of fair value accounting to legal claims.
• Judicial Uncertainty: Changes in champerty and maintenance laws in key jurisdictions like Singapore or Australia could invalidate existing contracts.

3. Risk-Adjusted Implementation Strategy

The strategy assumes a stable legal environment. To account for operational friction, Burford should maintain a cash reserve equivalent to 24 months of operating expenses. This provides a buffer against protracted litigation timelines or unexpected adverse rulings. The transition to US GAAP should include a bridge document explaining the differences from IFRS to prevent market confusion during the transition period.

Executive Review and BLUF

1. BLUF

Burford Capital remains the dominant force in litigation finance, but its business model faces a fundamental credibility crisis. The 31 percent internal rate of return is impressive yet currently unverifiable to external skeptics. To survive, Burford must pivot from a closed-door investment shop to a transparent financial institution. The path forward requires a New York Stock Exchange listing and US GAAP adoption. This is not a choice but a necessity to lower the cost of capital and regain a premium valuation. Speed in execution will determine if the company remains the industry leader or becomes a cautionary tale of accounting complexity.

2. Dangerous Assumption

The single most consequential premise is that legal outcomes are truly uncorrelated with the macro economy. In a severe recession, court systems slow down, settlement amounts decrease as corporate defendants face liquidity constraints, and the duration of cases extends, significantly eroding the internal rate of return.

3. Unaddressed Risks

• Adverse Selection: As competitors enter the market, Burford might be forced to take on riskier cases or accept lower returns to maintain growth targets, which the current analysis does not quantify.
• Key Person Risk: The valuation of the portfolio relies heavily on the judgment of a small group of senior lawyers. The loss of Christopher Bogart or Jonathan Molot would likely trigger a massive valuation discount.

4. Unconsidered Alternative

The team failed to consider a strategic sale to a major global investment bank or insurance company. Integrating Burford into a larger financial entity would provide the permanent capital and institutional credibility needed to bypass the public market skepticism entirely.

5. MECE Analysis of Strategic Pillars

• Capital Structure: Transitioning from balance sheet heavy to fund-led growth.
• Regulatory Compliance: Shifting from Alternative Investment Market to New York Stock Exchange standards.
• Transparency: Moving from proprietary valuation models to audited, standardized reporting.

VERDICT: APPROVED FOR LEADERSHIP REVIEW