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The easy way to profit from legal battles
Litigation finance provider Burford Capital (BUR:AIM) could be on course for big returns which are uncorrelated to traditional asset classes and the macro-economic backdrop.
Market leader Burford has two arms which both conduct the same activity, namely funding law suits in return for a share of a compensation award.
The established operation invests Burford’s own funds. The $160m acquisition of rival Gerchen Keller, announced in December 2016, has helped establish an asset management business which invests third party funds.
The Gerchen Keller business also adds performance and management fees which could help smooth out the lumpy and unpredictable returns from court payments.
Burford has branched out into legal insurance and loans to law firms. It is also broadening its approach by investing in lawsuit defences in return for a share of the money saved by a successful defence.
It can be difficult to forecast short-term earnings performance. However, Burford announced in January the sale of an interest in the Petersen V Argentina case which implies the asset could be worth several multiples of its cost value of $18m. That could have positive implications for full year results published on 14 March.
The litigation concerns Spanish investment group Petersen which faced insolvency after the Argentine government summarily renationalised oil company YPF.
As well as a lack of visibility, Burford’s earnings suffer from a lack of transparency. It is standard industry practice to keep the identity of most ‘invested’ cases under wraps. For this reason, litigation finance won’t be for everyone but investors can draw comfort from the historic track record.
Good track record
According to Liberum, the company has historically delivered a return on invested capital (ROIC) of 70% and an internal rate of return of 28%. A company which generates ROIC in excess of its weighted average cost of capital (WACC) can truly be said to be creating shareholder value.
This success is underpinned by a robust team of more than 80 people, encompassing 40 experienced lawyers. The specialised nature of this activity and required expertise creates substantial barriers to entry.
A 231.5% advance in the shares over the past 12 months suggests the market is switching on to the potential in this nascent and little-understood industry and we see scope for further upside. (TS)
Burford Capital (BUR:AIM) 734p
Stop loss: 587.2p
Market value: £1.52bn