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What Lawyers Can Learn From Burford’s Financial Results

Feb. 6, 2020, 9:51 AM

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at two metrics from Burford Capital that might help lawyers curious about the future of litigation finance.

Burford Capital CEO Chris Bogart says this summer’s battle with short-seller Carson Block is behind him.

“What you’re calling the battle with Carson Block, for me, was sort of a one-day skirmish,” Bogart said in an interview with Bloomberg Law.

Still, Block’s impression lingers on the litigation finance firm’s shares. They trade at roughly half the price they did in August, when Block’s Muddy Waters Research questioned Burford’s accounting practices and said it is “a poor business masquerading as a great one.”

But what matters most for investors isn’t the same as what attorneys interested in litigation finance should be watching for in Burford’s latest round of financial results.

Burford this week released most of its 2019 results a month earlier than anticipated and warned that profit was likely to fall short of 2018 levels.

Burford attributed the profit dip to bad timing. If some of its cases brought in returns just a month earlier, its 2019 results would have been “materially higher,” Burford said. It said it had recorded “litigation successes” worth roughly $150 million in January.

That caveat highlights a fundamental issue for Burford’s investors. The conclusion of cases doesn’t neatly mesh with the reporting requirements for publicly traded companies. Meanwhile, attorneys are likely interested in the general health of the company, but they are not as discerning as shareholders in poring over financial reporting.

For litigators, the company can be viewed as a data point to answer bigger questions: What is the current state of litigation finance? And where is it headed? (And for a primer on litigation finance, you can watch this Bloomberg Law video.)

On that front, two metrics from Burford’s financial reports are useful. One is how much Burford invests in cases in any given period, and the other is how much money its investments bring in. In Burford-speak, those figures are called “deployments” and “investment income.”

Taken together, they show a more mature business that does more than invest in individual lawsuits.

Start with what it’s spending. In 2014, Burford deployed $80 million. In 2019, the firm put out $1.07 billion, just shy of its $1.08 billion outlay in 2018.

But the firm’s spending on what is most commonly known as litigation finance, non-recourse investments in lawsuits, declined to $459 million in 2019 from $502 million in 2018.

A newer, less-risky business line buying awards and settlements, called post-settlement finance, grew to $254 million in spending from $160 million in 2018. I wrote about that type of work last week. Bogart said corporate legal departments are interested in selling awards at a discount in return for a quicker payout.

“What’s driving that is the desire for cash,” Bogart said. “Sometimes it can take you a very long time to go from settlement to cash.”

As for how much money Burford is making on its prior investments, 2019 will be the first time the firm’s “investment income” metric declines year-over-year. That metric measures returns from completed cases and adjustments to the value of ongoing cases based on developments such as a claim surviving a motion for summary judgment. From 2011 to 2018, that figure grew by more than 20 times to nearly $390 million. The exact figure for 2019 is yet to be released.

But a decline in profits it is not all that surprising given the relative lack of growth in Burford’s deployments over the past couple of years and the inherent volatility of investing in lawsuits. Bogart said the company’s explosive growth days are likely behind it.

“I don’t think anybody expects us to be doubling or tripling [deployment] anymore just because of the law of large numbers,” he said. “When you’re doing $1 billion or more, it is virtually impossible to double or triple that in a given year.”

I asked Bogart if he agreed that the simplest way lawyers could analyze a litigation funder was to ask whether it was still spending money on new investments and making money from its previous ones. He said he agreed at a “very, very basic level,” but stressed that generating high returns was also fundamental to success.

“That is really what has brought down some litigation funders,” he said. “Can you [invest] over and over in a disciplined and repeatable process? Or were you just lucky? And that, I think, is what separates the fairly small number of large, institutional, sophisticated players from the larger number of smaller, start-up players.”

Worth Your Time

On Lawyer Sanctions: Ex-Willkie Farr & Gallagher co-chair Gordon Caplan will not be allowed to practice in front of the U.S. Securities and Exchange Commission following his guilty plea in the college admissions scandal.

On Strategic Directions: Irell & Manella will no longer invest in “non-core” practice areas, my colleague Meghan Tribe reports. The firm’s leadership said as much in a memo following the departure of three partners, including the co-chair of its transactional practice. It is just the latest example of a strategic announcement in the wake of partner departures.

On Shared Communications: A standard language to describe legal work was officially published after three years of work developing a system that some say is vital to advancing data analytics in the legal profession. Next, the group that published the standard will turn to codifying litigation tasks.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com