Litigation Finance
June 28, 2021·1 comment·In Brief
A litigation finance company reports returns that seem too good to be true in a low-yield world. The numbers look extraordinary, but when you trace where they come from, something becomes clear: the company and its critics agree completely on the raw data. What they disagree on is whether the data actually means what the company claims it means.
- The math works, but only for half the portfolio. Burford reports a 92% return on capital deployed. That calculation uses only cases that have already settled. Cases still pending represent about $1 billion in capital that doesn't appear in the denominator, making the returns look larger than they would if you counted all the money actually invested.
- Accounting standards can hide what's missing. In 2010, Burford's management said they opposed Fair Value accounting because litigation outcomes are inherently speculative. Then in 2011, they stopped publishing a separate cash NAV figure and abandoned that principle entirely. No explanation was given for the shift.
- The narrative changed at the same moment the disclosures disappeared. Around the time Burford stopped publishing cash NAV, one of its two co-founders left the company. The remaining executive was previously General Counsel at Time Warner. Something about how the company wanted to present itself had shifted.
- Extraordinary returns attract capital and capital changes how business gets written. When an industry reports mid-50s to triple-digit returns, new competitors arrive and money floods in. There's typically a time lag between writing optimistic business and discovering whether those assumptions were real. The sector hasn't yet faced its reckoning.
- A short seller compared the accounting to Enron and the stock fell by 85 percent. Then something unexpected happened. The company recovered, bought back bonds, and awaited an arbitration case worth potentially hundreds of millions. Whether the accounting was defensive or prescient remains unclear, and the case won't be resolved for years.
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Comments
Not sure these companies rise to the level of “asset class” - it’s more like investing in LYG. However, if they securitize their assets and add a little leverage… Credit Litigation Swap anyone?
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