Burford – profiting from corporate lawsuits

It is a common complaint that the only people who consistently profit from litigation are the lawyers. Christopher Bogart, chief executive officer of Burford Group, can claim some solid success in demonstrating that this no longer needs to be true, at least as far as US commercial cases are concerned.

Burford is investment adviser to AIM-quoted investment fund Burford Capital, which offers to pay the legal fees of companies contemplating suing others for damages through the courts in return for a share of whatever damages they recover. Registered in Guernsey and chaired by Sir Peter Middleton, one-time Whitehall mandarin and former head of Barclays Bank, Burford Capital achieved a sevenfold increase in net profits to $7.1 million (£4.4 million) in the first half of this year on total income nearly trebled to $11.5 million and lifted net assets marginally to $1.66 (104p) a share.

Based in Madison Avenue, New York, Bogart, a Canadian and former general counsel to US media and entertainment giant Time Warner, points out that Burford has made a 91 per cent return on capital in cases that have already been settled or adjudicated since the company’s AIM float two years ago. Then, Burford Capital  raised $130 million (£81 million) at £1, followed by another fundraising of $175 million (£109 million) in December 2010 at 110p.

With hefty backing from South African group Invesco and other institutional investors including Baillie Gifford and Fidelity, Burford claims to be market leader in this esoteric field. Bogart says the fund is now waiting to invest some of its still uncommitted  $130 million in cases making their way to the courts arising from the mortgage-backed and complex financial instrument fiasco that prompted the crash of 2007-08.  

Burford Group’s team, including Harvard law professor Jonathan Molot and ex-US Justice Department prosecutor Ken Doroshow, cite some notable recent successes. These include one trial result yielding gross proceeds of up to $20 million on a  $4 million investment, another yielding at least $18.5 million on a $6.5 million investment and a settlement of a case yielding $10.5 million on an investment of $6 million.

Bogart explains that Burford, which is currently invested in 30 cases, sticks to investing in ‘large claims we judge likely to succeed’. In practice, that means cases where at least $2 million to $3 million is at stake and, as yet, the company, whose average case size is around $6 million, has not invested in a case worth more than $15 million.

Noting that in the USA, 97 per cent of corporate cases are settled before coming to trial, Bogart says Burford is a purely passive investor. He instances companies, such as US chemical giant DuPont, which use litigation investors to enhance their balance sheets in other ways than simply sharing the costs and any rewards of litigation.

For example, according to Bogart, if a US company pays $10 million in legal fees to recover $75 million in damages, the $10 million comes as a straight hit to its profit and loss account. But, if the company wins, the $75 million does not swell profits but comes as an ‘extraordinary item’.

‘The end goal is for companies to treat litigation in the same way as any other asset purchase,’ declares Bogart. As yet, Burford has backed US cases, though the fund will also invest in international arbitrations and, he adds, it will consider moving into other jurisdictions, such as Canada, England and Wales, Scotland, South Africa and other places where English is the prime language.

Some analysts see Burford making impressive profits gains, upping full-year pre-tax profits tenfold to £16.3 million in 2011, with a leap to £64 million on the cards for 2012. However, as Bogart concedes, profits can be lumpy, because of the nature and duration of corporate lawsuits.

Investors can take comfort from Burford’s dividend policy. Having declared a maiden dividend of £4 million, 2.2p a share, the company says it intends to pay out ‘whichever would provide a larger dividend’: 90 per cent of net cash returns until a 5 per cent dividend yield is achieved or 50 per cent of net cash returns on investments.

Of course, Burford’s prospects hinge on its investment team’s success in picking winners or cases that lead to satisfactory settlements. The shares are tightly held, but they could reward a medium- to long-term investment.