2017
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About Burford Capital
Burford Capital is a leading global finance and investment management firm
focused on law. Its businesses include litigation finance and risk management,
asset recovery and a wide range of legal finance and advisory activities.
Burford is publicly traded on the London Stock Exchange, and it works with
law firms and clients around the world from its principal offices in New York,
London, Chicago and Singapore.
Contents
Highlights
Financial Summary
Report to Shareholders
Introduction
Burford’s core business
Investment management
Insurance
New initiatives
Forecasting and guidance
Corporate and financial matters
Corporate governance
Reconciliation
Director’s Report
Independent Auditor’s Report
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Corporate Information
1
2
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5
25
29
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37
40
42
44
53
59
92
This report is for the use of Burford’s public shareholders and does not constitute
an offer of any Burford fund.
1
Full Year Highlights
2017
341
163
82
103
61
2013
2014
2015
2016
2017
265
115
54
66
40
2013
2014
2015
2016
2017
362
230
159
90
53
2013
2014
2015
2016
2017
1,318
968
533
594
376
2013
2014
2015
2016
2017
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Income up 109% to
$341m
Profit after tax up 130% to
$265m
Cash generation up 57% to
$362m
Return on Equity of
37%
Full year dividend up 20% to
11.00¢
Note: As adjusted and defined in each annual report. Please refer to note on page 2 for
further details on 2017 figures.
Burford Annual Report 2017HIGHLIGHTS
2
Full audited IFRS consolidated financial statements can be found in the following pages.
Below is a summary of Burford’s results without third-party interests in consolidated funds.
The figures for operating profit, profit before tax and profit after tax also exclude the impact
of the amortisation of intangible asset and non-recurring acquisition costs relating to the
acquisition of GKC Holdings, LLC and investment banking and brokerage fees and are shown
to assist in understanding the underlying performance of the Company. Without these
adjustments, reported profit after tax would have been $249.3 million, and the increase over
2016 would have been 129%.
Financial summary
US$’000
2017
2016
% Change
Investment income
$318,234
$140,187
+ 127%
Investment management income
Insurance income
New initiatives income
Other income
Total income*
$15,626
$7,613
$2,968
($3,199)
$647
$12,923
$8,849
$797
$341,242
$163,403
+ 109%
Operating expenses – investments
($33,540)
($26,017)
Operating expenses – investment management
Operating expenses – insurance
Operating expenses – new initiatives
Operating expenses – corporate
($7,159)
($2,001)
($2,271)
($7,298)
($443)
($1,696)
($4,895)
($5,975)
Operating profit*
$288,973
$124,377
+ 132%
Finance costs
Profit before tax*
Taxation
Profit after tax*
($24,251)
($14,108)
$264,722
$110,269
+ 140%
$123
$4,817
$264,845
$115,086
+ 130%
* Income, operating profit, profit before tax and profit after tax exclude the impact of amortisation
* Income, operating profit, profit before tax and profit after tax exclude the impact of amortisation
of intangible asset and non-recurring acquisition costs relating to the acquisition of GKC Holdings,
of intangible asset and non-recurring acquisition costs relating to the acquisition of GKC Holdings,
LLC, investment banking and brokerage fees and also exclude third-party interests in consolidated
LLC, investment banking and brokerage fees and also exclude third-party interests in consolidated
funds. Refer to pages 40 and 41 for a reconciliation to the corresponding amounts reported on a
funds. Refer to pages 40 and 41 for a reconciliation to the corresponding amounts reported on a
consolidated IFRS basis.
consolidated IFRS basis.
Burford Annual Report 2017FINANCIAL SUMMARY 3
Our volume of new commitments in 2017 – $1.34 billion,
more than triple the 2016 level and more than 30x the
level in 2013, only four years ago – shows that what was
once a novel concept is now mainstream.
Introduction
Burford emerged in 2009 from the ashes of the
global financial crisis to meet nascent demand
from corporate clients for financial alternatives
to conventional law firm economic arrangements.
Little did we imagine that less than nine years
later we would have become a global commercial
finance enterprise, committing more than
$1.3 billion to new investments in a single year
from offices spanning the globe with more than
$3.3 billion invested and available for investment.
What we did know was that the legal industry
was sorely in need of a financial revolution.
Although law firms account for hundreds of
billions of dollars of direct economic activity every
year, and trillions of dollars of indirect activity,
the legal sector has traditionally operated with
an antiquated approach to capital, generally
eschewing it and running large, highly profitable
businesses on a pure cash basis. And corporate
clients, beleaguered by ever-increasing spending
burdens for regulatory compliance and litigation,
have a desperate need for the kind of financial
alternatives commonplace in other aspects of
their businesses.
Burford provides those financial alternatives
through an ever-growing range of products
and services, all of which build on our core
competency, the assessment of legal and
regulatory risk as applied to investment assets.
This is our entire business; we have remained true
to our core principles and maintained a relentless
focus on execution. Indeed, we surely sacrifice
some growth given our focus on profitability and
quality, and we believe that is the prudent
course as stewards of investor capital. Moreover,
Burford makes a positive social and economic
contribution by ameliorating the negative effects
of litigation risk and expense on productive
business activity and on the civil justice system.
While we have always been confident about
the market opportunity, law is a conservative
sector that embraces change slowly. It has
thus taken some years to move what were novel
concepts into the legal mainstream. Our volume
of new business in 2017 – $1.34 billion in new
commitments, more than triple the 2016 level of
$378 million and more than 30x the level in 2013,
only four years ago – shows that this move to the
mainstream has now occurred.
Investors are also taking note of Burford’s
consistent financial performance and attractive,
uncorrelated investment returns, which are
generated through its legal and financial
underwriting acumen. This business can seem
esoteric to investors, primarily because investors
lack not just exposure to legal finance but
generally to the legal industry altogether. Burford
is not just the only listed legal finance firm of scale,
it is also virtually the only way to invest publicly
in the legal sector as a whole. The past year saw
yet more investors focusing on the opportunity
here. Our share price doubled in 2017 and we
created more than $1.5 billion in shareholder
value. A shareholder who purchased our stock at
our IPO in 2009, a bit more than eight years ago,
will have enjoyed 1250% in total shareholder return
through the end of 2017 on that initial investment,
a 37% annualised return.
Burford Annual Report 2017REPORT TO SHAREHOLDERS Our financial performance1 – which for the most
part reflects the outcomes of investment decisions
made years ago – continues to be robust, and
to increase alongside our larger investment
portfolio. This is an important point: Our income
predominantly comes from the performance of
investments made in prior periods. Virtually none
of our 2017 income came from investments made
in 2017, and thus we are not seeing today the
income potentially associated with the higher
volume of new investments made this year.
■ Our income rose 109% to $341 million, and our
profit after tax rose 130% to $265 million
–
–
Realised gains from investments also more
than doubled
20 different investments contributed to
2017’s realised gains
– Unrealised gains remained generally
consistent with prior year levels at 53% of
income (2016: 54%) and 36% of investments
(2016: 31%)
■ We generated $362 million in cash, more than
1.5x the prior year’s level (2016: $230 million)
■ Our total assets rose to $1.3 billion (2016:
$968 million)
■ Our operating expenses declined sharply as a
percentage of income, to 15.3% (2016: 23.9%)
■ Our return on equity rose to 37.4% (2016: 21.1%)
Our 2017 results were generated by a combination
of a couple of large cases and a significant
number of more moderate successes, with 20
investments reporting realised gains. Rather than
being unusual or exceptional, this is the nature
of our business. Most litigation matters settle,
and settlements produce nice returns, while our
best returns come from cases that go to trial and
win. Cases that produce large returns for us at
trial could easily have settled and produced only
moderate returns (and vice versa). Part of the
secret of litigation investing is having a large,
diversified portfolio so that we always have some
cases going to trial, with the potential of high
returns but the presence of binary risk of complete
loss, while benefiting from the tendency of matters
to settle and produce desirable returns from the
majority of the portfolio without litigation risk.
4
There is no reason to believe that we will not
regularly have outsize successes from those
cases that do go to trial and it is simply not
correct to treat large gains in this business
as being extraordinary.
Moreover, while much is sometimes made of the
Petersen investment (discussed below) because
of its size, Burford’s financial performance is the
product of many investments. Although Petersen
was certainly a rewarding addition to a successful
year, Burford would have posted a robust,
record-breaking year without it. Our approach
to valuations and our level of unrealised gain
remained generally consistent with the prior year,
with unrealised gain making up 53% of 2017
income (2016: 54%) and 36% of investment value
(2016: 31%). Indeed, the recently announced sale
of our Teinver investment for $107 million, a 736%
return on invested capital, further supports
Burford’s approach to valuation. We discuss the
question of valuation and unrealised gain later
in this report.
While the business satisfies some of its capital
needs from reinvesting the considerable amount
of cash we are generating, strong demand is
causing us to continue to add incremental
capital. We have done so through two new bond
issues, one in June 2017 for £175 million and one
in February 2018 for $180 million (the first-ever
US-Dollar-denominated bond offering on the
LSE’s ORB with the tightest pricing we have ever
been able to command, 349 basis points over
the US Treasury security of comparable maturity).
We also raised a new $500 million private
investment fund in June 2017 and we anticipate
exploring further investment fund capital raising
in 2018. We continue to have low relative leverage
levels: Even including our new February 2018
bond our net debt/equity ratio would have stood
at 0.46x at year end. We generated cash in 2017
sufficient to cover our debt service costs by 12x.
While we don’t believe in high levels of leverage,
there is clearly room for additional capital from
both bonds and investment funds in order to
finance growth.
1 Unless otherwise specifically indicated, financial and operational data provided throughout this report is as at 31 December 2017 or
for the 2017 fiscal year. Financial statement data generally exclude the impact of amortisation of intangible asset and non-recurring
acquisition costs relating to the acquisition of GKC Holdings, LLC, investment banking and brokerage fees and also exclude third-party
interests in consolidated funds and are shown to assist in understanding the underlying performance of the Company. Without those
adjustments, profit after tax would have been $249.3 million, and the increase over 2016 would have been 129%. A reconciliation is
provided on pages 40 and 41 and also in Note 21 to the consolidated financial statements.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued We continue to grow our infrastructure to meet
demand. We added 23 new employees in 2017,
bringing our team to more than 90 people at
the end of the year, more than 40 of whom are
experienced lawyers. We had our first full year of
operation with our Chicago office supplementing
our New York and London presence (along with
individual people located in Washington, Boston,
Texas and California), and late in 2017 we opened
an office in Singapore. We are proud of the
diversity of our workforce, with 16 women in
positions of Vice President or above, more than
one-third of our senior team.
In recognition of a strong year and consistent with
our dividend policy, the Board is recommending
an increased final dividend of 7.95 cents per
share, taking the full year dividend to 11.0 cents
per share (a 20% increase over last year). We have
increased our dividend every year of our short
history. Our approach to dividend growth is an
attempt to balance the desire of some shareholders
for increased dividend income with the opportunity
to reinvest profits in the business at desirable returns.
We receive a good deal of positive commentary
on our annual report, in which we endeavor to
present the business comprehensively, and we
always welcome feedback. We are aware that the
growth and increased complexity of the business
has elongated our narrative, and to assist with
navigating what is now quite a lengthy report we
have added some key takeaway bullet points at
the beginning of most sections that are qualified
by the text that follows them.
5
Burford's core business2
Turning the corner into the mainstream
■ Significant growth and performance in the
core business
■ Market research points to rapid rates of
continuing growth and adoption
■ Media attention corroborates market research
Our core business is the application of capital
and specialised expertise to legal claims and
assets. We consider the asset value of claims, or
the potential impact of other legal or regulatory
circumstances, and we invest capital or provide
other services to corporate clients and law firms
based on that assessment.
Key metrics3 for our core balance sheet business
– not including our significant investment funds –
include:
■ Portfolio investment returns (net of losses but
before operating expenses) of 31% internal rate
of return ("IRR") and 75% return on invested
capital ("ROIC") on $773 million of investment
recoveries to date, with 2017 performance
causing those returns to increase from their
2016 levels of 27% IRR and 60% ROIC
■ Current investment portfolio of $1.5 billion,
comprised of $982 million in balance sheet
assets plus a further $564 million in undrawn
commitments (2016: $850 million total;
$560 million in assets and $290 million
in undrawn commitments)
■ Widely diversified portfolio with 82 separate
investments and 877 underlying claims
(2016: 64 separate investments and 811
underlying claims, respectively)
■ New commitments to investments in 2017 of
$698 million (2016: $378 million), plus a further
$645 million in investment fund commitments
for a total of $1.34 billion
■ Cash receipts from investments of $336 million
in 2017 (2016: $203 million)
2 While much of the commentary in this section may apply equally to the investments we make in our private investment funds,
the numbers in this section relate only to investments we make with capital from Burford’s balance sheet unless otherwise noted.
Also, Burford had a small law firm lending business for a time, originally presented as part of our new initiatives segment and later
transferred to our core business. That business made total investments of $28.1 million before it ceased writing new business (and
all but one of its investments have now resolved in full and profitably). In general, to give as clear a picture as possible of the core
business, we do not include the lending business in our reporting of the core business. However, because the lending numbers do
now sit in the core business for financial statement reporting, we include them in numbers drawn from the financial statements to
avoid confusion about the numbers in this section not matching to our financial statements. The lending business was not financially
material to Burford.
3 Defined and discussed further below.
Burford Annual Report 2017 6
After a period of early adoption, we believe legal
finance has entered the mainstream of the legal
sector, showing dramatic growth in a few short
years with considerable growth still to come as
demonstrated by Burford’s annual independent
market research.
Market research: Litigation finance
is growing and increasingly important
Law firm & corporate respondents
Market research: Reported use
of litigation finance by US law firms
2013
Yes, 7%
Indifferent,
20%
Disagree,
8%
No, 93%
2017
Agree,
72%
Source: Burford 2017 Litigation Finance Survey
The media provides another window into the
growth and evolution of legal finance. The
number of press stories written about litigation
finance in 2017 alone nearly equaled the total
number of press stories written on the subject
in the preceding seven years together. The
trend is continuing: the number of press stories
in January and February 2018 is already well
over half of the total volume of 2017 coverage.
We truly have turned a corner.
Yes, 36%
No, 64%
Source: Burford 2017 Litigation Finance Survey
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 7
In addition to raw growth, we have also seen
enormous evolution in the business. We have
always had a robust and profitable business
around financing single litigation cases –
“litigation funding”, in the vernacular – and that
business continues to be significant in absolute
terms. In 2017, between the balance sheet and
our investment funds, we made around $75 million
in new single case investment commitments.
However, other forms of legal finance have grown
so quickly that single case finance accounted
for quite a small proportion, around 5%, of our new
investment commitments in 2017. Considerable
detail about the composition of our portfolio and
our new business is contained in the pages
that follow.
We provide an extensive financial review of
the business in this section, but first we start by
presenting the business at a macro level, including
comments on the market, competition and
global growth. We will then turn to specifics about
Burford’s performance and existing portfolio.
Key elements of the legal finance business
The trend towards multi-case portfolios
and complex structures
■ Trend towards reducing binary risk continues
■ Multi-case portfolio loss rate of 3% vs single
case loss rate of 19%
■ Multi-case portfolios generating higher net
returns with capital pricing more attractive
to clients
■ Single case finance remains important and
Burford remains the market leader in single
case finance – and we have generated 54%
ROICs on single case investments
The largest trend in our business is the move
to investment transactions that reduce the risk
of binary loss associated with litigation investing.
Today, the considerable majority of our new
investments are in structures where the loss
of a single litigation matter will not cause the
complete loss of our invested capital.
The simple rationale for this evolution lies in the
impact of binary loss on capital pricing. We are
experts in the evaluation of litigation risk, but
litigation is an inherently high-risk and unpredictable
process with a high degree of idiosyncratic
variability in outcome. In other words, while
we do a considerably better job of predicting
outcomes (and thus making investment decisions)
than would occur in a passive pool of litigation
risk, some number of cases will nonetheless
inevitably go against us. That is the nature of
litigation and the reason so many cases settle
rather than take the risk of trial: there are no 90%
odds in litigation, even with the strongest case
and the best lawyer. Of all the single cases we
have financed, 19% of concluded cases have
been complete losses on a dollar-weighted basis,
which we believe to be a considerably lower loss
rate than in adjudicated litigation generally.
Thus, in order to produce acceptable returns
across our portfolio and to absorb the cost of
the losses we will experience, we need to charge
quite a lot for single case capital, and that pricing
is unattractive to some proportion of clients.
To put numbers around this, our single case
portfolio has over time produced 54% returns on
invested capital (net of the impact of losses), but
to achieve those results and also to overcome the
impact of unsuccessful matters, the weighted
average return on invested capital on successful
matters has needed to be 90%, which obviously
discourages some potential clients.
Burford Annual Report 2017
8
The most effective way to reduce the price of
our capital is to reduce the risk of loss, and clients
are enthusiastic about structures that moderate
that risk in exchange for lower pricing. As a result,
our business has evolved significantly towards
multi-claim portfolios and other complex
structures that are more capital protective in
various ways. As an example of the rate of change
in our business, only around 5% of our new
investment commitments in 2017 were in single-
case litigation matters. In 2009, that number
would have been 100%, and even last year, in
2016, it was 12%. This change has allowed us
simultaneously to decrease our portfolio risk
(our loss rate using the same methodology as
above for investments other than single cases
is 3%, dramatically lower than for single cases),
deploy considerably more capital than
would have been possible if we had focused
predominantly on single cases given increased
transaction sizes and operating efficiencies,
and still produce desirable returns. Indeed, our
returns (net of losses) on multi-claim portfolios are
presently higher than our returns on single cases.
either unwilling or unable to pay legal fees seek
a third-party capital solution to do so on their
behalf. Many such clients are structurally
challenged when it comes to meeting legal fees,
such as fund managers wanting to bring claims
against fraudulent investees or insolvencies that
have distributed out their remaining assets to
creditors. There are also litigants whose size,
liquidity or capital spending priorities lead them
to seek external financing for single matters.
Moreover, financing a single case is in many
instances the entry level product in our business,
the first step in establishing a new relationship with
a law firm or a corporate counterparty. By building
those relationships, Burford sets the stage to be
the provider of choice of a range of products and
services that meet the needs of as wide a swath
of the legal sector as possible.
The addressable market
■ Difficult to size market but very large and thinly
addressed to date
■ Market data suggest dramatic growth in usage
(5x increase since 2013)
■ Survey data point to significant continuing
Evolution of investment commitments
growth
Single case
100%
82%
87%
88%
87%
52%
48%
67%
63%
53%
47%
37%
33%
18%
13%
12%
0%
Portfolio and recourse
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
5%
*
7
1
0
2
*Legal risk commitments represent the remaining 8% in 2017
We hasten to add that even as single-case
financing represents a lower percentage of our
total commitments, we believe Burford still leads
the single-case market. There is still – and will
always be – demand for financing the costs of
single litigation matters, where clients who are
We are regularly asked about the size of our
potential or addressable market. This is an
unanswerable question at this stage of the
development of this industry. It is like asking what
the addressable market was for iPhones in 2007
– the answer was most of the world’s population,
but that answer didn’t help anyone.
The challenge is distilling the global pool of legal
fee spending and claim value – which is almost
unimaginably enormous – into the portion of that
pool that is theoretically addressable by us, and
doing so without history to guide us. We do know
that each year (i) vast amounts of money –
hundreds of billions of dollars – are spent globally
on legal fees and (ii) vast numbers – probably
millions – of litigation claims and other matters
involving legal or regulatory risk come into being
and that hundreds of billions if not trillions of
dollars change hands in resolving those claims.
But we have no data to enable us to project what
proportion of the total legal pie we and our
competitors could occupy in the future except
to say that we are not worried about market
saturation – quite the opposite.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 9
Our business today is much more than financing
legal fees; a significant portion of our investments
look just to the underlying claim asset value, and
legal fee spending is irrelevant. Thus, the relevant
addressable market from our perspective is what
we believe to be the trillion-dollar or greater
annual payment of litigation resolutions.
To add a further dimension to this discussion,
and also for the collateral purpose of illustrating
market growth and penetration to our client
base, for a number of years running we have
commissioned third-party research into the
industry (available on our website). That research
confirms our hypothesis that we remain at a
relatively early stage of market adoption as the
business turns the corner into the mainstream:
■ The number of US private practice lawyers
who said their firms have used litigation finance
directly grew five-fold from 2013 to 2017, from 7%
to 36%, but significant upside remains at firms
that have not yet used litigation finance and
(because an innovation by one partner may
move slowly to colleagues at the firm) among
the many still inexperienced litigators at firms
that have
■ A clear majority – 72% of respondents – agree
that litigation finance is a growing and
increasingly important area in the business of law
■ Indeed, 76% of in-house lawyers predict that
litigation finance will continue to grow
■ Portfolio financing remains in its relative
infancy, with only 31% of litigation finance users
having done a portfolio financing transaction
compared with 88% for single cases
Competition and barriers to entry
■ Burford leads what has always been
a competitive market
■ At least 11 $100+ million firms have been
competing for at least four years
■ Multiple factors protect from naked price
competition
■ Significant barriers to entry exist including
scale, data, relationships and people
Another common question we are asked by
investors is about competition: Won’t your returns
attract competition, and won’t that competition
inevitably drive down returns?
In fact, we operate in what has always been a
competitive marketplace. Burford has grown by
besting its competition. We were not the first
mover in this market and we have always faced
robust competition. That competition is not very
visible to investors given that Burford is the only
listed player of scale in this industry and our
largest competitors are structured as private
investment funds. Indeed, there are at least 11
firms competing directly with us, each of which
has at least $100 million in capital and has been
operating for at least four years, with many of
them having longevity similar to Burford’s.
So, we have in fact been producing our historical
returns in the face of substantial competition.
Furthermore, a number of factors insulate our
business from naked price competition, which
should provide some level of confidence in our
ability to continue to produce desirable returns:
■ Law in general is not a price-sensitive
commodity: Particularly at the high end of the
corporate market, where Burford focuses, law
is not generally a commodity product, and
lawyers and clients put value on relationships,
reputation, pedigree and other factors that
weigh in Burford’s favour.
■ The extensive diligence process is inconsistent
with auction-style processes: Setting a price in
a litigation finance matter requires substantial
diligence, including extensive (often unpaid)
work from the client’s lawyers, and thus the
market does not regularly have auction-style
competition for investments as neither litigation
finance providers nor lawyers are generally
willing to spend the uncompensated time
necessary to facilitate such a process.
Moreover, lawyers' confidential work product
(which is important to the diligence process)
cannot be widely disseminated without putting
its protection at risk.
■ Contingency fee pricing is a useful reference:
The relatively high pricing offered by
contingency fee law firms operating in an
adjacent but related space can create
a benchmark or expectancy divorced from
conventional capital market expectations and
has remained relatively constant over time.
■ Scale matters: Our size and expertise are
unmatched which gives us a unique ability
to serve our clients. While there are other
large pools of capital out there, none has our
expertise when it comes to litigation evaluation
and management, and our competitors with
litigation expertise lack anything approaching
our capital and scale.
Burford Annual Report 2017 10
the US by revenue) and 70 of those firms
approached us to do business just in 2017.
■ Pure-play firms dominate: As a general matter,
litigation finance investing tends to occur in
pure-play specialist firms (like Burford) that do
not provide other kinds of corporate financing,
or in funds dedicated to a litigation strategy.
Much as we view litigation dispassionately as
a financial asset, there is nonetheless emotion
associated with litigation, even at a corporate
level, and businesses with activities in other
parts of the financial services market generally
find that the relationship downside of financing
corporate litigation to be harmful to their other
lines of business, sharply limiting the universe of
potential entrants.
■ Large, expensive teams: This is not a business
for dabblers; successful financiers need
significant teams of experienced and expensive
people to make high quality investment
decisions. Burford’s investment committee
has more than 250 years of collective litigation
experience. Assembling such a team is a
challenging undertaking when combined
with the difficulty of raising a significant pool
of capital for a first-time venture.
■ Proprietary data and systems: Burford has
been in this business for almost a decade
and has reviewed many thousands of potential
investments. We have what we believe is
an unmatched and substantial proprietary
dataset that we use to assist in our investment
decisions. We also have developed bespoke
risk assessment and risk management systems
that use our data and our experience in our
underwriting and investment management
process.
■ Absence of liquidity and secondary market:
The absence of liquidity and a secondary
market against which to mark position value
makes this a complicated proposition for many
hedge funds which need to contend with
redeemable capital structures.
Despite those daunting barriers to entry, our view
remains that the potential market for litigation
finance remains thinly penetrated at present, and
that the addition of competitors (on the occasions
when they do appear) and their incremental
marketing and visibility serve to expand the active
market more than to introduce competition for
existing market opportunities.
■ We avoid commoditising our capital: Litigation
finance is not just about capital; Burford
provides a host of non-financial benefits to law
firms and clients who do business with it.
■ Discounting will depress promised returns: The
legal finance business is capital intensive and
participants need to raise capital to compete
and grow. The providers of that capital can
see Burford’s publicly disclosed returns, and
sensibly demand comparable returns from new
entrants. Thus, discounting to achieve volume
will result in relative underperformance for
those entrants, which will in turn lead to investor
unhappiness and the refusal to advance
incremental capital. As such, other players
have every incentive to emulate Burford’s
returns and not try to undercut them.
We are not naive about competition nor do we
suggest that price competition will not intensify.
And indeed, given our low cost of capital and
strong balance sheet, it might be in our long-term
interest to take the lead in such competition. But we
also believe that we are a considerable distance
away from capital being a price-based commodity
in this sector, if indeed that ever occurs.
Moreover, there are considerable barriers to entry
in this industry – which explains the paucity of
large-scale new entry into this market in the last
several years:
■ Significant capital required: A significant pool
of capital is necessary to achieve portfolio
diversification – $100 million would be very
much at the low end, and considerably more
would be desirable. Burford raised $300 million
during its first year in operation. Entering with
a small first fund is simply too risky for investors.
This is a significant barrier to entry, as most
potential entrants lack the track record and
experience to be able to convince investors
to provide such a large pool of capital for
a first-time team, and it is notable that the bulk
of the market is occupied by incumbents who
have been in existence for a number of years.
Moreover, while entry may be theoretically
possible at the $100 million level, Burford’s vastly
larger capital resources give it an enormous
advantage, especially with average
transaction sizes on the rise.
■ Relationships matter: Relationships can be
sticky in this business, and Burford has
established strong relationships over its long
history. For example, we have worked with 88%
of the AmLaw 100 (the 100 largest law firms in
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued Geographic activity
■ US remains our largest market and US Dollars
our largest exposure
■ Global expansion ongoing with Burford active
all over the world
■ Asia opening in 2017 is reason for longer term
optimism
Burford has always invested capital in connection
with litigation matters pending in any English-
language common law jurisdiction. Our largest
jurisdiction measured by the location of cases is
the US but we are also active in many other
markets, such as the UK, Australia, Canada,
Singapore, the Cayman Islands, the British Virgin
Islands and others. We also have a robust
international arbitration practice and are active
in specialty areas of law in Brazil, Germany and
some other smaller markets. We generally do
not participate in investments in jurisdictions
where we lack substantive assessment ability;
for example, we would not finance Japanese
litigation in the Japanese courts, although we
would finance Japanese clients in US courts.
As a result, it is difficult to categorise our investments
by geography as many of our investments are
either transnational or offer multiple paths to a
potential resolution, often in different fora. However,
looking to currency, although our clients are from
all over the world, the business remains heavily
US Dollar-weighted between US litigation and
transnational matters denominated in USD.4
11
Current commitments
denominated by currency
6% 1%
8%
85%
USD
EUR
GBP
AUD
While our business continues to expand globally
every year, 2017 brought a particular focus on
Asia. Until 2017, both Hong Kong and Singapore
had prohibited litigation finance (except in
insolvency), and indeed any form of risk-based
litigation activity, including lawyers taking risk
on their own fees. However, following significant
education and lobbying by Burford, both
jurisdictions passed legislation in 2017 that
enabled litigation finance for arbitration. Notably,
they did not expand their tolerance for risk-based
litigation beyond litigation financiers, so lawyers
remain prohibited from taking on risk; the only way
for a client to achieve a risk-based arrangement
is with a litigation finance firm.
4 This chart does not capture all of the currency risk to which the business is subject and is not intended to do so; it merely shows the
currency in which our investment contracts are written. While generally our returns are computed based on that contractual currency,
so that if we advance US Dollars we are entitled to be repaid in US dollars, the underlying litigation may expose us to currency risk.
For example, if we finance an arbitration claim in which the underlying damages will be assessed by the court in local currency and if
that currency devalues against the US Dollar during the course of our investment, our share of the underlying recovery would be worth
less in US Dollars (and we do not generally hedge that risk because of the uncertainty both of outcome and timing of the underlying
adjudication). However, we are often entitled to recover our principal in the contractual currency regardless of underlying currency
movements, so while the currency movement could reduce (or increase) our profits, it would be less likely to affect the recovery of our
US Dollar principal.
Burford Annual Report 2017 12
This presents an interesting greenfield market
opportunity, to which Burford has responded by
opening an office in Singapore and expanding
its presence in the region. We also announced
Burford’s financing of the first-ever Singapore-
seated arbitration funded by a third-party finance
provider following adoption of the new legislation.
At present, we would characterise the region as
having significant curiosity but little expertise in
financing transactions, leading to quite a long
road ahead to build a significant business.
However, we are optimistic about the long-term
future for Burford in Asia. It is an area to which we
intend to devote resources over the next few years
despite it being unlikely that we will see substantial
immediate financial benefit.
More broadly, it is fascinating to watch – and
participate in – the spread of the concept of legal
finance around the globe. We are regularly
approached by clients, law firms and potential
partners across a wide range of jurisdictions. We
continue to believe that we stand at the forefront of
a global revolution in the provision of legal services.
Principal investing
■ Burford expanding its principal investing
activities alongside its client-facing financing
We are increasingly interested in investing in
litigation risk as a principal, and we have created
a dedicated function that engages in principal
investing. Principal investing permits us to exercise
more control over litigation outcomes than we are
permitted to exercise as a financier. We raised
a new $500 million investment fund during 2017
to focus on one particular principal strategy, but
we anticipate pursuing others as well, with both
balance sheet and incremental fund capital.
Fundamentally, our principal investing strategies
consist of taking a position in an underlying
asset as to which there will be a litigation claim.
Our position as an owner of the asset permits us
to act as a principal in the ensuing litigation or to
be a direct beneficiary of its results, as opposed
to our core business in which a client stands
between us and the litigation outcome.
An example of such a strategy would be in
connection with a business that has been
the victim of corporate fraud and where the
debtholders have seen the value of the
company’s bonds decline as a result. Those
debtholders may now have a claim against
the perpetrator of the fraud, and by purchasing
a position in the bonds, Burford could become
entitled to assert that claim. The distinction
between Burford’s approach as opposed to
a more conventional distressed-debt approach
is that we would look to the litigation outcome
as the principal source of our value as opposed
to relying on trading in the bonds.
Our principal investing strategies are proprietary
and we expect to be circumspect around
disclosure of their details for competitive reasons
and due to litigation sensitivity.
We envision continuing to grow and expand this
area of our business.
Portfolio performance and composition
Just as we did last year, we highlight three
fundamental data points for Burford’s core
business:
■ Burford’s performance across investments
that have concluded
■ Burford’s presently outstanding litigation
investment portfolio
■ Burford’s commitments to new investments
We examine each in turn.
It bears mentioning that this section of our
reporting is on an actual returns basis, without
reference to IFRS. In other words, this is an
independent way of looking at our business;
it does not build on our IFRS reporting but stands
entirely separate from it. We do not take the view
that one approach is better than another, but
rather want to give investors the opportunity
to see our business through two different lenses
– IFRS and a more cash-based approach.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued Performance of concluded investments5
■ $773 million of concluded investments have
now produced 75% ROIC and 31% IRR
■ Return on equity jumped to 37%
■ Weighted average duration of the portfolio
fell to 1.5 years
■ Deployments continued at historical levels –
83% of commitments deployed
■ Receivables balance fell sharply as collections
increased significantly
■ Cash receipts rose to $336 million (2016: $203
million) enabling reinvestment
Portfolio returns
70%
75%
60%
60%
28%
27%
31%
24%
52%
ROIC
26%
IRR
2013
2014
2015
2016
2017
13
Burford has demonstrated consistently strong
historical investment performance and enjoys a
robust and substantial track record. IRR and ROIC
performance (net of losses but before operating
expenses) are shown below.6 Those performance
figures have been generated across what is now
more than $773 million in investment recoveries.
While there remains some risk of period-to-period
levels of volatility, Burford’s increasing scale
mitigates that risk to a considerable extent.
While we publish this return information for the
information of investors, we are more focused on
our return on equity, which we regard as the best
metric for this business as it includes the impact of
operating costs, which the returns above exclude.
As Burford matures and as its portfolio returns
ramp up, Burford’s return on equity has been
rising (although we do not consider the 2017
level as run rate), and for us it is clearly a key
performance metric.
Return on equity
37%
21%
15%
16%
12%
2013
2014
2015
2016
2017
5 We have consistently used concluded investments and investment recoveries as terms to refer to those investments where there is no
longer any litigation risk remaining. We use the term to encompass: (i) entirely concluded investments where Burford has received all
proceeds to which it is entitled (net of any entirely concluded investment losses); (ii) the portion of investments where Burford has
received some proceeds (for example, from a settlement with one party in a multi-party case) but where the investment is continuing
with the possibility of receiving additional proceeds; and (iii) investments where the underlying litigation has been resolved and there is
a promise to pay proceeds in the future (for example, in a settlement that is to be paid over time) and there is no longer any litigation risk
involved in the investment. When we express returns, we do so assuming all investment recoveries are paid currently, discounting back
future payments as appropriate. We do not include wins or other successes where there remains litigation risk in the definition of
“investment recoveries”. We view matters as concluded when there is no longer litigation risk associated with their outcome and when
our entitlement is crystallised or well-defined. While concluded matters often produce cash returns rapidly, some concluded matters
are still in the process of being monetised.
6 We compute IRRs by treating our entire investment portfolio (or, when noted, a subset thereof) as one undifferentiated pool of capital
and measuring inflows and outflows from that pool. IRRs are computed only as to concluded investments and do not include unrealised
gains or losses. The alternative approach to computing IRRs that is also used in our industry is to compute IRRs on individual
investment outcomes and then to express portfolio-wide IRRs on a weighted average (or even a simple average) basis. Were we to use
this alternative method our IRRs would be considerably higher than reported here (by orders of magnitude) due to the greater impact
of some very high IRR resolutions from successful investments of short duration. For example, we have one investment where the IRR
was 1,497,414%, which alone would skew our returns on that alternative calculation basis. Investors comparing Burford’s performance
to its competitors should ensure that they are comparing returns on an apples-to-apples basis.
Burford Annual Report 2017 14
Nevertheless, we realise that investors would like
as much visibility as possible into investment
returns so they can form their own views about
the portfolio and our future prospects. We have
historically published a chart of individual
investment returns. That chart has become too
large to publish here and we began last year
providing it only on our website; we have updated
it there today with data for 2017. However, it has
also become increasingly difficult for us to fit
different types of investments into that consistent
reporting format. For example, when we close
a multi-case, complex portfolio arrangement,
we may well be embarking on a number of years
of capital flows that are essentially revolving and
include flows originally attributable to one matter
in the portfolio potentially moving to other matters,
making it difficult to fit within our historical
reporting approach. While we have some
question about the utility of that chart in a world
where only around 5% of our new investments are
in single cases, we are continuing to make the
individual line item chart data available, although
we continue to consider ways of evolving our
reporting and welcome investor feedback.
We have been engaged in a continuous process
of expanding our disclosure based on that
investor feedback, and last year for the first time
we provided a summary of the portfolio’s
performance by vintage, including providing
information about the division between fully and
partially concluded matters, with more detail
about ongoing matters. We again provide that
presentation on the next page. We repeat our
caution about reading anything into the early
returns in recent vintages; early settlements can
have quite silly IRRs and, like wine, vintages need
more maturity before judgements should be
made about them. At the same time, we would
remind readers that we do not include matters
here until they are partially or fully concluded,
so this table would not, for example, include our
significant win (more than $100 million in current
entitlement on a $13 million investment) in the
2010 Teinver matter this past summer as it has not
yet reached the end of the litigation process; that
outcome would obviously alter the 2010 vintage’s
currently tepid returns.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 15
Investment performance
# of
investments
Total
commitments
Total
invested
Total
recovered
ROIC
IRR
3
–
–
3
12
–
4
16
9
1
4
14
8
–
1
9
8
2
2
12
11
4
8
23
7
3
7
17
3
4
13
20
–
1
28
29
61
82
$11.5
$11.5
$40.1
–
–
–
–
–
–
$11.5
$11.5
$40.1
251%
32%
$70.5
–
$44.8
$115.3
$78.9
$15.6
$28.1
$122.6
$61.5
–
$2.0
$63.5
$20.8
$3.5
$13.6
$37.9
$61.8
$47.8
$53.1
$57.8
–
$44.8
$102.6
$55.9
$15.8
$23.7
$95.4
$75.6
–
–
$75.6
$85.3
$1.4
–
$86.7
$56.7
$119.4
–
$0.5
$57.2
$19.7
$3.5
$10.1
$33.3
$43.3
$33.2
$38.8
–
–
$119.4
$25.0
$2.1
–
$27.1
$63.6
$22.2
–
$162.7
$115.3
$85.8
$68.2
$44.5
$80.5
$55.5
$21.1
$41.0
$62.9
$107.6
–
$193.2
$117.6
$170.5
$12.4
$155.9
$185.0
$353.3
–
$160.4
$537.4
$697.8
$12.4
$151.8
$59.6
$223.8
–
$163.9
$151.0
$314.9
$18.3
$136.1
–
$154.4
–
$13.1
–
$13.1
31%
10%
51%
16%
110%
42%
30%
22%
61%
57%
183%
205%
36%
36%
13%
250%
$515.6
$442.8
$772.7
75%
31%
$1,242.2
$628.8
–
$ in millions
Concluded
Partial realisation
Ongoing
2009 vintage total
Concluded
Partial realisation
Ongoing
2010 vintage total
Concluded
Partial realisation
Ongoing
2011 vintage total
Concluded
Partial realisation
Ongoing
2012 vintage total
Concluded
Partial realisation
Ongoing
2013 vintage total
Concluded
Partial realisation
Ongoing
2014 vintage total
Concluded
Partial realisation
Ongoing
2015 vintage total
Concluded
Partial realisation
Ongoing
2016 vintage total*
Concluded
Partial realisation
Ongoing
2017 vintage total
Total investment recoveries to date
Total ongoing investments
* An investment initially closed in 2016 has been rolled into a portfolio investment in 2017
Burford Annual Report 2017 In 2017 we saw a further acceleration of cash from
investment recoveries to record-breaking levels.
Cash receipts from litigation
investments
($ in millions)
336
203
145
66
32
2013
2014
2015
2016
2017
We think of the weighted average duration of the
concluded portfolio as being around two years,
which is consistent with our view of the average
length of a litigation matter when settlement is
taken into account. Last year, that duration fell
to 1.6 years and this year the weighted average
has fallen still further, to 1.5 years, but we are still
not prepared to suggest that is a trend in the
business. Nonetheless, it is clear that this is not
a long duration asset class.
Investment recoveries & duration of
concluded portfolio
($ in millions)
2.1
2.0
1.9
Duration (years)
348
209
147
773
1.5
1.6
522
2013
2014
2015
2016
2017
16
We have commented before on the manner in
which our capital flows to investments. When we
enter into an investment transaction, we set out
the maximum amount of capital we will provide
in connection with that investment. (We do not
enter into open-ended commitments, such as an
agreement to pay all of the legal fees associated
with a matter; rather, we enter into finite financing
arrangements.) In some instances, all of our
capital is deployed immediately, such as when
we are buying an award or monetising a position.
In others, our capital flows out over time, typically
as the underlying litigation matter needs capital
to proceed. Given the high settlement rates of
litigation, it is inevitable that some of our
investments will not draw all of the capital that
we have committed to them before they resolve;
moreover, in some portfolio investments, the
portfolio will never reach the total size to which
we have potentially committed.
Historically, we have ended up deploying 83% of
the capital we have committed when measured
across concluded investments. Unsurprisingly,
when examined by vintage, the newer vintages
have lower deployment levels which tend to rise
over time. This permits, of course, quite a bit of
visibility into our capital planning needs which
gives us confidence about being able to manage
our current level of undrawn commitments.
Commitments deployed by vintage
100%
89%
90%
88%
83%
78%
71%
63%
61%
45%
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
Average deployment of
concluded investments
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued We would also note a significant change in our
investment receivables balance. In many cases,
a resolution of the underlying litigation is
accompanied by a cash payment of our
entitlement rapidly thereafter. However, there
are some matters that take time to pay, often
through agreement with the defendant, and those
matters become receivables on our balance
sheet. Our long-running and lucrative Arizona real
estate matter that we won in 2010 and for which
we ultimately received our core payment in 2016,
with a 448% ROIC, would have been an example
of a litigation receivable. We have an excellent
success rate on collecting such receivables;
indeed, we have never failed to do so. Moreover,
we often garner considerable economic benefit
from the delay, as was the case in the real estate
matter. This year, however, we saw tremendous
collections success, and our receivables balance
has fallen to $3.2 million (from $39.4 million at the
end of 2016). This is an area to which we devote
significant attention and we are pleased with our
continuing success.
Current investment portfolio
■ Very large and widely diversified investment
portfolio – $1.5 billion on balance sheet,
$2.4 billion when adding the investment funds
■ 877 individual litigation claims underlying
balance sheet portfolio
■ No concentration – no defendant represents
even 5% of total commitments, no single case
capital loss would amount to more than 2%
of total commitments and our largest law firm
relationship accounts for 14% of investments
across more than 30 different partners
At the end of 2017, Burford had outstanding
investments on our balance sheet of $982 million
(2016: $560 million). In addition, we have a further
$564 million in undrawn commitments made to
existing investments. Thus, our current balance
sheet portfolio stands at $1.5 billion in investments
and commitments (2016: $850 million) across
82 different investments. When including our
fund investments, we have a total of $2.4 billion
in investments and commitments. We do not
generally include our fund investments in this
discussion, but it is useful to understand the total
scale of Burford’s business, which we believe
positions us as one of the largest purchasers
of litigation services in the world.
17
Current balance sheet
investment portfolio
($ in millions)
564
1,546
982
Current
investments
Undrawn
commitments
Total
investment
portfolio
This is obviously a significant expansion
of Burford’s portfolio.
Burford counts each of its contractual
relationships as an “investment”, although many
such relationships are composed of multiple
underlying litigation matters that are typically
cross-collateralised rather than reliant on the
performance of a single matter. So, while Burford
has 82 balance sheet “investments”, there are now
877 separate claims underlying the investment
portfolio (and a single claim may well have
multiple paths to a recovery), although some of
those claims relate to the same underlying
legal theory.
Burford makes investments using a wide range
of economic structures. The starting point in
a single-case investment is typically an
arrangement under which Burford will receive
its invested capital back as a first dollar matter
followed by some preferred return on that capital
along with a share of the ultimate recovery. Even
in straightforward investments, the terms agreed
will vary widely based on our assessment of the
risk and likely duration of the matter as well as
the individual needs and preferences of the client.
Moreover, the larger or more complex a matter,
the more likely it is to have an individually
designed transactional structure to fit the needs
of the matter, to accommodate what are often
multiple parties with economic interests and to
align interests and incentivise rational economic
behavior. It is impossible to generalise about the
financial terms of litigation finance.
Burford Annual Report 2017 Burford engages in portfolio construction with an
eye towards balancing risk and return, managing
duration and achieving broad diversification.
Burford believes that it has – by a considerable
margin – the largest diversified portfolio of
litigation investments in the world targeting the
kind of returns Burford has historically generated.
At the half-year, Burford began providing
incremental granularity around new investment
commitments and classifying them in four
categories which we discuss below in the context
of new investment commitments. We have now
classified our total pool of commitments on
that basis:
Total investment
commitments
4%
17%
16%
63%
Portfolio
Single
case
Recourse
Legal
risk
In addition to sheer size, Burford’s current portfolio
is widely diversified across many other metrics:
■ Our investments relate to litigation matters
spread across more than 30 US states and
countries, and underway in multiple arbitral
institutions
18
■ We presently have active investments with
more than 40 different law firms – and, last
year alone, worked with 70% of the AmLaw
100 (the largest US law firms by revenue)
on potential investments
■ Even when we have multiple matters with
a single law firm, we often work with multiple
partners at such firms
■ Our claim types run the gamut of complex
commercial litigation and arbitration; we don’t
specialise in any one area of law
■ Although we focus on English common law
jurisdictions and international arbitration,
our clients who bring actions in those fora
are located around the world
■ There is no capital risk concentration among
defendants/respondents in matters we finance
for plaintiffs/claimants – none rises to even 5%
of our commitments
■ We are involved in every stage of claims, from
claims where our financing is obtained at the
beginning of the matter to matters where
judgment has already been obtained and
an appeal is pending
While our relationships with law firms are now
resulting in some law firms doing a significant
amount of repeat business with Burford,
that business tends to have its own internal
diversification across partners and clients. Our
investment with our largest law firm relationship
comprises 14% of our balance sheet investments,
but that relationship is made up of matters
litigated by more than 30 different partners
at the firm.
Litigation investing has the benefit of considerable
asymmetry, in that potential losses are much
smaller than potential recoveries. On a single
case basis, the loss of any case would not result
in a loss of capital of more than 2% of Burford’s
total commitments.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 19
Last year we wondered if large dollar commitments
were anomalies. This year, we answered that
question with a resounding “no”; indeed, our
average commitment size increased from
$17.5 million in 2016 to $23.7 million in 2017.
Commitments to new investments
■ New commitments rose sharply, to $698 million
on balance sheet (2016: $378 million) and
$1.34 billion in total
■ Average commitment size continued to
increase, to $24 million (2016: $18 million)
■ Highly selective process – closed 59 investments
(fewer than 4%) of 1,561 requests for capital
New commitments are a valuable but imperfect
leading indicator for our business. New
commitments set the business up for future
realisations as those commitments turn into
(hopefully) profitable investments.
The reason new commitments are an imperfect
indicator is that our enthusiasm for committing
capital depends on deal structures and terms.
When a significant part of our economics in a
matter comes from our preferred return on the
amount of capital we actually invest, we are
clearly incentivised to commit and deploy capital.
However, some of our investments take most or
even all of their economics from sharing in the
outcome on some formulaic basis (e.g., 40% of
whatever is recovered). In those instances, our
recovery is not related to the amount of our
invested capital, and we are instead incentivised
to commit as little capital as possible.
In 2017, we saw significant growth in the level of
new litigation finance commitments on the
balance sheet.
New balance sheet investment
commitments annually
($ in millions)
698
378
206
152
41
2013
2014
2015
2016
2017
Burford Annual Report 201720152013201420162017Average size of commitment($ in millions)37111824 Moreover, we continue to be happy with the diversity, the pricing and the quality of the investments we take
on – as well as the rigour and discipline of our investment process. We close only a small minority of the
potential investments presented to us – indeed, in 2017, we closed fewer than 4% of the inquiries we received.
20
Burford’s investment process
1,561
Inbound inquiries: screening
Number of inquiries received that
run through our initial screening
process, filtering potential
investments into our pipeline.
493
Pipeline process
Number of potential investments
discussed among the global
investment team and that progress
into more significant diligence.
Investment Committee
Number of potential investments that
ultimately were presented to our
Investment Committee for consideration.
151
59 Closed investments
Note: Investment process figures are from 2017.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued Our new 2017 commitments were as follows, shown by category and divided between the balance
sheet and our investment funds.
21
Total 2017 investment commitments: $1.344 billion
$ in millions
Balance sheet
commitments
Investment fund
commitments
Investment commitments made during 2017
Single case finance:
Investments subject to binary legal risk – in other
words, Burford’s traditional litigation finance
investments, such as financing the costs of
pursuing a single litigation claim
Portfolio finance:
Investments with multiple paths to recovery where
Burford’s returns come entirely from litigation
outcomes – in other words, many of Burford’s
traditional complex and portfolio investments, such
as financing a cross-collateralised pool of a client’s
litigation claims
Recourse finance:
Investments in connection with legal claims where
Burford has recourse to an underlying asset beyond
the legal claim – in other words, investments where
Burford would not expect to suffer a complete
loss upon failure of the claim, such as the Rurelec
investment concluded in 2014 where the bulk of
Burford’s profits came from an interest in a claim
outcome but where Burford expected to recover its
principal from Rurelec’s assets even if the claim had
been unsuccessful
Legal risk management:
Investments where Burford is providing some form
of legal risk arrangement pursuant to which Burford
does not generally expect to deploy capital unless
there is a failure of the claim, such as providing an
indemnity for adverse costs
$34.4
5%
$38.3
6%
$377.8
54%
$347.7
54%
$226.9
33%
$248.4
38%
$59.2
8%
$10.8
2%
Total
$698.3 100%
$645.2 100%
Total investment commitments
$1.344 billion
Burford Annual Report 2017 22
Valuations and the impact of fair value
accounting
■ Significant majority of our investments are held
at fair value equivalent to invested cost with
no valuation change
■ Investment portfolio comprised of 64% cost
and 36% unrealised gain
■ Portion of income from unrealised gain
consistent – 53% in 2017, 54% in 2016
■ Petersen appropriately carried well below
secondary trading market value of smaller
parcels; Teinver appropriately carried well
below entitlement value
■ Only 0.2% of write-ups have ever turned into
a loss
We have written at length in the past about IFRS and
its approach to litigation investing. We add below
our current perspective to that discussion.
The portfolio generally
We have used the same accounting principles and
the same philosophy for many years: We only adjust
asset values and thus experience unrealised gains
(or losses) when there is some objective basis in the
underlying litigation to support such a change.
Second, it is rare for us to increase the carrying
value of an asset and then later have a result that
causes us to need to write down that value.
Indeed, we have only twice ever written up an
investment that later turned to a loss, amounting
to 0.2% of our total write-ups by dollar value.
As the portfolio continues to grow and mature and as
our track record continues to solidify, it is only natural
for more such valuation adjustments to arise, which
we think is entirely appropriate. However, we would
emphasise our continuing conservatism in this area
by providing two key metrics.
First, the portion of our balance sheet asset value
attributable to valuation changes remains
modest. It is notable that the realised gains we
experienced in 2017 more than doubled from the
prior year. At the end of 2017, 36% of our balance
sheet investment value was due to unrealised
gains, which is not a dramatic change from 2016’s
level of 31%, and the share of income contributed
by unrealised gains fell slightly, from 54% in 2016
to 53% in 2017. In other words, as the business
grows, we are continuing to see balance between
realised gains and the recognition of unrealised
gains as the portfolio continues to mature. Given
our historic returns, it is clear that we are applying
valuations that are well below the level of returns
we have traditionally generated on our concluded
litigation investments – which is appropriate given
the idiosyncratic risk associated with each
individual investment.
The reality is that we all live in a world of market
valuations of assets. Fund managers mark their
entire portfolios to market all the time. We operate
much more cautiously, given that the secondary
market for litigation risk is less developed, but fair
value accounting is a fact of life and our marks
have historically been shown to be reliable. We
expect our income going forward to continue to
be a mix of realised and unrealised gains. Our
track record in estimating unrealised gains that
are subsequently confirmed as realised gains
makes that entirely appropriate.
We now turn to three matters in the public domain
that had valuation or accounting significance in
2017; there are other matters in the portfolio with
valuation changes that are not in the public domain.
Petersen
We have commented on the Petersen investment,
its litigation progress and our secondary market
activity with respect to the investment in prior
reports and we will not repeat all of that discussion
here. In short, Petersen is a claim against Argentina
and its energy major, YPF, arising out of Argentina's
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued20152013201420162017Unrealised gains in investments(% of investments)Investments at costUnrealised gains26%19%22%31%36%74%81%78%69%64% 23
expropriation of YPF without compensation for
shareholders like Petersen, a Spanish group
that was one of YPF's largest shareholders before
the expropriation and which went bankrupt as
a result of it.
Substantively, the last event in Petersen was the
oral argument in June 2017 of Argentina’s appeal
against the trial court’s finding that the case
should remain and be litigated in US federal court.
We await a decision on that appeal; there is no
deadline for the court to release a decision. The
outcome of the appeal is procedural as opposed
to substantive; in other words, the decision will
impact whether the case is to be heard in US
federal court or before an arbitration panel
constituted by an arm of the World Bank, but in
either event the substantive claim is the same.
In late 2016 and the first half of 2017, Burford sold
25% of its interest in the Petersen outcome into
a secondary market we are working to build. The
sale price of that interest was $106 million; Burford’s
investment to date was approximately $17 million.
Thus, Burford has no risk of principal loss in the
matter and continues to hold 75% of its entitlement.
Since the secondary sales, there has been trading
activity in the secondary market throughout the year
at varying price levels, with the weighted average
price in 2017 implying a value of around $660 million
for Burford’s total original investment – in other words,
the value placed on Petersen by third party investors
has continued to climb from the $440 million
valuation implied by our final tranche of sales.
We have thus increased the carrying value of
our remaining investment in Petersen. We do
not release individual investment carrying values
for reasons of client confidentiality and litigation
strategy but we can say that we have acted
conservatively with respect to Petersen as is
our general practice. In the end, we altered
the carrying value of 15 investments in 2017
and the net increase in value across all of those
investments was $181 million, so it is clear that
we have not increased the carrying value of
Petersen to anything approaching its secondary
market trading level, which we do not regard as
determinative of our own carrying value.
Teinver
We enjoyed a significant win in July 2017 in the
Teinver case, an arbitration matter arising out of
the expropriation of two major Argentine airlines
by Argentina's government, plunging their prior
Spanish owners into bankruptcy. We invested
approximately $13 million in the matter, and the
carrying value subsequently increased to $30
million several years ago following a mid-case
success on an important jurisdictional matter.
Ultimately, the arbitration tribunal rendered an
award with a face value in excess of $325 million.
Were that award to be paid in full, Burford’s
entitlement at the time the award was issued
would have been more than $100 million. The
reality of such awards, however, is that they are
often discounted in return for prompt payment,
and Burford would not necessarily expect to
recover its full entitlement. Nonetheless, this is
clearly a valuable asset, and our valuation policy
has caused its carrying value to be increased
somewhat. The respondent in this matter has now
sought annulment (a limited form of appeal) and
thus the timing of the resolution of this matter
remains uncertain. We have just announced the
sale of our Teinver investment into the secondary
market which we continue to develop for $107
million, a $94.2 million investment gain and a 736%
return on invested capital.7
Jaguar Health
We have repeatedly commented on the
increasing complexity of Burford’s investment
transactions, and the Jaguar investment is an
example of both investment and accounting
complexity – but also an illustration of our success
in turning complexity into profit. Jaguar is a
NASDAQ-listed pharmaceutical company. Burford
provided financing in connection with a litigation
matter involving one of Jaguar’s predecessors.
In the end, Jaguar was not successful in the
litigation although it did succeed in using the
litigation to reach a desirable non-financial
settlement. The structure of our investment and
of Jaguar’s subsequent corporate changes have
led us to be paid a sum of cash in 2017 that more
than recovered our invested capital with the
remainder of our return coming in the form of
7 The Teinver award is the subject of ongoing annulment proceedings (a limited form of appeal). Only 6% of awards ever rendered by the
World Bank’s arbitration institution have been annulled (and only 3% in the current decade). Were the award to be annulled, the sale
transaction could be rescinded at the option of the buyers, although in that unlikely event Burford would retain a $7 million fee and
would also have its original entitlement back and be free to pursue the claim again.
Burford Annual Report 2017 24
a series of complex equity transactions that now
leave us holding around 6% of Jaguar’s voting
common stock along with rights over a further
interest in the company (collectively worth
approximately $6 million at the end of 2017).
Because Jaguar is publicly traded in an active
market, we are obliged to mark our equity position
to market, which in 2017 caused an unrealised
loss of $6.95 million as the stock price declined
from a formulaic deal price at which our equity
interests were initially issued (which we are
reporting separately as “net loss on equity
securities” on the income statement). Stocks like
Jaguar are notoriously volatile in the US equity
markets and we expect the potential of continued
market price volatility for so long as we hold this
position, which will have non-cash earnings
impact. Some of our interest in Jaguar remains
locked-up and we have not yet determined our
path forward with respect to the investment, but
every incremental dollar for us from this investment
will be pure profit as we have already recovered
our invested capital and a cash profit from our
initial investment.
Recourse investing
We have reported elsewhere an increase in the
volume of recourse investing we do – investing
where we have recourse to an asset in addition
to the underlying litigation claim, which benefits
us by lowering the risk of binary loss and expanding
our market opportunity. This practice gives rise
to further potential accounting complexity as the
asset to which we have recourse may be an asset
as to which there is a trading market or a reasonably
ascertainable third-party value. At this point we
have not had meaningful valuation adjustments
based on such asset value but it is certainly
possible that we will see further activity in this
area in the future.
An exemplary concluded investment
Given our general inability to discuss pending
investment matters, we have a custom of discussing
concluded ones to give investors some color about
the business.
Last year, we described an exciting – and lucrative
– multi-jurisdictional enforcement action that
ended up being featured as a front-page story
in The Wall Street Journal. This year, we will report
on an investment that exemplifies our business:
Garden-variety, rather dull corporate litigation
that is just about money.
Our client was a business that rehabilitated moribund
oil fields in an effort to increase production. It was
typically compensated for doing so with a small
fee and a share of the additional production its
efforts generated. Having achieved success across
multiple fields, the oil field owner purported to
terminate the contract and avoid liability for the
success payments to our client. Our client brought
a commercial arbitration proceeding to enforce the
contract and to obtain payment of its success fees.
Given the loss of expected cash flow from this
project as well as its desire to invest all of its
available capital in the development and growth
of its business, our client sought financing from
us for the bulk of its legal expenses related to the
arbitration claim. Burford agreed to finance up
to $4.7 million for the pursuit of the claim.
Unusually, the case did not settle and proceeded
to adjudication. The arbitration tribunal found
unanimously in our client’s favour, upheld the
contract and awarded damages.
Under its agreement, Burford was entitled to
its invested capital back on a first dollar basis,
a preferred return of 2.8x of invested capital,
and a portion of the net damages based on
a formula. Ultimately, Burford received $16.0 million
in proceeds, for a profit of $11.3 million on its
$4.7 million investment, generating a 112% IRR
and a 240% ROIC.
This is an example of how the process is supposed
to – and often does – work. We selected a strong
case on the merits from among the many we see
each year. The case was a corporate dispute
about money, without significant emotion or
personal animosity. Our client made a rational
economic decision about the allocation of its
own resources and opted to make use of external
financing to pursue its claim. The matter
proceeded through adjudication in a relatively
conventional way, taking 23 months from filing to
result. After losing, the respondent paid the award
without the need for any enforcement proceedings
or further delay, and Burford received its agreed
entitlement immediately. About the only surprise was
the failure of the case to settle, the more typical
outcome of many such cases.
So, while this example isn’t exciting or dramatic,
it is indeed a good illustration of our core business
– where 20 different investment resolutions
contributed to our realised results this year.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 25
Investment management8
■ Burford is the largest investment manager
in our sector; our AUM grew to $1.7 billion
■ $13 million in management fee income earned
in 2017
■ New $500 million complex strategies fund
raised in 2017; $320 million already invested
and first investment resolved less than six
months after launch at 16% ROIC/324% IRR
■ Existing Partners funds are paying performance
fees and are close to fully committed; new
fundraising is anticipated in 2018
investment teams so that we run one seamless
investment process without regard to the source
of the capital we are investing. We were delighted
to be able to raise a new $500 million fund in June.
The availability of capital from our funds was critical
to our ability to do the level of new business we
experienced in 2017 and we see fund capital as
an ongoing part of our investing activity.
Going forward, we expect to be in the fundraising
market again this year, and we see considerable
investor appetite for investment in the legal
finance sector.
Burford operates five private investment funds
as an investment adviser registered with and
regulated by the US Securities and Exchange
Commission (“SEC”).9 At the end of 2017 our
assets under management were $1.7 billion
(2016: $1.3 billion).10 We believe that we are the
largest investment manager in the legal finance
sector by a considerable margin. The two
largest categories of investors in our funds
have historically been pension funds and
university endowments.
Four of our funds were part of our December 2016
entry into the investment management business
through the acquisition of Gerchen Keller Capital
(“GKC”), a leading asset manager in the litigation
finance space, and we raised the fifth fund in June
2017, taking advantage of our new investment
management platform. The five funds encompass
three distinct investment strategies; we provide
details of the funds and their strategies below.
We have been very pleased with the acquisition
and our subsequent activities in the investment
management space. We rapidly integrated the
The funds
We now manage five investment funds along
with various sidecar vehicles with total investor
commitments of about $1.6 billion at 31 December
2017. We earn management and performance
fees from the closed-end funds; we provide
more details of those fees in our discussions
of the individual funds. We earned $13 million
in management fees and $2.7 million in
performance fees from the funds in 2017.
We conduct the sponsorship and management
of our funds through limited partnerships. Each
investment fund that is a limited partnership has
a general partner that is responsible for the
management and operation of the fund’s affairs
and makes all policy and investment decisions
relating to the conduct of the investment fund’s
business. The limited partners of such funds take
no part in the conduct or control of the business
of such funds, have no right or authority to act for
or bind such funds and have no influence over
the voting or disposition of the securities or other
assets held by such funds. Each investment fund
engages an investment adviser. Burford Capital
8 Burford Capital Investment Management LLC (“BCIM”), which acts as the fund manager of Burford's investment funds, is registered
as an investment adviser with the U.S. Securities and Exchange Commission. The information provided herein is for informational
purposes only. It describes multiple investment vehicles focused on multiple investment strategies. Nothing herein should be construed
as solicitation to offer investment advice or services. Information about investing in BCIM-managed funds is available only in the form
of private placement memoranda and other offering documents. The information contained herein does not purport to present a
complete picture of the actual or anticipated financial position, activities, results, actions and/or plans of the Fund or any other fund or
account managed by the Firm. Past performance is not indicative of future results.
In SEC parlance we have more than five “funds” when one includes sidecars and various fund structures but for ease of the discussion
that follows we ignore sidecars unless specifically included and we collapse fund structures into overall strategies, ignoring, for
example, onshore and offshore separations. With the exception of the new complex strategies fund whose IRR is based on a single
resolved investment, the IRR is calculated for each fund as a whole, based on the timing of capital contributions/distributions and
ending fund net asset value (either on a gross or net basis, as denoted within).
9
10 Consistent with its status as a registered investment adviser with the SEC, Burford reports publicly on its investment management
business on the basis of regulatory assets under management (“AUM”). For the benefit of non-US investors, the SEC’s definition of
AUM may well differ from that used by European investment managers. AUM as we report it means the fair value of the capital invested
in funds and individual capital vehicles plus the capital that we are entitled to call from investors in those funds and vehicles pursuant to
the terms of their capital commitments to those funds and vehicles (including capital committed by Burford). Our AUM will fluctuate
as we raise new funds and other investment vehicles, and as existing funds and vehicles mature and no longer represent sources of
callable capital in the future; there is no direct translation from AUM to investment management income.
Burford Annual Report 2017 26
Investment Management LLC serves as the
investment adviser for all of our funds and is
registered under the Investment Advisers Act
of 1940, as amended.
When there is overlap between investments
suitable for Burford’s balance sheet and for one
of its investment funds, we invest jointly pursuant
to a formulaic allocation policy, which provides
that the first $15 million of such an investment
commitment will be allocated on a 50/50 basis
between Burford’s on-balance-sheet capital and
the investment fund, with Burford’s balance sheet
taking any commitment in excess of $15 million
until it reaches its maximum risk tolerance, after
which the fund may again take up any remainder
consistent with the fund’s risk concentration limit.
We believe that this kind of clear and formulaic
approach to investment allocation is fair and
transparent both to Burford’s public investors and
its fund investors. This dual approach broadens
significantly Burford’s access to capital and
permits Burford to engage in a range of
investment strategies.
One common feature across the current funds
other than the new complex strategies fund is
the use of a so-called “European” structure for
the payment of performance fees, in which the
investment manager is not paid any performance
fees until fund investors have had their entire
capital investment repaid, as opposed to
performance fees being paid on profitable
resolutions as they occur. The impact of this
structure is to delay the receipt of performance
fees, and thus while many fund investments have
already successfully and profitably concluded,
leading to a steadily growing expectation of
performance fees, few of those performance
fees have yet been paid. Burford reports on its
investment management business as a separate
accounting segment. Management fee income
is reported as income as earned; management
fees are generally paid quarterly. Because of
the funds’ European performance fee structure,
performance fees will only be reported as income
once crystallised.
The Partners funds
When considering the economic potential of
the Partners funds, it is important to look at
management and performance fees holistically,
rather than attempting to separate those two
income streams. Unlike some asset classes,
properly underwritten portfolios of litigation
finance investments should reasonably be
expected to deliver positive returns in excess of
any applicable fund hurdle rates, thereby entitling
Burford to performance fees. However, just as in
Burford’s litigation finance business, the timing
of resolutions and payments is unpredictable,
and that unpredictability will affect the balance
between management and performance fees
at any point in time.
A theoretical example may assist. Assume a fund
with a 2% management fee on deployed capital
and a 20% performance fee. The fund invests
$10 million in a litigation matter. The fund will
begin earning $200,000 annually in management
fees when it makes the investment and will
continue to do so for so long as the litigation
is continuing and the investment is outstanding.
Then, assume the litigation matter resolves
favorably and the fund receives $50 million,
representing its capital back and a 4x profit.
At that point, the fund will cease earning
management fees but will become entitled to
a performance fee of $8 million (20% of the
$40 million profit, ignoring for the sake of simplicity
expenses and hurdles, if applicable) – but under
the funds’ structure, that performance fee may
well not be paid for some time. Because it is
difficult to predict the timing of the litigation
resolution, it is also difficult to predict the amount
of management fee income in any given
period for a fund with fees paid on the basis of
committed or deployed capital because a paid
litigation resolution will bring the management
fees associated with that investment to an end,
and it is similarly difficult to predict the timing of
performance fees. Indeed, in some instances a
decline in management fees in such a fund could
be regarded as a positive development as it
would signal that resolutions were occurring, thus
unlocking performance fees, which over time
should produce considerably more income than
management fees.
Three of the funds (the “Partners funds”) invest
in legal finance assets in a manner comparable
to Burford’s core business. This part of the business
is also often called “pre-settlement” financing,
in that the focus is on assets with legal or regulatory
risk that has not yet been resolved or adjudicated.
This theoretical example is just that: The actual
funds have a wide variety of economic terms and
structures as discussed in more detail below,
including the ability to re-deploy capital during a
fund’s investment period if an investment resolves
successfully, adding more complexity to the
example above. But the fundamental point
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 27
remains: The fund structures and terms are
desirable and crafted for (and work well in) the
litigation finance market, and we expect their
addition to Burford’s business to be lucrative, but
they may not suit the kind of granular analysis
and predictability that may be more available
in other asset classes, especially as to the timing
and quantum of the receipt of performance fees.
have resolved, and the remaining active
investments represent a significant proportion
of the fund’s outstanding commitments. A number
of investments in the fund have had early success
but have not yet completed the litigation process;
the two largest pending resolutions are today
collectively entitled to more than $22 million
in proceeds based on their current posture
(vs. $9 million in invested capital).
Partners I
Partners I, GKC’s inaugural small fund with
$45.5 million in investor commitments, was raised
in March 2013 and began investing immediately.
Partners I invested in a diversified range of
litigation finance assets, ultimately making
17 investments, of which 13 have already resolved.
The fund has been successful on a returns basis
(39% net IRR and 140% net ROIC to date) but its
investments were relatively small; ultimately, it
deployed $31.1 million in capital, or an average
of $1.8 million per investment. It has generated
$1.3 million in performance fees for Burford and
we expect incremental performance fees in the
future, especially as one of the four outstanding
investments is a potentially significant investment
success making its way through the appellate
process, with Partners I’s current entitlement
being more than $31 million net of invested
capital or almost $5 million in performance fees.
(This illustrates the outsized significance of
performance fees in this business; this one
investment is capable of generating several
times the fee income in performance fees than
the entire fund will generate over its entire life
in management fees.)
Partners I is no longer generating significant
management fees given its maturity; Burford
earned $0.2 million in management fees in
2017 from the fund.
Partners II
Partners II was raised in December 2013 following
the rapid commitment of Partners I. Partners II
was a significantly larger fund, with $259.8 million in
investor commitments. Its investment period ended
at the end of 2015, having made 36 investments.
While Partners II has a diverse pool of investments,
it has a particular emphasis on intellectual
property investments. Those investments tend to
be characterised by longer duration and higher
risk, but also higher return when successful. Thus,
compared to Partners I, it is not surprising that a
smaller proportion of investments (11 in total)
Partners II paid $2.2 million in management fees
in 2017. Future fees will depend on the speed of
resolutions, as noted in the theoretical example
above. The fund has not yet reached the stage of
returning all of investors’ capital and thus has not
yet paid any performance fees. It is worth noting
that $85.5 million of investor commitments in
Partners II were made on the high-octane basis
of 0% management fees and 50% performance
fees, as opposed to the more traditional 2%
management fee and 20% performance fee. For all
of those reasons, it is difficult for us to project the
quantum and timing of future fee income from
Partners II – but we remain of the view that significant
performance fee income is entirely possible.
Partners III
Partners III began investing in January 2016,
following the close of the Partners I and II
investment periods. Partners III has $412 million in
investor commitments; we are actively investing
the fund, which has a four-year investment period
ending 1 January 2020 (and the ability to recycle
capital within that investment period).
Although Partners III was a legacy GKC fund,
its investment portfolio is fundamentally from
Burford’s pipeline. At the closing of Burford’s
acquisition of GKC, Partners III had committed
$92 million to investments. Little more than a year
later, Partners III stands with around $334 million
committed, approximately 81% of the fund, as
of 31 December 2017, and investing activity has
continued into 2018 leaving the fund close to fully
committed. As a result, Partners III’s performance
should be comparable to Burford’s ultimate
balance sheet performance – and notably,
Partners III is not focused on intellectual property
(although it certainly contains IP investments),
which should result in a shorter average duration
than Partners II.
Partners III is at an early stage of delivering
performance given that the bulk of its investments
were made in 2017. However, early indications are
promising. In 2017, the fund generated $13.2 million
Burford Annual Report 2017 28
in investor profits on $31.8 million of proceeds, a
71.4% ROIC, and litigation returns tend to increase
with time.
Partners III has a somewhat different fee structure
than our other funds. Investors in Partners III pay
a 2% management fee on their total capital
commitments during the four-year investment
period (2016-2019), regardless of deployment
levels, and then they do not pay any management
fees once the investment period ends. Burford
earned $6.2 million in management fees from
Partners III in 2017. The fund has two investment
classes: (i) Class A, 75% of total commitments,
pays 2% management fees and receives full
investment returns subject to 20% performance
fees; and (ii) Class B, 25% of total commitments,
which does not pay a management fee and
which is not entitled to investment returns but
receives only an 8% coupon if drawn (and Class A
must be drawn in its entirely prior to Class B
being drawn). The nature of litigation finance
investments suggests that it is unlikely that Class B
will ever be drawn. As such, it should be thought
of as a form of synthetic leverage, with the result
that Class A performance fees are likely to be
enhanced by its presence.
Because of the close-to-full commitment of
Partners III, we expect to be in the fundraising
market this year. We are enthusiastic about
the potential for our core funds business.
Post-settlement investing
In addition to our conventional pre-settlement
litigation finance, we also have a fund that
monetises post-settlement and other legal
receivables – a sort of law-focused factoring.
There are frequently significant delays between
the point at which parties to a litigation matter
agree upon a settlement and the finalisation of
and payment under the settlement. Often, those
delays are due to the operation of the judicial
process, which may require notice periods and
fairness hearings before approval of settlements.
In the interim period, both law firms awaiting
payment of their fees and clients eager for cash to
flow may well find it attractive to secure financing
against those expected receipts, and our
post-settlement fund provides such financing, at
return levels considerably lower than traditional
litigation finance.
The post-settlement fund commenced in
September 2014. At 31 December 2017, the fund
had $296.1 million of investor commitments and
an investment period (including the ability to
recycle capital) extending until 30 September
2019. In addition to the core fund, GKC has also
made active use of sidecars in the post-settlement
space, investing several hundred million dollars
provided by investors since April 2014 with widely
varying structures and economics.
This strategy is not especially remunerative for
Burford given the significantly lower returns
available in this area. We value the strategy not so
much for its cash income but for its expansion of
our offering to clients. Management fees in the
post-settlement fund are an average of 1.6% on
drawn capital, with performance fees of generally
20% after investors receive a 5% preferred return.
In 2017, the fund paid $3.4 million in management
fees and no performance fees were yet earned.
The structure of our fund permits investors to elect to
discontinue participation in future investments while
remaining bound to existing investments, and as time
passes, some investors are rotating out of this fund.
We regard this as entirely expected given our fund
structures and investor time horizons, just as the
turnover in our public shares continues to increase.
Complex strategies
We believe that there are incremental
opportunities to deploy capital profitably in other
complex and proprietary strategies based on our
assessment of legal and regulatory risk and the
skills we have developed in understanding the
underlying value of legal assets. We are
particularly interested in investing as a principal
in such areas as discussed above in the section on
principal investing. We are recognised for those skill
sets, and we are regularly approached by investors
seeking exposure to various expressions of this
fundamental investment theme, which combines
attractive risk-adjusted returns and a lack of
correlation to market and economic fluctuations.
In June 2017 we raised a new fund to exploit
certain of those opportunities in connection with
one particular principal investing strategy. That
fund closed at $500 million, including a $150
million commitment from Burford. In the first six
months of the fund’s operation the fund has
invested $319.7 million and has continued to
make new investments in 2018.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued Burford earns management fees of 2% on funded
capital. We do not receive any fees for uncalled
investor capital commitments. We also earn 20%
performance fees (over a 5% annual preferred
return with a full catch-up) on the investment
strategy. Thus far, we have had one investment
resolve, which generated significant returns in
light of its short duration – 324% gross IRR and 16%
ROIC on an investment of $22.8 million. In the six
months of 2017 following the fund’s closing, we
earned $0.9 million in management fees and
$0.3 million in performance fees from the fund.
As an accounting matter, because of Burford’s
significant investment in this fund, we are required
to consolidate the fund and then show separately
the entitlement of other investors. That creates
some noise in our financials and we have
generally excluded the impact of that fund
consolidation in our presentation of results and
our discussion of the business; if we had included
it, it would have increased our income and total
assets by $1.4 million and $181.3 million respectively.
A line-by-line reconciliation is provided on pages 40,
41 and also in Note 21 of our financials.
Sidecars
We occasionally make use of sidecar investment
vehicles when individual investments are too large
for our direct investment capacity. The scale of
Burford’s own investment capacity means that
fewer investments require the use of sidecars
but they remain a useful addition to our capital
mix. During 2017, we had four active sidecars
although by 31 December 2017 three of the four
had concluded, leaving just one in operation.
We earned $1.2 million in fee income from sidecars
in 2017. While the remaining sidecar facilitated
the making of larger investments, it is unlikely to
produce additional income in the future given
its structure.
GKC principals
As previously announced, following the successful
and rapid completion of the integration of the
fund business within Burford, the GKC principals
stepped back from their operating roles at Burford
as of 31 December 2017 and took on advisory
and investment committee functions, leaving them
free to pursue other non-competitive opportunities.
The entrepreneurial zeal of the principals made this
a natural outcome. We continue to have an
excellent relationship with the principals and look
forward to continuing collaboration with them.
29
The GKC principals are subject to stringent
non-compete provisions that do not expire
until December 2020. They are also subject to
non-solicit and no-hire provisions. Moreover,
the shares that the principals hold are subject
to a lock-up until December 2019.
Insurance
Our legacy insurance business has been in run-off
since the end of 2016 and as expected saw a
decline in income in 2017 as we continue to see the
back book mature. The legacy business delivered
$7.6 million in income (2016: $12.9 million) and $5.6
million in operating profit (2016: $11.2 million). The
business has some distance still to go; for example,
we still have 19 cases in the £250,000+ category
(2016: 41).
Thus far, the insurance business has generated
$94.7 million in income and $71.2 million in
operating profit since our acquisition of it in 2012,
when we paid an effective cash price of $18.75
million to purchase it. Moreover, there is a further
reserve that sits on MunichRe’s balance sheet and
not on ours to which we become entitled at the
conclusion of the run-off; that reserve stood at
$12.0 million at the end of 2017 although it can
fluctuate in the future based on the outcomes
of individual matters.
In addition to the cash profitability of the business,
we have the benefit of an extensive track record.
The insurance business has written 56,985 insurance
policies to cover adverse costs risk during its life.
Of those matters, 77.2% have resolved favorably
and only 20.4% have suffered losses (and 2.4%
remain unresolved). That represents an enormous
body of litigation assessment data and experience
in addition to our core business.
The legacy insurance business was more of a
middle market business than our core business
and we only infrequently wrote more than £3 million
coverage for a single case. As we have discussed
before, demand for adverse cost insurance in
that market has declined because of regulatory
changes implemented in 2013, and that decline
in demand coupled with increasing platform
costs caused us to terminate our arrangement
with MunichRe at the end of 2016 – particularly
as our core business is not particularly focused
on the middle market.
Burford Annual Report 2017 30
However, adverse cost risk remains a key issue
in the kind of larger complex litigation that is
squarely the focus of our core business. Today,
it is difficult to find a path forward on litigation
claims once the adverse cost exposure approaches
£20 million as there is limited capacity in the
insurance market for such claims – and while
those numbers seem large, the costs of defending
RBS from actions relating to its financial crisis
conduct handily exceeded £100 million and
we have had requests for even larger levels of
adverse cost protection. Moreover, adverse cost
protection is often a prerequisite in large cases
as individual defendants are typically unwilling to
take on the kind of joint and several adverse cost
exposure that can exist in such cases.
Thus, given our historic experience as an
insurance provider and our expertise in litigation
risk assessment, we have decided to re-enter
the adverse cost insurance business – but with
our own wholly-owned insurer (as opposed to our
agency relationship with MunichRe) and at the
large case end of the market where we have
historically focused. We have thus created Burford
Worldwide Insurance Limited, a Guernsey insurer
that will offer adverse cost insurance globally
in both litigation and arbitration subject to final
regulatory approval, and we have arranged
substantial reinsurance capacity for that insurer
from leading reinsurers.
Initially, we do not expect a material financial
contribution from this venture – we see it more as
facilitating cases we want to invest in as a funder
and providing us with a competitive advantage
in the litigation finance market – but we will remain
open to the potential expansion of this business
as time passes.
New initiatives
Our new initiatives segment principally contains
our asset recovery business at this point and its
associated law firm, Burford Law.
Once a matter has been litigated through to
a final judgment and all appeals have been
exhausted, that judgment is enforceable globally
as a debt obligation of the judgment debtor.
While many tenacious litigants do pay their
judgments when they ultimately lose a matter
(as illustrated earlier in our discussion of the oil
field services case), some do not, and further
effort is needed to collect the judgment debt.
Our asset recovery business provides expert
assistance to lawyers and clients around global
asset location and enforcement. As one might
expect given Burford’s background and orientation,
we approach this business as lawyers, not as
on-the-ground private investigators. Our asset
recovery business is run by an English barrister
and an English solicitor, and tends to be heavily
research-intensive. With the results of our research,
we then use global legal tactics and strategies to
obtain yet more information and ultimately to seize
(typically financial) assets to satisfy judgments.
We also operate a small law firm inside Burford,
called Burford Law, under license from the Solicitors
Regulation Authority. Burford Law today provides
specialised services to our asset recovery business
and also offers those services to other clients.
As noted previously, 2017 marked the migration of
this asset recovery business from a fee-for-service
model to a contingent risk one. In other words,
instead of our prior model of billing clients for our
time, the bulk of our business is now done on risk
in exchange for a share of whatever recovery
is generated. Under most potential scenarios,
the contingent risk model will be more profitable.
However, the migration to that model will take
some time to generate income, as the business
will immediately lose its fee-for-service income
and will not receive its contingent income until
the conclusion of a matter, and there is also
the potential for lumpy returns. As a result, 2017
income for the business is considerably below its
prior year level. However, investments have soared
– from $2.3 million at the end of 2016 to $10.2
million at the end of 2017 – which positions the
business for future success from those investments.
Forecasting and guidance
Burford is, as far as we know, unique among
public companies in the world. We know of no
other large business with a management team
composed largely of veteran litigation lawyers.
We make this point because as corporate litigators
we have spent decades of our professional lives
seeing, and dealing with, the misjudgements and
other fallacies of corporate executives and market
participants. We were the people called in when
companies got into trouble. Collectively, we have
hundreds of years of such experience, addressing
corporate peccadillos measured in the many
billions of dollars.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 31
This experience leaves us skeptical about predictions
and deeply reluctant to try to make them, particularly
in the kind of business we have. Our view is that
it is our function as corporate managers to be
excellent stewards for shareholders’ capital and to
provide investors with data and with commentary
on the past, and that it is for investors to form their
own individual views about what the future holds.
We are repeating this annual homily because as
we have grown in size and prominence, we have
attracted an expanding audience that takes the
view that we should give “guidance” on not only
what is going to happen in the future but when it is
going to happen. With respect, we decline to do so.
This philosophy is particularly appropriate for
our line of business. We are dependent for
much of our income on the outcomes of legal
proceedings. While we have shown some level of
ability to predict substantive outcomes (although
we are certainly fallible), we are simply incapable
of predicting the timing of those outcomes finely
enough to produce a financial model to estimate
quarterly earnings. We do, however, have the
comfort of knowing that all legal proceedings
do come to an end – and do so on an
uncorrelated basis.
Burford values transparency in its presentation
of financial results and wants to be clear with
investors about its approach to those results.
Most of Burford’s income comes from its litigation
finance business. Within that business, there are
two principal sources of income for accounting
purposes, realised gains on investments and
unrealised gains on investments. (Realised and
unrealised losses will naturally negatively affect
income and the principles we set forth here apply
equally to losses.)
Realised gains are straightforward: they represent
the amount of profit, net of the return of Burford’s
invested capital and any previously recognised
unrealised gains, on an investment that has
either resolved entirely or has been settled or
adjudicated such that, in Burford’s view, there
is no longer litigation risk associated with the
investment. (In the latter event, Burford may
discount the anticipated profit in respect of
an investment to account for any continuing
uncertainty as to the recoverability of any
amount.) Burford announces individual
investment results that will produce realised gains
separately from its financial results only when the
individual gain is new information which may be
material to Burford.
What we can say is that we assemble our large
and diversified portfolio with great care, and more
than eight years in this business and more than
$773 million in investment proceeds have shown
that we have a level of competence in doing so.
We also manage our costs aggressively. We are
investing personally in Burford and are highly
exposed to its success – collectively, our team owns
13% of Burford's shares. We believe that our portfolio
will generate a desirable level of profits as it
matures, and we believe that our investment funds
will generate appealing performance fee income
from their own litigation resolutions. But we are not
going to try to predict precisely when or how much
income we will generate, despite mounting
pressure to conform and pretend we can.
And now for some disclaimers, which we have
provided before and also appear on our web site:
Burford cautions that its earnings for any financial
period partly depend on judgements made by
management, which are then included in the
audit process and ultimately determined by
Burford’s board of directors. That review process
often results in adjustments to initial expectations
and continues right up until the finalisation and
release of these results.
Unrealised gains are more complex: They represent
the fair value of Burford’s investment assets,
as determined by Burford’s board of directors in
accordance with the requirements of the relevant
IFRS standards, as at the end of the relevant
financial reporting period. There is no active
secondary market for litigation risk, and thus
there is generally no market-based approach
to assessing fair value; to the extent that
a secondary market transaction does take place
with respect to an investment, the implied value
of that transaction is a relevant valuation input.
In the absence of such a transaction, we are
mindful that the outcome of each matter Burford
finances is likely to be inherently uncertain,
may take several years to conclude and is often
difficult to predict with accuracy. Moreover,
litigation matters frequently experience multiple
significant shifts in sentiment during their evolution.
Burford thus eschews fair values based solely on
current sentiment, and focuses on objective events
(such as court rulings or settlement offers) to
ground its assessment of fair value.
Burford’s Board of Directors assesses the fair value
of Burford’s investments after the close of each
financial reporting period and therefore investors
should not expect updates about potential
Burford Annual Report 2017 32
changes in fair value during the course of any
given reporting period. Following the close of
each financial reporting period, Burford’s Board
determines the fair values of investments after
taking into account the views of management,
the operation of the audit process and input from
external experts (as it considers appropriate).
Generally, that process does not conclude finally
until shortly before the release of Burford’s
financial results for the relevant period.
Burford is pleased to be followed by a number
of research analysts and we are grateful for their
efforts to understand and explain our business.
They perform a valuable role in assessing our
operating performance, the evolution of the
litigation finance market and interpreting other
relevant industry developments. However,
prospective investors and other market participants
must appreciate that, due to the confidential,
potentially privileged, long-term and uncertain
nature of each investment asset, it is very difficult
for research analysts to project accurately the
likely investment income of the business. Any
projections produced by research analysts are
not produced on behalf of Burford and Burford
takes no responsibility for such projections. As a
result, prospective investors and other market
participants should not treat, and Burford does
not intend to treat, the financial projections
produced by research analysts as indicative
of the market’s expectations of Burford’s future
financial performance. We specifically eschew
any obligation to correct estimates made by
financial analysts or to inform the market should
we come to believe that our actual performance
will diverge from those estimates. This is, of course,
different to the approach taken by most operating
companies, in respect of which research analysts
can produce relatively reliable estimates and the
relevant company will advise the market if it
expects to see performance materially different
from the consensus of analyst forecasts. It is
important that investors understand that Burford
takes a different approach as a result of the
different nature of its business.
Corporate and financial matters
Finance function and controls
Burford operates an extensive and sophisticated
finance function, with 13 dedicated finance staff
located throughout the business and present in all
three of our significant offices, including nine with
public accounting qualifications. By having the
finance team embedded in the business and
privy to investment activity, we gain considerable
control benefits in addition to a more effective
operation. It bears remembering that Burford
does a relatively small number of large investments
each year; we are closing about one new
investment per week on average. Thus, there is
abundant opportunity for the finance team to be
intimately familiar with the activity in the business.
We also have an extensive system of internal
controls around access to payment systems and
the release of payments. For example, for any
payment, regardless of size, to be released, that
payment must be created in our internal systems
by one of several team members, none of whom
have the authority to release payments, and then
the payment’s release must be authorised by two
other team members separately, neither of whom
is able to create a payment. Thus, at least three
different people from two different groups are
required to provide sign-off before a single dollar
leaves Burford’s hands. Moreover, payments are
not even created without a formal process of
approval, with investment payments being
circulated widely among and approved by the
investment team. Senior executives in the
business, including the Chief Executive Officer
and the Chief Investment Officer, do not have
access to our payment systems and cannot
release payments as a control matter.
In recognition of its growth and increasing
complexity, Burford recently created the position
of Chief Accounting Officer, which has been filled
by Charles Utley, a former Barclays Managing
Director, where he spent 11 years in a variety
of senior accounting roles, including Head of
Technical Accounting for the Americas and
Head of Product Control Valuation for the
Americas, and previously spent eight years
at PwC, rising to the level of Director, with a
particular focus on complex accounting in
the financial sector.
Risk management
Burford manages risk in a number of ways.
In the investment portfolio, Burford employs a
disciplined, comprehensive, multi-stage process
to evaluate potential investments and benefit from
the judgement and experience of Burford’s
highly qualified team of experienced lawyers
and finance professionals. Burford also uses an
internal, proprietary risk tool to assess risk during
the investment process and regularly after the
investment has been made, and engages in
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 33
substantial portfolio management activities using
a risk-based approach. Burford believes that its
approach to risk management has enabled
it to improve materially on investment results in
challenging situations where a more conventional
approach would likely have yielded diminished
performance.
Burford also regularly considers business and
systemic risk in its business units and overall. We
have long been focused on operational risk and
have a system of internal controls around the
integrity of our internal processes and data.
Among other steps, we have a dedicated team
focused on operational controls and data.
Moreover, while perhaps trite to say, Burford is
fundamentally a business run by experienced
lawyers, including some who have functioned
in senior legal roles in major global corporations.
The challenge in many businesses is reining in
business people who take on unacceptable or
ill-considered risk, and it is the function of the
lawyers to hold those reins – so here, we have a
business run by the people accustomed to that
role. Burford’s culture is a disciplined, risk-focused
one. We augment that culture with a seven-
member in-house legal team.
In addition to our ongoing risk management
activities within the business, we make a
comprehensive risk presentation to the Burford
Board at every quarterly meeting.
IT and cybersecurity
While a species of risk, IT and cybersecurity risk
deserve their own dedicated discussion.
Burford has always been very alive to the risk
associated with the dissemination of its confidential
information publicly, especially as that information
contains highly sensitive client litigation information.
We have also focused on the risk associated with
attacks on our financial systems.
However, data security is much more than
protecting data against invasive hacking. Human
error and inattention is arguably a greater risk
than sophisticated penetration attacks. Thus, we
engage in a variety of training and testing, and
we also introduce restrictions on technology use
designed to minimise those risks. We regularly
review best practices from both the legal and the
financial services industries and are engaged in a
programme of continuous improvement, including
adopting a wide range of measures designed to
improve security and minimise risk.
Finally, we are focused on tone from the top
when it comes to these issues. Burford’s senior
management regularly spends time on these
issues and communicates about their importance
to all staff.
In addition to data security we are also focused
on privacy, and are sensitive to the various
obligations we face in that regard. Given that
Burford does not deal with consumers and is
purely a corporate business, the burdens on us
are far less than on businesses amassing
considerable personal data.
Compliance
While Burford has always had a robust
compliance programme, showing the internal
emphasis we put on compliance, 2017 saw the
hiring of our first full-time Chief Compliance
Officer, Anne Duffy, formerly Vice President
and Chief of Staff in Compliance at Nuveen
Investments and before that Compliance Director
at Fidelity. Our compliance regime is global in
scope and addresses our various legal and
regulatory obligations, including our obligations
in light of our registration with both the US
Securities and Exchange Commission and the UK
Financial Conduct Authority along with the myriad
laws and codes to which we are subject.
Capital structure and leverage
From Burford’s inception, sensitive to these issues,
Burford has operated on an entirely cloud-based
platform. Our data does not sit on our own servers,
even virtual cloud servers, but rather on the
servers of world-class technology companies
such as Microsoft and Salesforce. While that is
no guarantee of perfect security, it is probably as
close as one can come in this day and age. The
use of those platforms also comes with built-in
disaster recovery protection.
Burford’s capital structure is straightforward: we
have a single class of equity and four essentially
identical tranches of public debt, including our
latest bond issue ($180 million) raised in February
2018 and denominated in US Dollars.
Burford today is operating at a net debt/equity
ratio of around 0.46x (measured at 31 December
2017 but including the February 2018 bond
offering as though it had been issued in 2017),
a low level of leverage for a specialty finance firm,
Burford Annual Report 2017 34
with abundant interest coverage. That is possible
because we re-invest many of our capital receipts
and manage our expenses closely. We do not
favour a highly leveraged platform, but there is
clearly room for us to absorb some additional
leverage should market conditions and our
financing needs suggest that we tap the
debt markets again. Moreover, our access to
investment fund capital through our investment
management platform also provides a
considerable potential source of incremental
capital as needed.
Burford has for some time had an investment
banking relationship with Morgan Stanley, and
our principal banker there, Jim Kilman, a Morgan
Stanley Vice Chairman and highly experienced
specialty finance banker, retired in 2016. We have
been fortunate in having Jim join Burford on a
part-time basis as a Senior Advisor, augmenting the
advisory talent we had already through Marshall
Heinberg, former Senior Managing Director and
Head of Investment Banking at Oppenheimer & Co.,
another of our Senior Advisors.
During the course of 2017, Jim led a team that
conducted a comprehensive review of our capital
structure and our listing position, including
seeking advice from three different investment
banking firms and culminating in a fulsome
presentation to the Burford Board in November
2017. The advice from all three firms and our
own internal analysis all led to the same set
of conclusions:
■ Burford would not see any meaningful benefit
from a move to the LSE Main Market for its
equity, and indeed Burford’s liquidity is already
comparable to a Main Market stock of its size.
The fact that Burford’s bonds trade on the Main
Market under a full prospectus is also a useful
governance and disclosure factor
■ A cross-listing in the US or a US-traded ADR
would likely offer no advantage for Burford.
We are already seeing significant investment
flows from US institutional investors who are
not experiencing any difficulty in accessing
Burford stock
■ Burford’s corporate structure with a Guernsey
parent company and UK and US operating
company subsidiaries is appropriate given the
multiple jurisdictions in which Burford operates
■ While an offering of additional equity cannot be
ruled out, the availability of debt capital and the
investment funds likely counsels against such an
issuance in the immediate future11
Foreign exchange
Burford is a US Dollar reporting business with the
considerable majority of its operations occurring in
dollar-denominated activities. We also declare our
dividends in US Dollars. However, our first three bond
issues, totaling £365 million, are denominated in
Sterling and thus Burford is exposed to currency risk.
Burford also has a minority of its investments
denominated in currencies other than US Dollars.
Burford generally does not hedge this currency
exposure although its exposure to different
currencies, especially Sterling, does provide
a degree of natural hedging.
Brexit
Burford does not anticipate any negative impact
from Brexit, in whatever form it were to take. Indeed,
Brexit creates uncertainty, and uncertainty is
generally good for the legal sector as it drives
demand for services and creates disputes, so from
that perspective Brexit is probably positive for
Burford. It is possible that Brexit will pose a risk to
London’s prominence as a global litigation center,
but that is of no moment to us as we are perfectly
happy doing transnational litigation and
arbitration all over the world and already do so
in Europe and elsewhere. In fact, moving some
dispute resolution from London to Europe is
arguably also good for us as adverse costs are
less of an issue in Europe than in England; even
without Brexit, the English preoccupation with
adverse costs is increasingly making England an
unfavorable jurisdiction for commercial litigation.
Operating expenses
Burford expenses its operating costs as they
are incurred. We don’t capitalise them as part
of our investment portfolio. Moreover, we perform
virtually all of our investment activities internally,
with our own staff, as opposed to outsourcing
diligence or legal work. Thus, we do not add
external costs to our investment balances as
opposed to expensing them. As a result, the
operating expenses on our accounts are essentially
what we are actually spending in cash each year
to operate the business.
11 Note that Burford does not undertake any obligation to update investors should its views on the foregoing issues change and
in particular Burford does not accept any obligation to notify investors should it proceed to explore an equity offering.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued This is a transparent and conservative way of
proceeding, and we believe it provides the best
quality of outcome. However, it introduces a
timing mismatch between expenses (current) and
portfolio income (future). As we grow the portfolio,
we take on immediately higher levels of activity
around (i) making new commitments and (ii)
managing a higher level of portfolio activity. While
our model is scalable to some extent, increases in
business activity will drive increased current costs
– and the profit those costs are working to achieve
may only be seen in the future.
It isn’t possible to describe staff costs or operating
leverage on some sort of formulaic basis –
x people per y dollars of new commitments,
for example. Litigation is simply too idiosyncratic
for that – which is why law firms hold large teams
of staff in reserve. One matter will consume
thousands of staff hours, and another matter
will coast to an easy and early settlement with
virtually no effort from us. We use decades of
litigation experience to run this business and staff
it appropriately based on our knowledge of the
portfolio and our sense of the market.
Our operating expenses (principally staff costs)
rose in 2017, but even with the addition of the
costs associated with the investment management
business we acquired (the principal basis for
the increase, which was more than offset by
management fee income), our total operating
expenses fell sharply as a percentage of income
(2017: 15.3%; 2016: 23.9%). We continue to balance
the desirability of investing in the growth of the
business and the maintenance of prudent levels
of spending.
35
Operating costs to income ratio
($ in millions)
341
29.9%
26.0% 25.1% 23.9%
15.3%
163
82
61
103
2013
2014
2015
2016
2017
Employee compensation, retention and
other issues
Burford’s team is one of its key competitive
advantages, and we expend considerable effort
to create an environment that is appealing to
the kind of people we recruit. Competitive
compensation is certainly an important part of that
dynamic, but so too is a collaborative environment
and mutual respect. We also devote considerable
resource to training and developing our team,
especially as incoming employees are generally
coming into the litigation finance industry from
adjacent industries for the first time – and indeed
that is a limitation on our growth, as we believe that
there is a limit to the number of people we can
properly assimilate at any given time in light of the
need to develop them and inculcate them in not
only Burford’s approach but the fundamentals of
the industry.
In 2017 we made new hires in key positions
including Chief Compliance Officer, Chief
Accounting Officer, General Counsel, UK/European
Corporate Counsel, the Director of our new
Singapore office, and a Director, Investor Relations.
Two new Directors joined Burford to build our
expertise in bankruptcy and insolvency and
securities litigation, and four new Vice Presidents
added further depth and breadth to our
investment team.
Burford Annual Report 2017 Our new hires are veterans of companies and firms
including Barclays, Brookfield Asset Management,
Goldman Sachs, Freshfields Bruckhaus Deringer,
Herbert Smith Freehills, Lehman Estate/Lehman
Brothers, Loeb & Loeb, Nuveen Investments,
Oppenheimer Funds, Quinn Emanuel Urquhart
& Sullivan, RPX Corporation and UBS.
We also promoted Elizabeth O’Connell as Burford’s
Chief Financial Officer; Aviva Will as Senior
Managing Director with responsibility for Burford’s
underwriting and investment management in its
core litigation finance business, Emily Slater as
Managing Director overseeing Burford’s business
development activities with US law firms; Katharine
Wolanyk as Managing Director overseeing Burford’s
Chicago office and its intellectual property
business, John Lazar as Director of Burford’s
investment team; and Eric Carlson as IP Principal.
We have always recognised that diversity and
inclusion are key values in fielding a market-
leading team, particularly in activity like litigation
where assessment of human conduct is a key
factor in what we do. Since inception, Burford has
worked to build a best-in-class diverse team.
Women hold key leadership positions including
its Chief Financial Officer, its Senior Managing
Director, its Chief Marketing Officer, Chief Process &
Innovation Officer, CFO-Funds, and a variety of
other Managing Directors and Directors, making
up more than one-third of Burford’s senior team.
As to compensation, our traditional model is that
of base salaries and performance-based annual
bonuses. Historically, that has made up the
considerable majority of our compensation and
reflects the origins of our team members, who
typically hail from law firms and finance firms that
also use this compensation approach.
In 2016, shareholders approved a long-term
incentive plan and we have added grants under
that plan to our compensation mix beginning in
2017, which creates additional alignment between
the team and public shareholders and also
creates a long-term retention vehicle. We made
an initial LTIP grant to every employee in the
business at the time of the plan’s inception, and
we make grants to most new employees as they
join. We also use annual LTIP grants as a further
compensation vehicle for our investment team
and other senior employees.
36
We also use more tailored compensation devices
for incentivisation and retention depending on
individual circumstances. However, our general
compensation philosophy is team-based rather
than individual as we believe that investing in this
asset class benefits from a team approach and
not from assigning individual ownership of and
responsibility for individual investments. When we
use incremental compensation devices, our focus
is on a combination of performance
incentivisation and retention.
Burford has historically enjoyed quite low
employee turnover after employees have been
with us for a period of time. There can, however,
be an assimilation period upon joining that does
lead to some turnover as we are generally hiring
people who have not done litigation finance
before, and some recruits ultimately do not fit
as litigation financiers. Of the 30 employees who
have worked for Burford for at least three years,
only two left during 2017, neither of whom was
part of the investment function.
Burford makes active use of non-compete
agreements as part of its employment
arrangements, with the length of the non-compete
period rising proportionately with seniority.
In the last few years, Burford has evolved from
a relatively small platform with a degree of key
person risk to a much larger and more developed
management structure that minimises or
eliminates key person risk. As we continue to build
out a multi-layered management team, we are
inherently engaging in succession planning at the
same time, and we are confident the business
would weather the departure of any or several of
our senior team given the cadre of experienced,
capable people we now have in senior positions.
Nevertheless, Christopher Bogart and Jonathan
Molot, respectively Burford’s Chief Executive
Officer and Chief Investment Officer, both
renewed their employment agreements with
Burford through the end of 2020.
We are proud to have assembled what is clearly
the leading and most experienced team in
the litigation finance industry. Not only do we
bring hundreds of years and billions of dollars
of litigation experience, but our team is
multidisciplinary as well, with senior and
experienced finance and investment professionals
– a critical component in any investment decision
making undertaking. We would encourage
shareholders to visit our website to review the
biographies of all of our team members.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued
37
The impact of the recent passage of tax reform
legislation in the US has the positive impact of
lowering the US corporate tax rate substantially
(although it may also have the impact of limiting
some interest deductibility and certain tax
planning opportunities). Thus, we are revising
downwards our long-term guidance as to our tax
rate and believe we will ultimately land in the low
teens, even if it takes some years to arrive there.
Tax
Burford’s gradual progression from a tax-free fund
prior to 2012 to a multinational taxpayer was
altered somewhat by the GKC acquisition. Under
US tax law, given that GKC had very few tangible
assets, the bulk of the acquisition was
characterised as goodwill and other intangible
assets for US tax purposes, and those assets are
amortised for tax purposes, significantly reducing
future US taxable income. Thus, Burford’s tax
expense will reflect this dynamic given the deferred
tax impact of various acquisition-related matters.
Burford Capital Limited is governed by its four-member Board of Directors. All four Directors are
Independent Non-Executives, and all four have been Directors since Burford’s inception. They are:
Corporate governance
Burford is composed of its publicly traded
parent company, Burford Capital Limited,
and a number of wholly owned subsidiaries in
various jurisdictions through which it conducts
its operations and makes its investments. Burford
Capital LLC is the principal operating entity in
the US and Burford Capital (UK) Limited is the
principal operating entity in the UK. Those two
entities provide various corporate and investment
advisory services to other Group companies.
Burford Annual Report 2017Charles ParkinsonDirectorMr. Parkinson is President of the States of Guernsey Trading Supervisory Board and is President of the Committee for Economic Development. He was formerly the Minister of Treasury and Resources for the States of Guernsey. He is a past Partner / Director of PKF Guernsey, accountants and fiduciaries, and is a barrister and an accountant. Mr. Wilson was a senior partner with Latham & Watkins, where he was Global Co-Chair of the Mergers and Acquisitions Practice Group and former Chairman of both the National Litigation Department and the National Mergers and Acquisitions Litigation Practice Group. He is the former Managing Partner of Tennenbaum Capital Partners. Hugh Steven WilsonVice ChairmanSir Peter Middleton GCBChairmanSir Peter Middleton was until 2013 UK Chairman of Marsh & McLennan Companies and Chairman of Mercer Ltd. He was previously Permanent Secretary at HM Treasury and Group Chairman and Chief Executive of Barclays Bank PLC. Sir Peter remains active in a number of other business ventures which are set forth on our web site.David Lowe OBEDirectorMr. Lowe was Senior Jurat of the Guernsey Royal Court. He was previously the Chief Executive of Bucktrout & Company Limited and a former director of Lazard and Barclays Capital in Guernsey. Burford Capital Limited, the public parent, does
not have any employees itself.
Burford Capital Limited has a single class of
ordinary shares which are traded on the
AIM market of the London Stock Exchange.
Subsidiaries have issued bonds traded on the
Main Market of the London Stock Exchange.
The Board holds an in-person meeting every
quarter during which it reviews thoroughly
all aspects of the business’ strategy and
performance; the Directors spend at least one
evening and one full day together for each
meeting, and every Director attended all such
meetings held in 2017. Burford’s Chief Executive
Officer and Chief Investment Officer participated
in the entirety of each board meeting (other
than the closed session discussed below), joined
as appropriate by other senior members of
management. The Board reviews its performance
and Director compensation annually and
regularly discusses succession planning and
management oversight. The Board meets in
closed session without management present
at each of its meetings.
The Board also operates through three
committees composed entirely of independent
Directors, Audit (Parkinson (Chair) and Lowe),
Investment (Lowe (Chair) and Parkinson) and
Remuneration (Wilson (Chair), Middleton, Lowe
and Parkinson), all of which meet throughout the
year as required. The Remuneration Committee
reviews and approves compensation and LTIP
awards for all staff. No members of management
sit on the Board; while atypical for a UK business,
we believe this structure maximises independent
oversight of the business. The Board composition
is also dictated by the provisions of Burford’s
Articles, which limit the proportion of US persons
that can be directors, thus making it impossible to
add executives to the Board without expanding its
size considerably, which we consider undesirable
for both cost and functional reasons. Sir Peter
Middleton also chairs the Board of Burford Capital
Holdings (UK) Limited, a significant Burford
subsidiary, to ensure non-executive oversight.
Regulation
We are often asked about regulation, or more
precisely the potential for expanded regulation
of this business in a way that would be harmful
to it. We do not see that as a likely prospect in
the current environment.
38
We are of course already regulated in a number
of different ways. The SEC regulates our investment
management business. The FCA regulates our
legacy insurance business. The GFSC regulates
our new insurance business. The UKLA reviews our
debt prospectuses for our Main Market-traded
debt. AIM and our Nominated Adviser regulate
our activities as a public company. The SRA
regulates Burford Law. And we are of course
subject to a myriad of laws and regulations,
ranging from the Bribery Act and the FCPA to
AML and KYC regulations in many jurisdictions.
Beyond that alphabet soup of regulation, we are
subject to an unusual – but very comprehensive
– level of regulation because of our activities
within the justice system. Courts have inherent
power to regulate within the matters before them,
and unlike agency-based regulation which is
based on rules and spot-checking, litigation
comes with 100% regulatory oversight in that every
single matter is put before a judge – and judges
are not shy to exercise that inherent power when
it is warranted. For example, in cases where issues
have been raised about the presence of a
litigation funder, courts have occasionally
ordered in camera review of the funding contract.
Typically, courts find funding agreements to be
irrelevant to the merits of a case, but in the rare
cases where funding agreements are in conflict
with state law or ethical rules, courts have voided
or reformed the agreements. Thus, there is clear
protection for clients when litigation finance
providers overreach, but there is also no need for
some sort of new agency in that regard given the
adequacy of the existing remedies.
This is also a matter that varies by jurisdiction.
For example, the United States has a long tradition
of not regulating non-bank finance providers
who only deal with corporate clients, as Burford
does. Most states have quite a clear ceiling above
which sophisticated parties like Burford and its
corporate clients are free to contract without
regulatory oversight; for example, in New York,
that point is when our invested capital exceeds
$500,000, well below Burford’s smallest investment.
On the other hand, the UK does engage in
some regulation of litigation finance conduct,
as expressed in a Code of Conduct promulgated
by the Association of Litigation Funders, a self-
regulatory body that operates under the auspices
of the Ministry of Justice and that Burford helped
to found and remains actively involved in.
Burford Annual Report 2017REPORT TO SHAREHOLDERSContinued 39
We are pleased to present these results, which
show another year of growth and performance.
We continue to set our sights high in this rapidly
evolving industry, and look forward to communicating
our future progress to you, just as we thank you
for your support and enthusiasm for the business
to date.
Sir Peter Middleton GCB
Chairman
Christopher Bogart
Chief Executive Officer
Jonathan Molot
Chief Investment Officer
Some newer entrants to the market, such as
Singapore and Hong Kong, have also enacted
regulatory regimes largely focused on capital
adequacy and constraining abusive behavior.
There is no question that business lobbyists have
added litigation finance to the long list of litigation
activity to which they are opposed. However,
we have not seen any indication that there is
any groundswell of support for incremental
regulation of this sector. In the US, state and
federal legislatures, as well as the federal courts,
have declined to impose new regulations on
commercial litigation finance. Even if there were
support for additional regulation, it is far from
clear that such regulation would not in fact create
a further barrier to entry and protect Burford’s
market position.
At the end of the day, regulation is affected by
sentiment, and sentiment in the justice system
is very much in favor of litigation finance. This has
most recently been expressed by Lord Justice
Tomlinson, writing for the English Court of Appeal:
“Litigation funding is an accepted and judicially
sanctioned activity perceived to be in the public
interest … and a feature of modern litigation.”
In the US, a similar view prevails, as most recently
expressed by Professor Brian Fitzpatrick of
Vanderbilt Law School in a comprehensive
examination of the topic: “Many scholars believe
that this new financing helps to balance the
risk tolerance of plaintiffs and defendants and
thereby facilitates the resolution of litigation
in a way that more closely tracks the goals
of the substantive law.”12
12 Professor Fitzpatrick goes on to attribute the origins of what is today litigation finance to our own Jonathan Molot, Burford’s CIO:
“In a brilliant article in 2010 entitled Litigation Finance: A Market Solution to a Procedural Problem, Jonathan Molot made a
compelling case for third-party financing of lawsuits: in a world where plaintiffs and defendants sometimes have different risk
constraints, selling some or all of legal claims and defenses to unconstrained third parties offers us a more promising way to ensure
that lawsuits are resolved at the right “price” than procedural reforms to our legal system. Professor Molot’s article has been incredibly
influential, and has contributed significantly to the tremendous rise over the last few years of a new form of litigation financing in the
United States where plaintiffs sell a portion of their claims to third parties in exchange for upfront cash compensation.”
Burford Annual Report 2017 40
As previously announced, Burford made a
$150 million commitment to its new $500 million
complex strategies investment fund raised in June
2017. The combination of Burford’s commitment
to the fund and its management oversight result,
under the applicable accounting rules, in the
consolidation of that fund and some other small
funds into Burford’s financial statements.
In our view, it is confusing to include the interests
of fund investors other than Burford in our
discussion of performance, and we have thus
generally excluded the non-Burford portion of
such funds from our presentation of our financial
performance. The table below provides a full
reconciliation so that investors are able to
relate our performance discussion with our
published accounts.
Burford Annual Report 2017RECONCILIATIONReconciliation of Consolidated Statement of Comprehensive IncomeFor the year ended 31 December 2017US$’000ConsolidatedIFRSElimination ofthird-party fundinterests*Otheradjustments**Burford($53,641)$1,372–($52,269)($11,703)–$11,703–($3,838)–$3,838–($2,664)($535)–($3,199)Other incomeThird–party share of gains relating to interests in consolidated funds($863)$863––Investment income$321,102($2,868)–$318,234Investment management income$14,458$1,168–$15,626Insurance income$7,613––$7,613New initiatives income$2,968––$2,968Total incomeAmortisation of intangible assetBanking and brokerage feesOperating expensesOperating profit$342,614($1,372)–$341,242$273,432–$15,541$288,973($24,251)––($24,251)$249,181–$15,541$264,722Profit before taxFinance costs$123––$123$249,304–$15,541$264,845Profit after taxTaxation($28,206)––($28,206)Other comprehensive income$221,098–$15,541$236,639Total comprehensive income* Elimination of third-party fund interests is the net of the funds and adjustments and eliminations figures shown in Note 21 to the consolidated financial statements.** Other adjustments are to exclude the impact of the amortisation of intangible asset relating to the acquisition of GKC Holdings, LLC and investment banking and brokerage fees to assist in understanding the underlying performance of the Company. 41
Notes 6 and 7 to the consolidated financial statements also provide a reconciliation of the investments
and due from settlement of investments balances showing the interests of Burford excluding the
third-party interests in consolidated funds.
Burford Annual Report 2017Reconciliation of Consolidated Statement of Financial PositionAs at 31 December 2017US$’000ConsolidatedIFRSElimination ofthird-party fundinterests*Burford$23,833($295)$23,538$36,242($36,242)–$181,034–$181,034$1,275,012($98,529)$1,176,483Other non-current assetsCurrent assets$165$1,517$1,682Due from settlement of investments$5,474$1,298$6,772Receivables and prepayments$135,415($43,942)$91,473Cash and cash equivalents$224,341($82,805)$141,536Investments$1,075,941($93,764)$982,177Due from settlement of investments$3,083–$3,083New initiatives investments$10,189–$10,189Investment income receivable$4,765($4,765)–Total assetsNon-current assetsAssetsCurrent liabilitiesLiabilitiesFinancial liabilities at fair value through profit and lossPayablesDue to limited partners$1,499,353($181,334)$1,318,019$1,158($1,158)–Loan interest payableNon-current liabilities$5,397–$5,397$66,630($37,695)$28,935Other non-current liabilities$490,520–$490,520$634,159($143,639)$490,520Third-party interests in consolidated funds$143,639($143,639)–Total liabilities$700,789($181,334)$519,455Total net assets$798,564–$798,564* Elimination of third-party fund interests is the net of the funds and adjustments and eliminations figures shown in Note 21 to the consolidated financial statements.$1,676–$1,676Tax receivable$41,678($41,678)–Due from broker$39,933–$39,933Cash management investments 42
The Directors proposed and, following shareholder
approval, paid a final 2016 dividend of 6.48¢ per
share on 16 June 2017 to shareholders on the
register as at close of business on 26 May 2017.
This combined with an interim dividend of 2.67¢,
paid in October 2016, resulted in a full year 2016
dividend of 9.15¢.
Directors
The Directors of the Company who served during
the year and to date are as stated on page 37.
Directors’ interests
Number of
Shares
% Holding at
31 December
2017
Sir Peter Middleton
Hugh Steven Wilson
David Charles Lowe
100,000
200,000
200,000
0.05
0.10
0.10
Furthermore, at 31 December 2017, Hugh Steven
Wilson holds a $708,000 interest in the consolidated
funds and David Charles Lowe holds 300,000
bonds as issued by the Group’s subsidiary Burford
Capital PLC.
Statement of Directors’ responsibilities in
relation to the Group financial statements
The Directors are responsible for preparing the
Annual Report and the Group financial statements
in accordance with applicable Guernsey law and
International Financial Reporting Standards.
Under Company Law, the Directors must not
approve the Group financial statements unless
they are satisfied that they give a true and
fair view of the financial position, financial
performance and cash flows of the Group
for that period. In preparing the Group financial
statements the Directors are required to:
■ Select suitable accounting policies in
accordance with IAS 8: Accounting Policies,
Changes in Accounting Estimates and
Errors and then apply them consistently;
■ Present information, including accounting
policies, in a manner that provides
relevant, reliable, comparable and
understandable information;
The Directors present their Annual Report and the
audited consolidated financial statements of the
Group for the year ended 31 December 2017.
Business activities
Burford Capital Limited (the “Company”) and its
subsidiaries (the “Subsidiaries”) (together the
“Group”) provide investment capital, investment
management, financing and risk solutions with
a focus on the legal sector. The Company is
incorporated under The Companies (Guernsey)
Law, 2008. Shares in the Company were admitted
to trading on AIM, a market operated by the
London Stock Exchange, on 21 October 2009.
Corporate governance
The Directors recognise the high standards of
corporate governance demanded of listed
companies. The Company has adopted and
complied with the Guernsey Code of Corporate
Governance (the “Code”). The Code includes
a number of the principles contained in the
UK Corporate Governance Code. While the
Company is not required to comply with the
Code, it has nevertheless elected to do so.
Results and dividend
The results for the year are set out in the
Consolidated Statement of Comprehensive
Income on page 53.
The Directors propose to pay a final dividend of
7.95¢ (United States cents) per ordinary share in
the capital of the Company during 2018. Together
with the interim dividend of 3.05¢ paid in
November 2017, this makes a total 2017 dividend
of 11.00¢. A resolution for the declaration of the
final dividend shall be put to the shareholders of
the Company at the Company’s forthcoming
Annual General Meeting (scheduled for 22 May
2018). If approved by shareholders, the record
date for this dividend will be 1 June 2018 and
payment of this dividend would then occur on
22 June 2018.
Because the Company is a dollar-denominated
business, dividends are declared in US Dollars.
For UK shareholders, those dividends will then be
converted into Sterling shortly before the time of
payment and paid in Sterling. Any UK shareholder
who would like to receive dividends in US Dollars
instead of Sterling should contact the Registrar.
US shareholders will automatically receive their
dividends in Dollars unless they request otherwise.
Burford Annual Report 2017DIRECTORS’ REPORT 43
Disclosure of Information to Auditors
So far as each of the Directors is aware, there
is no relevant audit information of which the
Company’s auditor is unaware, and each has
taken all the steps he ought to have taken as
a Director to make himself aware of any relevant
audit information and to establish that the
Company’s auditor is aware of that information.
Auditors
Ernst & Young LLP have expressed their willingness to
continue in office and a resolution to re-appoint them
will be proposed at the Annual General Meeting.
Charles Parkinson
Director
13 March 2018
■ Provide additional disclosures when
compliance with the specific requirements in
IFRS is insufficient to enable users to understand
the impact of particular transactions, other
events and conditions on the Group’s financial
position and financial performance;
■ State that the Group has complied with IFRS,
subject to any material departures disclosed
and explained in the financial statements; and
■ Make judgements and estimates that are
reasonable and prudent.
The Directors are responsible for keeping
adequate accounting records that are sufficient
to show and explain the Group’s transactions
and disclose with reasonable accuracy at any
time the financial position of the Group and
enable them to ensure that the Group financial
statements comply with The Companies
(Guernsey) Law, 2008 and Article 4 of the IAS
Regulation. They are also responsible for
safeguarding the assets of the Group and hence
for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Burford Annual Report 2017 44
Use of our report
This report is made solely to the company’s
members, as a body, in accordance with Section
262 of the Companies (Guernsey) Law, 2008. Our
audit work has been undertaken so that we might
state to the company’s members those matters we
are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume
responsibility to anyone other than the company
and the company’s members as a body, for our
audit work, for this report, or for the opinions we
have formed.
Conclusions relating to going concern
We have nothing to report in respect of the
following matters in relation to which the ISAs (UK)
require us to report to you where:
■ the directors’ use of the going concern basis of
accounting in the preparation of the financial
statements is not appropriate; or
■ the directors have not disclosed in the financial
statements any identified material uncertainties
that may cast significant doubt about the
Group’s ability to continue to adopt the going
concern basis of accounting for a period of at
least twelve months from the date when the
financial statements are authorised for issue.
Opinion
We have audited the consolidated financial
statements of Burford Capital Limited and its
subsidiaries (together the ‘Group’) for the year
ended 31 December 2017 which comprise the
Consolidated Statement of Comprehensive
Income, the Consolidated Statement of Financial
Position, the Consolidated Statement of Cash
Flows, the Consolidated Statement of Changes
in Equity and the related notes 1 to 28, including
a summary of significant accounting policies.
The financial reporting framework that has been
applied in their preparation is applicable law and
International Financial Reporting Standards.
In our opinion, the financial statements:
■ give a true and fair view of the state of the
Group’s affairs as at 31 December 2017 and
of its profit for the year then ended;
■ have been properly prepared in accordance
with International Financial Reporting
Standards; and
■ have been properly prepared in accordance
with the requirements of the Companies
(Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (ISAs
(UK)) and applicable law. Our responsibilities
under those standards are further described in
the Auditor’s responsibilities for the audit of the
financial statements section of our report below.
We are independent of the Group in accordance
with the ethical requirements that are relevant
to our audit of the financial statements in the UK,
including the FRC’s Ethical Standard as applied
to listed entities, and we have fulfilled our other
ethical responsibilities in accordance with these
requirements.
We believe that the audit evidence we have
obtained is sufficient and appropriate to provide
a basis for our opinion.
Burford Annual Report 2017INDEPENDENT AUDITORS’ REPORT 45
Overview of our audit approach
Key audit matters
■ Incorrect valuation of investments
■ Incorrect goodwill impairment assessment and allocation to cash
generating units (CGUs)
■ Incorrect calculation of tax balances
■ Incorrect recognition of investment management income and
insurance income
All of the above matters are considered to be significant risks. The first and
third risks and revenue recognition of insurance income are consistent with
the 2016 audit.
The above risks associated with goodwill impairment and revenue recognition
for the investment management income stream are new in 2017 as a result
of the acquisition of GKC Holdings LLC (“GKC”), the parent entity of Gerchen
Keller Capital, on 14 December 2016.
Materiality
■ Overall group materiality of US$8.0 million which represents 1% of Total
net assets.
Key audit matters
Key audit matters are those matters that, in our
professional judgement, were of most significance
in our audit of the financial statements of the
current period and include the most significant
assessed risks of material misstatement (whether
or not due to fraud) that we identified. These
matters included those which had the greatest
effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the
efforts of the engagement team. These matters
were addressed in the context of our audit of
the financial statements as a whole, and in
our opinion thereon, and we do not provide
a separate opinion on these matters.
Burford Annual Report 2017 46
Key observations communicated
to the Audit Committee
The valuation of investments
is determined to be within an
acceptable range of fair values.
Appropriate inputs to the
valuations were used for
investments tested and
management judgements and
estimates are considered to
be reasonable and supported
by relevant evidence. The
investment valuations
calculated by management
are consistent with the Burford
accounting policy and detailed
valuation guidelines and are
within an acceptable range.
Based on our procedures
performed we had no matters
to report to management.
Our response to the risk
We obtained an understanding
of management’s processes
and controls for determining the
fair value of investments by
performing a walkthrough
procedure.
For all investments where there
has been a change in fair value,
we tested the assumptions,
performed external research on
the status of litigation, obtained
supporting documentation,
considered any relevant
secondary market trading and
challenged management’s
judgements. Where there had
not been a change to assessed
fair value during the year, we
tested a sample of investments
applying a combination of
methods, including obtaining
other supporting information
as appropriate and reviewing
the contract documentation,
if acquired in the current period.
Additionally we performed
external research on the status
of litigation. We held discussions
with management to determine
the qualitative factors and
ongoing legal proceedings
and whether there have been
any changes in the facts and
circumstances that suggest
that the fair valuation is not
appropriate. In all cases above,
we considered whether the
investments tested were
assessed for fair value consistent
with the detailed fair value
policy guidelines maintained
by management.
Continued
Risk
Incorrect valuation
of investments
(US$1,075.9 million,
2016: US$559.7 million)
Refer to the Accounting policies
(pages 64 to 66); and Note 6 of
the Consolidated Financial
Statements (page 73)
Owing to the illiquid nature
of these investments, the
assessment of fair valuation is
highly subjective and requires
a number of significant and
complex judgements to be made
by management. The exit value
will be determined for each
investment by the contractual
entitlement, the underlying risk
profile of the litigation, a trial
or an appellate outcome or other
case events, any other
agreements in respect of
settlement discussions or
negotiations as well as the
credit risk associated with the
investment value and any
relevant secondary
market activity.
There is a risk that inaccurate
judgements made in the
assessment of fair value, in
particular in respect of the
expected return on the legal
judgment and the application
of discounts could lead to
the incorrect valuation of an
investment. This could materially
misstate the value of the
investments in the Consolidated
Statement of Financial Position
and relevant fair value gain
in the Consolidated Statement
of Comprehensive Income.
There is also the risk that
management may influence
the significant judgements and
estimations in respect of the
valuation of investments.
Burford Annual Report 2017INDEPENDENT AUDITORS’ REPORT Risk
Our response to the risk
Key observations communicated
to the Audit Committee
47
At our request, management
engaged an independent
counsel to perform an annual
review of the fair value of a
specific investment selected by
us. The review focussed on a
legal judgment and subsequent
developments arising thereon
together with the application
of the valuation policy and the
associated credit risk in arising
at fair value. We reviewed his
conclusions, independence
and objectivity and discussed
with him the approach and
judgements considered in
reaching his conclusion.
We engaged our valuation
specialists to review a sample
of larger and higher risk
investments to:
■ use their relevant industry
knowledge and experience
to assess and corroborate
the valuation metrics;
■ assist us to determine
whether the methodologies
used and judgements
applied to value investments
were appropriate and
consistent.
We performed back-testing
procedures on cases concluded
in 2017 and, combining this
with previous history, continued
to challenge the ongoing
valuation process and
methodology of management
which may involve significant
judgements given the
dependency on inherently
unpredictable trial outcomes.
Burford Annual Report 2017 48
Key observations communicated
to the Audit Committee
Based on the procedures
performed, we concluded that
the overall total valuation of
goodwill is appropriately stated
and that there was no material
goodwill impairment identified
in respect of the year.
Continued
Risk
Incorrect goodwill impairment
assessment and allocation
to the cash generating units
(CGUs)
(US$134.0 million, 2016:
US$133.9 million)
Determining whether the
carrying value of goodwill
is recoverable requires
management to make
significant estimates concerning
the estimated future cash flows
and associated discount rates,
returns and growth rates based
on management’s view of future
business prospects.
Allocating the goodwill
across the CGUs also requires
significant judgements in
respect of future returns which
once fixed is the basis used for
the carrying value.
Refer to the Accounting policies
(page 63); and Note 18 of the
Consolidated Financial
Statements (pages 80 to 81)
Our response to the risk
We assessed the
reasonableness of cash flow
projections and compared key
inputs, such as the discount
rates, investment returns and
growth rates to externally
available industry data and
the group’s own historical data
and performance. With the
assistance of our own valuation
and modelling specialists,
we assessed critically the
assumptions and methodologies
used to forecast value in use
for the two CGUs identified
by management. We also
validated the logical integrity
and mathematical accuracy
of the model.
We reviewed the accounting
paper prepared by management
which covered the allocation of
goodwill to the investment and
investment management CGUs
based on the expected returns
from the synergy of the acquisition
of GKC and validated the inputs
used to underlying records
and agreements.
Burford Annual Report 2017INDEPENDENT AUDITORS’ REPORT 49
Key observations communicated
to the Audit Committee
Based on the procedures
performed, we concluded that
the tax balances were not
materially misstated and are
properly disclosed in the
financial statements.
Risk
Our response to the risk
Incorrect calculation of
tax balances
With the involvement of tax
specialists in our team:
■ we obtained the deferred tax
calculations and assessed
the recoverability of the
deferred tax assets. We
evaluated the evidence
supporting the reversal of
temporary differences in the
future and whether there
were sufficient taxable profits
available against which the
temporary difference can
be utilised.
■ we performed a review of
the realised and unrealised
gains arising on investments
to ensure that any tax
aspects are appropriately
recorded.
■ we reviewed the transfer
pricing report and
considered the impact
on the Group.
■ we have read relevant tax
advice received by the
Group and considered its
application to the Group. We
also considered the impact
of the US Tax Reform in order
to identify any relevant tax
consequences.
In addition we tested the
disclosures in the financial
statements and ensured
they complied with relevant
accounting standards.
(Net deferred tax asset
US$10.4 million, 2016: US$9.3
million; Tax receivable US$1.7
million, 2016: US$1.4 million in
the consolidated statement
of financial position)
(US$0.1 million, 2016: US$4.8
million in the consolidated
statement of comprehensive
income)
The Group is exposed to a
number of tax regimes across
the different tax jurisdictions
in which it operates.
Income tax is calculated on
the basis of the tax laws
enacted or substantively
enacted at the balance sheet
date in the countries where the
Group operates and generates
taxable items. Management
establish provisions where
appropriate on the basis
of amounts expected
to be paid to tax authorities.
Deferred tax is recognised on
temporary differences arising
between the tax bases of
investments and their carrying
amounts as disclosed in the
financial statements. This risk
is related to the recoverability
of the deferred tax assets
recognised.
Refer to the Accounting policies
(page 67); and Note 4 of the
Consolidated Financial
Statements (pages 68 to 69)
Burford Annual Report 2017 50
Key observations communicated
to the Audit Committee
Based on the procedures
performed, we concluded that
the investment management
income and the insurance
income are not materially
misstated.
Continued
Risk
Incorrect recognition of
investment management
income and insurance income
(US$14.5 million and US$7.6
million respectively, 2016:
US$0.6 million and US$12.9
million respectively)
Investment management fees
are composed of management
fees and performance fees.
Management fees are
calculated as a percentage
of the invested or committed
capital of the fund (depending
on the fund specific terms)
managed by the Group while
performance fees are earned
when relevant contractual
realised performance levels
on exited investments are
exceeded.
Insurance income is profit
commission and the main risk
for this revenue stream relates
to the occurrence (premium
values in the insurance
database not updated on a
timely basis) and measurement
(premium values not reflective
of updated correspondence
with solicitors) of revenue.
Refer to the Accounting policies
(page 62)
Our response to the risk
For investment management
income:
We recalculated the
management fees ensuring
they were in line with the
relevant limited partnership
and operating agreements
and validating all external
inputs used to source data.
We recalculated the
performance fees income due
and received in accordance
with the contractual
commitment under the relevant
agreements and agreed all
inputs used to source data.
For insurance income:
We performed a walkthrough
to understand the revenue
process of all streams of
insurance income and methods
of recognition and ensured
that the accounting policy on
revenue recognition is in line
with relevant accounting
standards.
For a sample of policies relating
to insurance income we tested
all components in the Insurance
Business Account (IBA) which
forms part of this calculation
to source data.
An overview of the scope of our audit
Tailoring the scope for an integrated audit team
Our assessment of audit risk, our evaluation of
materiality and our allocation of performance
materiality determine our audit scope for
each entity within the Group. Taken together,
this enables us to form an opinion on the
consolidated financial statements. We take into
account size, risk profile, the organisation of the
group and effectiveness of group-wide controls,
changes in the business environment and other
factors when assessing the level of work to be
performed at each entity.
In assessing the risk of material misstatement to
the Group financial statements, and to ensure
we had adequate quantitative coverage of
significant accounts in the financial statements
we performed an audit of the underlying financial
information covering all material entities.
All audit work was performed by one integrated
audit team with one audit partner across the
whole group. The team comprised individuals
from Guernsey (“Group audit team”) and the
United Kingdom (“Funds and Insurance team”)
and we operated across both jurisdictions. We
performed the audit procedures and responded
to the risks identified as described above.
Burford Annual Report 2017INDEPENDENT AUDITORS’ REPORT 51
Our application of materiality
We apply the concept of materiality in planning
and performing the audit, in evaluating the effect
of identified misstatements on the audit and in
forming our audit opinion.
We evaluate any uncorrected misstatements
against both the quantitative measures of
materiality discussed above and in light of other
relevant qualitative considerations in forming
our opinion.
Materiality
The magnitude of an omission or misstatement
that, individually or in the aggregate, could
reasonably be expected to influence the
economic decisions of the users of the financial
statements. Materiality provides a basis for
determining the nature and extent of our audit
procedures.
We determined materiality for the Group to be
US$8.0 million (2016: US$5.9 million), which is 1%
(2016: 1%) of Total net assets. We believe that Total
net assets provides us an appropriate level of
basis as the group’s objective is to provide
attractive levels of dividends and capital growth.
During the course of our audit, we reassessed
initial materiality and accordingly updated the
materiality using yearend figures.
Performance materiality
The application of materiality at the individual
account or balance level. It is set at an amount
to reduce to an appropriately low level the
probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality.
On the basis of our risk assessments, together
with our assessment of the Group’s overall
control environment, our judgement was that
performance materiality was 75% (2016: 50%)
of our planning materiality, namely US$6.0 million
(2016: US$5.9 million). We have increased
performance materiality due to the strengthening
and increased maturity of relevant controls and
processes in the Group.
Reporting threshold
An amount below which identified misstatements
are considered as being clearly trivial.
We agreed with the Audit Committee that we
would report to them all uncorrected audit
differences in excess of US$0.4 million (2016:
US$0.3 million), which is set at 5% of planning
materiality, as well as differences below that
threshold that, in our view, warranted reporting on
qualitative grounds. There was no change in the
threshold used from prior year.
Other information
The other information comprises the information
included in the annual report set out on pages 1
to 43 other than the financial statements and
our auditor’s report thereon. The directors are
responsible for the other information.
Our opinion on the financial statements does
not cover the other information and, except to
the extent otherwise explicitly stated in this report,
we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial
statements, our responsibility is to read the other
information and, in doing so, consider whether
the other information is materially inconsistent
with the financial statements or our knowledge
obtained in the audit or otherwise appears
to be materially misstated. If we identify such
material inconsistencies or apparent material
misstatements, we are required to determine
whether there is a material misstatement in the
financial statements or a material misstatement
of the other information. If, based on the work
we have performed, we conclude that there is
a material misstatement of the other information,
we are required to report that fact.
We have nothing to report in this regard.
Matters on which we are required to report
by exception
We have nothing to report in respect of the
following matters in relation to which the
Companies (Guernsey) Law, 2008 requires us
to report to you if, in our opinion:
■ proper accounting records have not been kept
by the company, or proper returns adequate
for our audit have not been received from
branches not visited by us; or
■ the financial statements are not in agreement
with the company’s accounting records and
returns; or
■ we have not received all the information and
explanations we require for our audit.
Burford Annual Report 2017 52
Notes:
1. The maintenance and integrity of Burford Capital Limited web
site is the responsibility of the directors; the work carried out
by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements
since they were initially presented on the web site.
2. Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from
legislation in other jurisdictions.
Continued
Responsibilities of directors
As explained more fully in the directors’
responsibilities statement set out on pages 42
to 43, the directors are responsible for the
preparation of the financial statements and for
being satisfied that they give a true and fair view,
and for such internal control as the directors
determine is necessary to enable the preparation
of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors
are responsible for assessing the group’s ability
to continue as a going concern, disclosing, as
applicable, matters related to going concern and
using the going concern basis of accounting
unless the directors either intend to liquidate the
group or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance
about whether the financial statements as a whole
are free from material misstatement, whether due
to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud
or error and are considered material if, individually
or in the aggregate, they could reasonably be
expected to influence the economic decisions
of users taken on the basis of these financial
statements.
A further description of our responsibilities for
the audit of the financial statements is located
on the Financial Reporting Council’s website at
https://www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor’s report.
Ernst & Young LLP
London
13 March 2018
Burford Annual Report 2017INDEPENDENT AUDITORS’ REPORT
C O N S O L I D A T E D S T A T E M E N T O F C O M P R E H E N S I V E I N C O M E
53
for the year ended 31 December 2017
Income
Investment income
Investment management income
Insurance income
New initiatives income
Net loss on equity securities
Cash management income and bank interest
Foreign exchange gains
Third-party share of gains relating to interests in
consolidated funds
Total income
Operating expenses
Amortisation of intangible asset
Banking and brokerage fees
Operating profit
Finance costs
Profit before tax and acquisition costs
Non-recurring acquisition costs
Profit for the year before taxation
Taxation
Profit for the year after taxation
Attributable to contingent preference shares
Attributable to ordinary shareholders
Other comprehensive income
Exchange differences on translation of foreign operations
on consolidation
Total comprehensive income for the year
Attributable to contingent preference shares
Attributable to ordinary shareholders
Basic profit per ordinary share
Diluted profit per ordinary share
Basic comprehensive income per ordinary share
Diluted comprehensive income per ordinary share
Notes
2017
$’000
2016
$’000
6
8
9
10
11
17
14
4
24
24
24
24
321,102
14,458
7,613
2,968
(6,953)
2,650
1,639
140,187
647
12,923
8,849
–
555
242
(863)
–
342,614
(53,641)
(11,703)
(3,838)
273,432
(24,251)
249,181
–
249,181
123
163,403
(39,026)
(271)
–
124,106
(14,108)
109,998
(5,945)
104,053
4,817
249,304
108,870
–
249,304
600
108,270
249,304
108,870
(28,206)
34,921
221,098
143,791
–
221,098
600
143,191
Cents
119.72
119.55
106.18
106.02
Cents
52.89
52.89
69.94
69.94
The notes on pages 59 to 91 form an integral part of these consolidated financial statements.
Burford Annual Report 2017 C O N S O L I D A T E D S T A T E M E N T O F F I N A N C I A L P O S I T I O N
54
as at 31 December 2017
Assets
Non-current assets
Investments
Due from settlement of investments
New initiatives investments
Equity securities
Investment income receivables
Deferred tax assets
Goodwill
Intangible asset
Tangible fixed assets
Current assets
Due from settlement of investments
Due from settlement of new initiatives investments
Receivables and prepayments
Tax receivable
Due from broker
Cash management investments
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Investments payable
Payables
Financial liabilities at fair value through profit and loss
Due to limited partners
Loan interest payable
GKC acquisition purchase price payable
Acquisition costs payable
Non-current liabilities
Deferred tax liability
Investment subparticipations
Third-party interests in consolidated funds
Loan capital
Loan notes
Total liabilities
Total net assets
Notes
2017
$’000
2016
$’000
6
7
8
9
6
4
18
17
7
12
21
10
1,075,941
3,083
10,189
6,058
4,765
10,863
134,022
27,692
2,399
559,687
29,814
2,337
–
–
9,498
133,932
39,395
2,156
1,275,012
776,819
165
–
5,474
1,676
41,678
39,933
135,415
9,554
747
10,240
1,402
–
11,098
158,371
224,341
191,412
1,499,353
968,231
13
21
14,15
13
–
23,833
36,242
1,158
5,397
–
–
9,505
17,622
–
–
4,139
57,863
5,858
66,630
94,987
4
21
14
15
437
3,152
143,639
486,931
–
227
2,865
–
230,243
43,750
634,159
277,085
700,789
372,072
798,564
596,159
Burford Annual Report 2017 C O N S O L I D A T E D S T A T E M E N T O F F I N A N C I A L P O S I T I O N
55
as at 31 December 2017 (continued)
Represented by:
Ordinary share capital
Contingent share capital – deferred consideration
Other capital reserve
Revenue reserve
Foreign currency translation reserve
Capital redemption reserve
Total equity shareholders’ funds
Notes
22
22
2017
$’000
2016
$’000
351,249
13,500
1,152
423,220
9,581
(138)
351,249
13,500
–
193,761
37,787
(138)
798,564
596,159
The notes on pages 59 to 91 form an integral part of these consolidated financial statements.
The financial statements on pages 53 to 91 were approved by the Board of Directors on 13 March 2018
and were signed on its behalf by:
Charles Parkinson
Director
13 March 2018
Burford Annual Report 2017 C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
56
for the year ended 31 December 2017
Cash flows from operating activities
Profit for the year before tax
Adjusted for:
Realised (gains) on realisation of investments
Realised (gains) on new initiatives investments
Realised (gains)/losses on disposal of cash management investments
Interest and other income from investment activities
New initiatives income
Fair value change on investments
Fair value change on new initiatives investments
Fair value change on equity securities
Fair value change on financial liabilities at fair value through profit and loss
Fair value change on cash management investments
Unrealised (gain) on forward foreign currency contract
Finance costs
Amortisation of intangible asset
Share-based payments expense
Depreciation of tangible fixed assets
Effect of exchange rate changes
Changes in working capital
Proceeds from investments
Proceeds from decrease in due from settlements of investments
Proceeds from new initiatives investments
Funding of investments
Funding of new initiatives investments
Net proceeds from (purchases)/disposals of cash management investments
(Increase) in investment income receivables
(Increase) in due from broker
Decrease/(increase) in receivables
Increase in payables
Proceeds from financial liabilities at fair value through profit and loss
Taxation paid
Increase in third-party interests in consolidated funds
2017
$’000
2016
$’000
249,181
104,053
(122,712)
–
(70)
(1,527)
(1,837)
(191,830)
(1,096)
6,953
(268)
(823)
–
24,251
11,703
1,152
444
(186)
(47,474)
(7,514)
1,101
(4,895)
(2,419)
(87,818)
1,110
–
–
222
(128)
14,108
271
–
307
(47,421)
(26,665)
(76,497)
363,889
23,109
2,623
(569,564)
(6,467)
(27,942)
(4,765)
(41,678)
2,528
3,524
36,510
(1,064)
143,639
180,772
22,241
13,135
(275,698)
(4,274)
127,785
–
–
(10,636)
22,358
–
(5,854)
–
Net cash (outflow) from operating activities
(102,323)
(6,668)
Cash flows from financing activities
Issue of loan capital and loan notes
Issue expenses – loan capital
Interest paid on loan capital and loan notes
Repayment of loan notes
Dividends paid on ordinary shares
Dividends paid on contingent preference shares
Net cash inflow from financing activities
Cash flows from investing activities
Purchases of tangible fixed assets
Purchase of subsidiary
Settlement of outstanding creditor relating to prior year’s acquisition of subsidiary
Net cash (outflow) from investing activities
Net (decrease)/increase in cash and cash equivalents
225,803
(3,170)
(22,680)
(43,750)
(19,845)
–
189,590
(2,042)
(11,994)
–
(17,059)
(600)
136,358
157,895
(650)
–
(57,863)
(1,570)
(35,418)
–
(58,513)
(36,988)
(24,478)
114,239
Burford Annual Report 2017 C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
57
for the year ended 31 December 2017 (continued)
Reconciliation of net cash flow to movements in cash and cash equivalents
Cash and cash equivalents at beginning of year
(Decrease)/increase in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
Supplemental Disclosure
Cash received from interest income
Asset received in kind to settle due from settlement of investments
2017
$’000
2016
$’000
158,371
(24,478)
1,522
45,417
114,239
(1,285)
135,415
158,371
2017
$’000
2,986
13,011
2016
$’000
6,862
–
The notes on pages 59 to 91 form an integral part of these consolidated financial statements.
Burford Annual Report 2017 C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N E Q U I T Y
58
for the year to 31 December 2017
31 December 2017
As at 1 January 2017
Profit for the year
Other comprehensive
income
Share-based payments
Dividends paid
(Note 25)
Balance at
Share
capital
$’000
Contingent
share
capital
$’000
Other
capital
reserve
$’000
Revenue
reserve
$’000
351,249
–
13,500
–
–
–
193,761
249,304
Foreign
currency
consol-
idation
reserve
$’000
37,787
–
Capital
redemp-
tion
reserve
$’000
Total
equity
share-
holders’
funds
$’000
(138)
–
596,159
249,304
–
–
–
–
–
–
–
1,152
–
–
(28,206)
–
–
(19,845)
–
–
–
–
(28,206)
1,152
(19,845)
31 December 2017
351,249
13,500
1,152
423,220
9,581
(138)
798,564
Conti-
ngent
share
capital
$’000
Revenue
reserve
$’000
Foreign
currency
consol-
idation
reserve
$’000
Capital
redem-
ption
reserve
$’000
Equity
attribut-
able to
ordinary
share-
holders
$’000
Conti-
ngent
Prefe-
rence
Shares
$’000
Total
equity
share-
holders’
funds
$’000
– 102,550
– 108,270
2,866
–
– 434,165
– 108,270
(138) 434,027
600 108,870
–
–
–
–
(17,059)
34,921
–
–
–
–
–
–
–
–
–
–
34,921
(17,059)
–
34,921
(600) (17,659)
22,500
–
22,500
–
13,500
–
13,500
(138)
(138)
138
–
31 December 2016
As at 1 January 2016
Profit for the year
Other comprehensive
income
Dividends paid (Note 25)
Issue of share capital
Share
capital
$’000
328,749
–
–
–
(Note 22)
22,500
Issue of contingent share
capital – deferred
consideration
(Note 22)
Redemption of
contingent preference
shares
Balance at
–
–
13,500
–
31 December 2016
351,249
13,500 193,761
37,787
(138) 596,159
– 596,159
The notes on pages 59 to 91 form an integral part of these consolidated financial statements.
Burford Annual Report 2017 N O T E S T O T H E C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
59
1. Legal form and principal activity
Burford Capital Limited (the “Company”) and its subsidiaries (the “Subsidiaries”) (together the
“Group”) provide investment capital, investment management, financing and risk solutions with
a focus on the legal sector.
The Company was incorporated under The Companies (Guernsey) Law, 2008 (the “Law”) on
11 September 2009. Shares in the Company were admitted to trading on AIM, a market operated
by the London Stock Exchange, on 21 October 2009.
These financial statements cover the year from 1 January 2017 to 31 December 2017.
2. Principal accounting policies
The principal accounting policies applied in the preparation of these consolidated financial
statements are set out below.
Basis of accounting
The consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”). IFRS requires management to make judgements, estimates
and assumptions that affect the application of policies and the reported amounts of assets and
liabilities, income and expenses. The estimates and associated assumptions are based on experience
and various other factors that are believed to be reasonable under the circumstances, the results
of which form the basis of making judgements about the carrying values of assets that are not
apparent from other sources. Actual results may differ from these estimates. The consolidated
financial statements are presented in US Dollars and are rounded to the nearest $’000 unless
otherwise indicated.
We have renamed the litigation investments segment to be called investments as we have increasingly
moved away from the use of “litigation” as a definer of our business as our investment scope has
broadened to encompass many different kinds of legal and regulatory risk.
Significant estimates and judgements
The most significant estimates relate to the valuation of investments at fair value through profit or loss
which are determined by the Group.
Fair values are determined on the specifics of each investment and will typically change upon an
investment having a return entitlement or progressing in a manner that, in the Group’s judgement,
would result in a Third-party being prepared to pay an amount different from the original sum invested
for the Group’s rights in connection with the investment. Positive, material progression of an investment
will give rise to an increase in fair value whilst adverse outcomes give rise to a reduction. The quantum
of change depends on the potential future stages of investment progression. The consequent
effect when an adjustment is made is that the fair value of an investment with few remaining stages
is adjusted closer to its predicted final outcome than one with many remaining stages.
In litigation matters, before a judgment is entered following trial or other adjudication, the key stages
of any matter and their impact on fair value is substantially case specific but may include the motion
to dismiss and the summary judgment stages. Following adjudication, appeals proceedings provide
further opportunities to re-assess the fair value of an investment.
The estimation of fair value is inherently uncertain. Awards and settlements are hard to predict and
often have a wide range of possible outcomes. Furthermore, there is much unpredictability in the
actions of courts, litigants and defendants because of the large number of variables involved and
consequent difficulty of predictive analysis. In addition, there is little activity in transacting investments
and hence little relevant data for benchmarking the effect of investment progression on fair value,
although the existence of secondary market transactions is a valuation input.
Burford Annual Report 2017 60
Continued
2. Principal accounting policies continued
There is a significant estimate around deferred tax as it is based on the tax expected to be paid in the
future and that estimate is based on factors including the structuring of investments for tax efficiency.
Testing goodwill for impairment involves a significant amount of judgement. This includes the
identification of independent CGUs and the allocation of goodwill to these units based on which units
are expected to benefit from the acquisition. Cash flow projections necessarily take into account
changes in the market in which a business operates including the level of growth, competitive activity,
and the impacts of regulatory change. Determining both the expected pre-tax cash flows and the
risk-adjusted interest rate appropriate to the CGUs requires the exercise of judgement. The estimation
of pre-tax cash flows is sensitive to the periods for which the projections are made and to assumptions
regarding long-term sustainable cash flows.
Control of funds and affiliates
In connection with investment funds and other investment-related entities where the Group does
not own 100% of the entity in question, the Group makes judgements about whether it is required
to consolidate such entities by applying the factors set forth in the relevant accounting standards,
including but not limited to the Group’s equity and economic ownership interest, the economic
structures in use in the entity, the level of control the Group has over the entity through the entity’s
structure or any relevant contractual agreements, and the rights of other investors.
Non-controlling interests where the Group does not own 100% of a consolidated entity are classified
as financial liabilities and recorded as third-party interest in consolidated funds on the consolidated
statement of financial position when they contain an obligation to transfer a financial asset to another
entity. Accordingly, third-party share of gains or losses relating to interest in consolidated funds is
treated as a reduction or increase, respectively, of income on the consolidated statement of
comprehensive income.
Basis of consolidation
The consolidated financial statements comprise the financial statements of Burford Capital Limited
and its Subsidiaries. All the Subsidiaries are consolidated in full from the date of acquisition.
The Subsidiaries’ accounting policies and financial year end are consistent with those of
the Company.
All intercompany transactions, balances and unrealised gains and losses on transactions between
Group companies are eliminated in full.
Basis of preparation
The financial statements have been prepared on a going concern basis under the historical cost
convention adjusted to take account of the revaluation of certain of the Group’s financial assets to
fair value.
Early adoption of IFRS 9: Financial Instruments
The Group adopted the classification and measurement rules from an earlier version of IFRS 9
Financial Instruments (2010) with a date of initial application of 1 January 2012. The latest version
will not further impact Burford’s classification or measurement of financial instruments. The Group
elected to adopt it early, with AIM’s consent, to achieve reporting consistency between unrealised
and realised gains and losses that was not available under the previous accounting policy.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 61
2. Principal accounting policies continued
New accounting pronouncements not yet effective
The following issued standards and interpretations, which are not yet effective, have not been
adopted in these financial statements.
IFRS 9
IFRS 15
IFRIC 22
IFRS 2
IFRS 16
IFRIC 23
Financial Instruments
Revenue from Contracts with Customers
Foreign Currency Transactions and Advance Consideration
Classification and Measurement of Share-based Payment Transactions
– Amendments to IFRS 2
Leases
Uncertainty over Income Tax Treatments
Effective Date
1 Jan 2018
1 Jan 2018
1 Jan 2018
1 Jan 2018
1 Jan 2019
1 Jan 2019
The Group intends to adopt the standards, if applicable, when they become effective. The Group
anticipates that the adoption of some of these standards and interpretations in the future will not have
a material impact on the financial statements of the Company, except for IFRS 9 and IFRS 15 which
have been qualitatively explained below.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39
Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings
together all three aspects of the accounting for financial instruments project: classification and
measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on
or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective
application is required, but the provision of comparative information is not compulsory. For hedge
accounting, the requirements are generally applied prospectively, with some limited exceptions.
The Group plans to adopt the new standard by the required effective date.
(a) Classification and measurement
There are no changes in the classification and measurement requirements of IFRS 9.
(b) Impairment
The most significant effect of the adoption of IFRS 9 will be on the assets classified at amortised cost. IFRS
9 requires the Group to record expected credit losses (ECLs) on its debt securities, loans, amounts due
from settlement of both investments and new initiatives investments and trade receivables, either on a
12-month or lifetime basis. At 31 December 2017, assets classified at amortised cost totalled $4,748,000.
The Group has determined there will be no material impact of ECLs on the financial statements.
(c) Hedge accounting
The Group has not applied hedge accounting.
Burford Annual Report 2017 62
Continued
2. Principal accounting policies continued
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising
from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the
consideration to which an entity expects to be entitled in exchange for transferring goods or services
to a customer.
The new revenue standard will supersede all current revenue recognition requirements under IFRS
and is effective for annual periods beginning on or after 1 January 2018. The Group has assessed the
impact of the new standard and has not identified any material impacts on its reported amounts.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an
Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the
Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the
recognition, measurement, presentation and disclosure of leases and requires lessees to account
for all leases under a single on-balance sheet model similar to the accounting for finance leases
under IAS 17. At the commencement date of a lease, a liability will be recognised to make lease
payments and an asset will be recognised to represent the right to use the underlying asset during
the lease term. Interest expense on the lease liability and the depreciation expense on the right-of-use
asset will be separately recognised.
IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with early application
permitted. The Group will analyse our leases in order to determine the possible impact on the
financial statements.
Insurance income
Insurance income comprises income derived from the sale of legal expenses insurance policies issued
in the name of Great Lakes Reinsurance (UK) Plc, a subsidiary of MunichRe, under a binding authority
agreement. Insurance income represents commissions receivable which are calculated based on the
premium earned, net of reinsurance and Insurance Premium Tax, less an allowance for claims, sales
commissions, fees and the other direct insurance related costs such as Financial Services Compensation
Scheme Levy. The payment of premiums is often contingent on a case being won or settled and the
Group recognises the associated income only at this point, whilst a deduction is made for claims
estimated to be paid on all policies in force.
Investment management income
Investment management income is derived from the governing agreements in place with various
investment funds under management. The rate or amount at which fees are charged, the basis
on which such fees are calculated, and the timing of payment, vary across investment funds and,
as to a particular investment fund, may also vary across investment options available to underlying
investors in or members of the investment fund. Management fees are generally based on an agreed
percentage of investor fund commitments, amounts committed or deployed depending on the
fund agreements. Management fees are recognised in the year in which the services are provided.
Performance fees are earned when contractually agreed performance levels are exceeded within
specified performance measurement periods. They are generally recognised at the end of these
performance periods, when a reliable estimate of the fee can be made and it is almost certain that
the fee will be received.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 63
2. Principal accounting policies continued
Segment reporting
Management consider that there are four operating business segments in addition to its corporate
functions, being (i) provision of investment capital in connection with the underlying asset value
of claims; (ii) investment management activities; (iii) provision of litigation insurance (reflecting UK
and Channel Islands litigation insurance activities); and (iv) exploration of new initiatives related to
application of capital to the legal sector until such time as those initiatives mature into full fledged
independent segments.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the aggregate of the consideration transferred, which is measured at acquisition
date fair value. Acquisition-related costs are expensed as incurred and included in the Consolidated
Statement of Comprehensive Income. When the Group acquires a business, it assesses the financial
assets and liabilities assumed for appropriate classification and designation in accordance with the
contractual terms, economic circumstances and pertinent conditions as at the acquisition date.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the
acquisition date. Subsequent changes in the fair value of contingent consideration classified as an
asset or liability are reflected in the Consolidated Statement of Comprehensive Income. Contingent
consideration classified as equity is not remeasured and its subsequent settlement is accounted for
within equity.
Goodwill
Goodwill arises on the acquisition of subsidiaries and represents the excess of the purchase
consideration over the fair value of the Group’s share of the assets acquired and the liabilities
assumed on the date of the acquisition. After initial recognition, goodwill is measured at cost less
any accumulated impairment losses. For the purposes of impairment testing, goodwill acquired
in a business combination is, from the acquisition date, allocated to each of the Group’s cash-
generating units (CGU) that are expected to benefit from the combination, irrespective of whether
other assets or liabilities of the acquiree are assigned to those units.
Intangible asset
The intangible is recognised at fair value when acquired as part of a business combination. It represents
the future cash flows of investment management income recognised in accordance with the Group’s
policy for the recognition of investment management income. This intangible is amortised to the income
statement over the period revenue is expected to be earned.
Impairment of non-financial assets
The Group assesses, at each reporting date, whether there is an indication that an asset may be
impaired. If any indication exists, or when annual impairment testing for an asset is required, the
Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of
an asset’s or cash-generating unit’s (CGU) fair value less costs of disposal and its value in use. The
recoverable amount is determined for an individual asset, unless the asset does not generate cash
inflows that are largely independent of those from other assets or groups of assets. When the carrying
amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is
written down to its recoverable amount.
Impairment losses are recognised in the income statement.
Burford Annual Report 2017 64
Continued
2. Principal accounting policies continued
Financial instruments
The Group classifies its financial instruments into the categories below in accordance with IFRS 9.
(1) Investments
Investments relate to the provision of investment capital in connection with the underlying asset value
of claims. The Group takes investment positions in assets where legal and regulatory risk can affect
asset value, either through direct litigation or through other dynamics relating to that risk. Investments
comprise primarily of investments held at fair value through profit or loss and some investments held at
amortised cost. Investments are initially measured as the sum invested. Attributable due diligence and
closing costs are expensed.
Recognition, derecognition and measurement
Purchases and sales of investments at fair value through profit or loss are generally recognised on
the trade date, being the date on which the Group disburses funds in connection with the investment
(or becomes contractually committed to pay a fixed amount on a certain date, if earlier). In some
cases, multiple disbursements occur over time. Investments are initially measured as the sum invested.
An investment that is renegotiated is derecognised if the existing agreement is cancelled and
a new agreement made on substantially different terms, or if the terms of an existing agreement
are modified, such that the renegotiated asset is substantially a different financial instrument.
Movements in fair value on investments are included within investment income in the Consolidated
Statement of Comprehensive Income. Investment income can also consist of interest that is accrued
or received on event-driven legal claim investments.
Investments held at amortised cost use the effective interest method, less any impairment, for loan
investments in the law firm lending business. Interest income is recognised on an accruals basis and
included within investment income in the Consolidated Statement of Comprehensive Income.
(2) New initiatives investments
New initiatives investments are held at fair value and relate to investments in the asset recovery
business. Investments are initially measured as the sum invested. Attributable due diligence and
closing costs are expensed.
New initiatives income comprises income from professional services and investment income from
the asset recovery business. Professional services income is recognised as services are provided.
(3) Financial assets and liabilities at amortised cost
Financial assets and liabilities, including loan capital, loan notes, amounts due from settlement
of investments and amounts due from settlement of new initiatives investments, that have fixed or
determinable payments representing principal and interest that are not quoted in an active market,
are measured at amortised cost using the effective interest method, less any impairment.
(4) Cash management investments
Investments for the purpose of cash management, acquired to generate returns on cash balances
awaiting subsequent investment, and are managed and evaluated on a fair value basis at the time
of acquisition. Their initial fair value is the cost incurred at their acquisition. Transaction costs incurred
are expensed in the Consolidated Statement of Comprehensive Income.
Recognition, derecognition and measurement
Cash management investments through profit or loss are recorded on the trade date, and those held
at the year end date are valued at bid price.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 65
2. Principal accounting policies continued
Listed interest-bearing debt securities are valued at their quoted bid price. Interest earned on these
investments is recognised on an accruals basis. Listed corporate bond funds are valued at their
quoted bid price. Unlisted managed funds are valued at the Net Asset Value per share published
by the administrator of those funds as it is the price at which they could have been realised at the
reporting date.
Movements in fair value and realised gains and losses on disposal or maturity of investments,
including interest income, are reflected in cash management income and bank interest in the
Consolidated Statement of Comprehensive Income.
(5) Financial liabilities at fair value through profit and loss
Equity positions taken for the purpose of hedging offsetting gains and losses attributable to long
equity positions held within investments. Movements in fair value on financial liabilities at fair value
through profit and loss and transactions costs incurred are included within investment income in the
Consolidated Statement of Comprehensive Income.
(6) Investment subparticipations
Investment subparticipations are classified as financial liabilities and are initially recorded at the fair
value of proceeds received. They are subsequently measured at fair value with changes in fair value
being recorded in investment income in the Consolidated Statement of Comprehensive Income.
Fair value hierarchy of financial instruments
The financial assets and liabilities measured at fair value are disclosed using a fair value hierarchy
that reflects the significance of the inputs used in making the fair value measurements, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Those involving inputs other than quoted prices included in level 1 that are observable for
the asset or liability, either directly (as prices) or indirectly (derived from prices);
Level 3 – Those inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
Valuation methodology for level 1 investments
Level 1 assets and liabilities are comprised of listed instruments including equities, fixed income
securities, investment funds, financial liabilities at fair value through profit and loss and loan capital.
All level 1 assets and liabilities are valued at the quoted market price as of the reporting date.
Valuation processes for level 3 investments
The Group’s senior professionals are responsible for developing the policies and procedures for fair
value measurement of assets and liabilities. At each reporting date, the movements in the values
of assets and liabilities are required to be re-assessed as per the Group’s accounting policies.
Following investment, each investment’s valuation is reviewed semi-annually. For this analysis, the
reasonableness of material estimates and assumptions underlying the valuation are discussed
and the major inputs applied are verified by agreeing the information in the valuation computation
to contracts, investment status and progress information and other relevant documents.
The semi-annual reviews are presented to the Audit Committee and the Group’s independent auditors.
Valuation methodology
Fair value represents the price that would be received to sell an asset or paid to transfer a liability
(an exit price) in an orderly transaction between market participants as of the measurement date.
Burford Annual Report 2017 66
Continued
2. Principal accounting policies continued
The methods and procedures to fair value assets and liabilities may include, but are not limited to:
(i) obtaining information provided by third parties when available; (ii) obtaining valuation-related
information from the issuers or counterparties (or their advisors); (iii) performing comparisons of
comparable or similar investment matters; (iv) calculating the present value of future cash flows;
(v) assessing other analytical data and information relating to the investment that is an indication of
value; (vi) reviewing the amounts invested in these investments; (vii) evaluating financial information
provided by the investment counterparties and (viii) entering into a market transaction with an
arm’s-length party.
The material estimates and assumptions used in the analyses of fair value include the status and risk
profile of the risks underlying the investment, the timing and expected amount of cash flows based on
the investment structure and agreement, the appropriateness of discount rates used, if any, and in
some cases, the timing of, and estimated minimum proceeds from, a favourable outcome. Significant
judgement and estimation goes into the assumptions which underlie the analyses, and the actual
values realised with respect to investments could be materially different from values obtained based
on the use of those estimates.
Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using
the currency of the primary economic environment in which the entity operates (“the functional
currency”). The functional currency of the Company, as determined in accordance with IFRS, is
the United States Dollar (“US Dollar”) because this is the currency that best reflects the economic
substance of the underlying events and circumstances of the Company and its Subsidiaries.
The consolidated financial statements are presented in US Dollars, the presentation currency.
Burford UK and certain other subsidiaries operate and prepare financial statements denominated
in Sterling. For the purposes of preparing consolidated financial statements, those subsidiaries’ assets
and liabilities are translated at exchange rates prevailing at each balance sheet date. Income and
expense items are translated at average exchange rates for the year.
Exchange differences arising are recognised in other comprehensive income and accumulated
in equity (foreign currency consolidation reserve).
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rate
prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year end exchange rates of monetary
assets and liabilities denominated in foreign currencies including intragroup balances are recognised
in the Consolidated Statement of Comprehensive Income as part of the profit or loss for the year.
Since April 2016, certain intragroup balances are now considered, in substance, to form part of a net
investment in a foreign operation. Gains and losses on such balances are recognised in other
comprehensive income, with a gain of $2,325,000 recognised in the current year (2016: loss of $5,507,000).
Bank interest income
Bank interest income is recognised on an accruals basis.
Expenses
All expenses are accounted for on an accruals basis.
Finance costs
Finance costs represent loan capital and loan notes interest and issue expenses which are recognised in
the Consolidated Statement of Comprehensive Income in line with the effective interest rate method.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 67
2. Principal accounting policies continued
Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and highly liquid
investments readily convertible within three months or less to known amounts of cash and subject
to insignificant risk of changes in value. Cash and cash equivalents at the balance sheet date
comprised amounts held on current or overnight deposit accounts.
Taxation
Current income tax assets and liabilities are measured at the amount expected to be recovered
or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those
that are enacted or substantively enacted.
To the extent that any foreign withholding taxes or any form of profit taxes become payable these will
be accrued on the basis of the event that creates the liability to taxation.
Deferred tax is provided on the liability method on temporary differences between the tax bases of
assets and liabilities and their carrying amount for financial reporting purposes at the reporting date.
Deferred tax assets and liabilities are measured at the rates that are expected to apply in the year
when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been
enacted or substantively enacted at the reporting date.
Dividends
Dividends paid during the year are shown in the Consolidated Statement of Changes in Equity.
Dividends proposed but not approved by shareholders are disclosed in the notes.
Tangible fixed assets
Fixed assets are recorded at cost less accumulated depreciation and provision for impairment.
Depreciation is provided to write off the cost less estimated residual value in equal instalments over
the estimated useful lives of the assets. The expected useful lives are as follows:
Leasehold improvements
Fixtures, fittings and equipment
Computer hardware and software
Life of lease
5 years
3 years
The gain or loss arising on the disposal or retirement of an asset is determined as the difference
between the net sales proceeds and the carrying amount of the asset and is recognised in income.
Receivables and prepayments
Receivables and prepayments are recognised at nominal value, less provision for impairments for
non-recoverable amounts. They do not carry any interest.
Payables
Payables are recognised at nominal value and are non-interest bearing.
Capital and reserves
Ordinary shares are classified as equity in share capital. Contingent shares are classified as equity
in share capital, where shares will be issued and converted to ordinary shares only after the specified
terms have been met. Other capital reserve is the obligation for the long term incentive plan issuance
of shares to the Group’s employees. Contingent preference shares issued by a subsidiary do not give
rise to a contractual obligation and are therefore classified as a non controlling interest. Profits are
allocated to the contingent preference shares based on their cumulative dividend entitlements.
Incremental costs directly attributable to the issue of new shares are deducted from equity in share
capital or contingent preference shares as appropriate.
Burford Annual Report 2017
68
Continued
3. Material agreements
During 2017 and 2016 there were no material agreements in place between Group entities and
third parties.
4. Taxation
The Company obtained exempt company status in Guernsey. In certain cases, a subsidiary of the
Company may elect to make use of investment structures that are subject to income tax in a country
related to the investment. The Company’s subsidiaries in Ireland, the UK and the US are subject
to taxation in such jurisdictions as determined in accordance with relevant tax legislation.
Profit on ordinary activities before tax
Corporation tax at country rates
Factors affecting charge:
Adjustment in respect of prior year
Tax losses not recognised
Costs allowable for tax
Costs not allowable for tax
Adjustment for US tax rate change
Total taxation (credit)
2017
$’000
2016
$’000
249,181
(198)
104,053
(5,125)
25
521
(3,936)
30
3,435
(71)
361
–
18
–
(123)
(4,817)
Corporation tax at country rates is influenced by taxable profits and losses arising in jurisdictions
at different rates and non taxable gains and losses arising on fair value adjustments.
The taxation charge for the year comprises:
US subsidiaries taxation (credit)/charge
Irish subsidiaries taxation charge/(credit)
UK subsidiaries taxation charge
US deferred taxation charge/(credit)
Irish deferred taxation charge
Total taxation (credit)
Deferred tax asset
Balance at 1 January
Movement on UK deferred tax – temporary differences
Movement on US deferred tax – temporary differences
Movement on Irish deferred tax – temporary differences
Foreign exchange adjustment
Adjustment for US tax rate change
Balance at 31 December
2017
$’000
(227)
1,188
–
(1,802)
718
2016
$’000
3,590
(643)
175
(7,939)
–
(123)
(4,817)
2017
$’000
9,498
–
5,681
(644)
–
(3,672)
10,863
2016
$’000
1,970
(174)
7,076
644
(18)
–
9,498
Included in the deferred tax asset recognised at the balance sheet date are amounts relating to
operating losses that the Group believes it will be able to utilise in the future.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4. Taxation continued
Deferred tax liability
Balance at 1 January
Movement on US deferred tax – temporary differences
Foreign exchange adjustment
Adjustment for US tax rate change
Balance at 31 December
Net deferred tax asset
Analysis of net deferred tax asset by type
Staff compensation and benefits
GKC acquisition costs
Investment fair value adjustments
Capital allowances
Net operating loss carry forward
5. Segmental information
69
2016
$’000
1,098
(863)
(8)
–
227
2016
$’000
9,271
2016
$’000
3,462
1,188
4,200
(223)
644
9,271
2017
$’000
227
443
4
(237)
437
2017
$’000
10,426
2017
$’000
3,618
690
1,584
(209)
4,743
10,426
Management consider that there are four operating business segments in addition to its corporate
functions, being (i) provision of investment capital in connection with the underlying asset value
of claims, (ii) investment management activities, (iii) provision of litigation insurance (reflecting UK
and Channel Islands litigation insurance activities), and (iv) exploration of new initiatives related
to application of capital to the legal sector until such time as those initiatives mature into full fledged
independent segments.
Burford Annual Report 2017
70
Continued
5. Segmental information continued
Segment revenue and results
31 December 2017
Income
Operating expenses
Amortisation of intangible
asset arising on
acquisition
Investment banking and
brokerage fees
Finance costs
Profit/(loss) for the year
before taxation
Taxation
Other comprehensive
income
Total comprehensive
income
31 December 2016
Income
Operating expenses
Amortisation of intangible
asset arising on
acquisition
Finance costs
Non-recurring acquisition
costs
Profit/(loss) for the year
before taxation
Taxation
Other comprehensive
income
Total comprehensive
income
Investments
$’000
Investment
management
$’000
Litigation
insurance
$’000
New
initiatives
$’000
Other
corporate
activity
$’000
Total
$’000
313,286
(34,912)
14,458
(7,159)
7,613
(2,001)
2,968
(2,271)
4,289
(7,298)
342,614
(53,641)
–
–
–
–
–
–
–
–
–
–
–
–
(11,703)
(11,703)
(3,838)
(24,251)
(3,838)
(24,251)
278,374
2,412
7,299
(3,008)
5,612
(662)
697
(235)
(42,801)
1,616
249,181
123
–
–
–
–
(28,206)
(28,206)
280,786
4,291
4,950
462
(69,391)
221,098
Investments
$’000
Investment
management
$’000
Litigation
insurance
$’000
New
initiatives
$’000
Other
corporate
activity
$’000
Total
$’000
140,187
(26,017)
647
(443)
12,923
(1,696)
8,849
(4,895)
797
(5,975)
163,403
(39,026)
–
–
–
114,170
4,718
–
–
–
–
204
(82)
–
–
–
–
–
–
–
(271)
(14,108)
(271)
(14,108)
(5,945)
(5,945)
11,227
(1,608)
3,954
(818)
(25,502)
2,607
104,053
4,817
–
–
34,921
34,921
118,888
122
9,619
3,136
12,026
143,791
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 71
5. Segmental information continued
Segment assets
31 December 2017
Non-current assets
Investments
Due from settlement of investments
New initiatives investments
Equity securities
Investment income receivables
Deferred tax asset
Goodwill
Intangible asset
Tangible fixed assets
Current assets
Due from settlement of investments
Receivables and prepayments
Tax receivable
Due from broker
Cash management investments
Cash and cash equivalents
Investments
$’000
Investment
management
$’000
Litigation
insurance
$’000
New
initiatives
$’000
Other
corporate
activity
$’000
Total
$’000
1,075,941
3,083
–
6,058
4,765
10,138
–
–
1,654
1,101,639
165
995
1,541
41,678
–
61,598
–
–
–
–
–
–
–
–
320
320
–
–
–
–
–
–
–
–
425
425
–
–
10,189
–
–
–
–
–
–
– 1,075,941
3,083
–
10,189
–
6,058
–
4,765
–
10,863
725
134,022
134,022
27,692
27,692
2,399
–
10,189
162,439 1,275,012
–
2,845
–
–
–
236
–
832
135
–
–
10,017
–
771
–
–
–
13,627
–
31
–
–
39,933
49,937
165
5,474
1,676
41,678
39,933
135,415
Total assets
1,207,616
3,401
11,409
24,587
252,340 1,499,353
105,977
3,081
10,984
14,398
89,901
224,341
Current liabilities
Payables
Financial liabilities at fair value
through profit and loss
Due to limited partner
Loan interest payable
Non-current liabilities
Deferred tax liability
Investment subparticipation
Third-party interest in
consolidated funds
Loan capital
Total liabilities
Total net assets
20,647
36,242
1,158
–
58,047
361
3,152
143,639
–
147,152
205,199
30
1,865
866
425
23,833
–
–
–
–
–
–
–
–
–
–
–
5,397
36,242
1,158
5,397
30
1,865
866
5,822
66,630
–
–
–
–
–
41
–
–
–
41
–
–
–
–
–
35
–
437
3,152
–
486,931
143,639
486,931
486,966
634,159
30
1,906
866
492,788
700,789
1,002,417
3,371
9,503
23,721 (240,448)
798,564
Burford Annual Report 2017 72
Continued
5. Segmental information continued
31 December 2016
Non-current assets
Investments
New initiatives investments
Due from settlement of
investments
Deferred tax asset
Goodwill
Intangible asset
Tangible fixed assets
Current assets
Due from settlement of
investments
Due from settlement of new
initiatives investments
Receivables and prepayments
Tax receivable
Cash management investments
Cash and cash equivalents
Investments
$’000
Investment
management
$’000
Litigation
insurance
$’000
New
initiatives
$’000
Other
corporate
activity
$’000
Total
$’000
559,687
–
29,814
8,310
–
–
1,389
599,200
9,554
–
854
1,279
–
48,097
59,784
–
–
–
–
–
–
402
402
–
–
–
–
–
–
365
365
–
2,337
–
–
559,687
2,337
–
–
–
–
–
–
1,188
133,932
39,395
–
29,814
9,498
133,932
39,395
2,156
2,337
174,515
776,819
–
–
–
–
9,554
–
1,279
–
–
235
–
7,165
123
–
6,375
747
718
–
–
2,384
–
224
–
11,098
101,280
747
10,240
1,402
11,098
158,371
1,514
13,663
3,849
112,602
191,412
Total assets
658,984
1,916
14,028
6,186
287,117
968,231
Current liabilities
Investments payable
Payables
Loan interest payable
GKC acquisition purchase price
payable
Acquisition costs payable
9,505
14,330
–
–
–
–
488
–
–
–
–
990
–
–
–
–
1,439
–
–
375
4,139
9,505
17,622
4,139
–
–
57,863
5,858
57,863
5,858
Non-current liabilities
Deferred tax liability
Investment subparticipation
Loan capital
Loan notes
Total liabilities
Total net assets
23,835
488
990
1,439
68,235
94,987
189
2,865
–
–
3,054
26,889
632,095
–
–
–
–
–
38
–
–
–
38
–
–
–
–
–
–
–
230,243
43,750
227
2,865
230,243
43,750
273,993
277,085
488
1,028
1,439
342,228
372,072
1,428
13,000
4,747
(55,111) 596,159
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6.
Investments
Investments are comprised of some assets at fair value and some assets at amortised cost. As at
31 December 2017, investments at fair value is $1,074,441,000 (2016: $549,173,000) and investments at
amortised cost is $1,500,000 (2016: $10,514,000), totaling $1,075,941,000 (2016: $559,687,000) as shown
on the Consolidated Statement of Financial Position.
73
As at 1 January
Additions
Realisations
Net realised gain for year
Fair value movement (net of transfers to realisations)
Net gain on investments at amortised cost
Foreign exchange loss gains/(losses)
As at 31 December
2017
$’000
2016
$’000
559,687
560,346
(362,890)
122,712
191,830
528
3,728
334,212
271,627
(177,624)
47,474
87,818
1,747
(5,567)
1,075,941
559,687
The investment income on the face of the Consolidated Statement of Comprehensive
Income comprise:
Net realised gains on investments (above)
Fair value movement on investments (above)
Net gain on investments at amortised cost (above)
Interest and other income*
Fair value movement on financial liabilities at fair value through profit and loss
Total investment income
2017
$’000
122,712
191,830
528
5,764
268
2016
$’000
47,474
87,818
1,747
3,148
–
321,102
140,187
*
Interest and other income includes $999,000 (2016: $3,148,000) of income received as part of due from settlement of investments and
$4,765,000 (2016: $nil) of investment income receivables.
Further detail and commentary on realised gains on investments and unrealised gains on investments
is included in the Report to Shareholders on pages 22 to 23.
The following table reflects the line-by-line impact of eliminating the funds’ investments from the
investments balance reported in the Consolidated Statement of Financial Position to arrive at Burford’s
investments at 31 December 2017.
At 1 January 2017
Additions
Realisations
Net realised gain for the year
Fair value movement (net of transfers to realisations)
Net gain on investments at amortised cost
Foreign exchange gains
Consolidated
total
$’000
Elimination of
third-party
fund interests
$’000
559,687
560,346
(362,890)
122,712
191,830
528
3,728
–
(145,429)
49,398
12,959
(10,608)
–
(84)
Burford
$’000
559,687
414,917
(313,492)
135,671
181,222
528
3,644
As at 31 December 2017
1,075,941
(93,764)
982,177
Burford Annual Report 2017 Continued
7. Due from settlement of investments
Amounts due from settlement of investments relate to the recovery of investments that have successfully
concluded and where there is no longer any litigation risk remaining. The settlement terms and duration
vary by investment. The carrying value of these assets approximate the fair value of the assets at the
balance sheet date.
74
As at 1 January
Transfer of realisations from investments (Note 6)
Interest and other income (Note 6)
Proceeds received
Assets received in kind (Note 9)
Foreign exchange gains/(losses)
As at 31 December
Split:
Non-current assets
Current assets
Total due from settlement of investments
2017
$’000
2016
$’000
39,368
362,890
999
(387,010)
(13,011)
12
61,609
177,624
3,148
(203,011)
–
(2)
3,248
39,368
3,083
165
3,248
29,814
9,554
39,368
The following table reflects the line-by-line impact of eliminating the funds’ investment receivables from
the due from settlement of investments balance reported in the Consolidated Statement of Financial
Position to arrive at Burford’s investment receivables at 31 December 2017.
At 1 January 2017
Transfer of realisations from investments
Interest and other income
Proceeds received
Assets received in kind
Foreign exchange gains
Consolidated
total
$’000
Elimination of
third-party
fund interests
$’000
39,368
362,890
999
(387,010)
(13,011)
12
–
(49,398)
(186)
51,101
–
–
Burford
$’000
39,368
313,492
813
(335,909)
(13,011)
12
As at 31 December 2017
3,248
1,517
4,765
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. New initiatives investments
New initiatives investments represent capital deployed in the exploration of new initiatives related to
the legal sector until such time as those initiatives mature into full-fledged independent segments.
75
As at 1 January
Additions
Realisations
Net realised gains for the year
Fair value movement (net of transfers to realisations)
Foreign exchange gains/(losses)
As at 31 December
2017
$’000
2,337
6,467
–
–
1,096
289
2016
$’000
3,509
4,274
(11,590)
7,514
(1,110)
(260)
10,189
2,337
New initiatives income on the face of the Consolidated Statement of Comprehensive Income is
$2,968,000 (including income of $1,837,000 from fees for asset recovery services and other income
of $35,000) for the year ended 31 December 2017 (2016: new initiatives income was $8,849,000,
including income of $2,419,000 from fees for asset recovery services and other income of $26,000).
9. Equity securities
Equity securities represent listed stock shares received to settle due from settlement of investments of
$13,011,000. As at 31 December 2017, equity securities are held at fair value of $6,058,000 and there is
a fair value loss of $6,953,000 in net loss on equity securities on the face of the Consolidated Statement
of Comprehensive Income.
10. Cash management investments
As at 31 December 2017, cash management investments of $39,933,000 (2016: $11,098,000) were
invested primarily in a listed investment fund and fixed income securities.
Reconciliation of movements
Balance at 1 January
Purchases
Proceeds on disposal
Net realised gains/(losses) on disposal
Fair value change in year
Change in accrued interest
Balance at 31 December
2017
$’000
11,098
32,948
(4,975)
70
823
(31)
2016
$’000
140,206
145,502
(273,425)
(1,101)
(222)
138
39,933
11,098
Burford Annual Report 2017 Continued
10. Cash management investments continued
The cash management income and bank interest on the face of the Consolidated Statement of
Comprehensive Income comprise:
76
Realised gains/(losses) (see above)
Fair value movement (see above)
Interest and dividend income
Bank interest income
Total cash management income and bank interest
11. Total operating expenses
Staff costs
Pension costs
Non-executive directors’ remuneration
Non-staff operating expenses
Investment related costs
Expenses incurred by consolidated funds*
2017
$’000
70
823
1,006
751
2,650
2017
$’000
40,991
817
348
7,182
2,931
1,372
53,641
* Expenses incurred by consolidated funds are shown net of adjustments and eliminations as shown in Note 21.
Directors’ remuneration* comprise:
Sir Peter Middleton
Hugh Steven Wilson
David Charles Lowe
Charles Nigel Kennedy Parkinson
* Directors’ remuneration is Sterling denominated.
Fees paid and payable to Ernst & Young LLP comprise:
Audit fees
Interim review fees
Tax compliance fees
Tax advisory fees
Other advisory fees
2017
$’000
114
108
63
63
348
2017
$’000
743
45
206
253
51
2016
$’000
(1,101)
(222)
1,839
39
555
2016
$’000
29,333
566
315
6,782
2,030
–
39,026
2016
$’000
103
96
58
58
315
2016
$’000
681
32
253
253
87
In 2017, the Group incurred investment banking and brokerage fees of $3,838,000 (2016: $nil) related to
the sale of an investment in the secondary market.
1,298
1,306
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. Receivables and prepayments
Trade receivable – insurance segment
Trade receivable – new initiatives segment
Investment management receivables
Prepayments
Other debtors
13. Payables
Audit fee payable
Claim costs payable
General expenses payable
77
2016
$’000
7,062
718
1,133
166
1,161
10,240
2016
$’000
448
69
17,105
17,622
2017
$’000
722
746
2,698
348
960
5,474
2017
$’000
505
–
23,328
23,833
In December 2016, the Group acquired GKC Holdings, LLC (“GKC”) for total consideration of
$173,500,000, of which $57,863,000 in cash consideration for the purchase price was payable at
31 December 2016 and settled on 4 January 2017.
14. Loan capital
On 19 August 2014, the Group, through a 100% owned subsidiary, Burford Capital PLC, issued retail
bonds to the value of $149,562,000 (£90,000,000). The bond proceeds were converted to US Dollars
in the weeks following the offering, producing $149,938,000 of proceeds. The bonds are listed on
the London Stock Exchange’s Order Book for Retail Bonds. The bonds will mature on 19 August 2022,
and pay a fixed rate of interest of 6.5% per annum. The fair value equivalent of the loan capital at
31 December 2017, based upon the market value of the bonds, is $135,056,000 (2016: $120,028,000).
On 19 April 2016, Burford Capital PLC issued a second set of retail bonds to the value of $144,020,000
(£100,000,000). The bond proceeds were received on 26 April 2016 and converted to US Dollars in the
weeks following the offering, producing $144,000,000 of proceeds. The bonds are listed on the London
Stock Exchange’s Order Book for Retail Bonds. The bonds will mature on 26 October 2024, and pay a
fixed rate of interest of 6.125% per annum. The fair value equivalent of the loan capital at 31 December
2017, based upon the market value of the bonds, is $151,042,000 (2016: $130,399,000).
Burford Annual Report 2017 Continued
14. Loan capital continued
On 1 June 2017, Burford Capital PLC issued a third set of retail bonds to the value of $225,803,000
(£175,000,000). The bond proceeds were received on 1 June 2017 and converted to US Dollars in the
weeks following the offering, producing $227,011,000 of proceeds. The bonds are listed on the London
Stock Exchange’s Order Book for Retail Bonds. The bonds will mature on 1 December 2026, and pay
a fixed rate of interest of 5.0% per annum. The fair value equivalent of the loan capital at 31 December
2017, based upon the market value of the bonds, is $250,079,000.
78
Retail bonds
As at 1 January
Retail bonds issued
Bond issue costs
Finance costs
Interest paid
Foreign exchange losses/(gains)
As at 31 December
Split:
Loan capital
Loan interest payable
Total loan capital
Loan capital interest expense
Bond issue costs incurred as finance costs
Loan notes interest expense (Note 15)
Total finance costs
15. Loan notes
2017
$’000
234,258
225,803
(3,170)
22,976
(21,281)
33,742
2016
$’000
134,454
145,840
(2,042)
13,984
(11,994)
(45,984)
492,328
234,258
486,931
5,397
230,243
4,015
492,328
234,258
2017
$’000
22,233
743
1,275
24,251
2016
$’000
13,504
480
124
14,108
On 30 June 2017, the $43,750,000 of loan notes that were issued on 14 December 2016 as part of the
acquisition of GKC Holdings, LLC were redeemed in full and there is no balance outstanding. The notes
paid a rate per annum equal to LIBOR plus 5.00% (semi-annual interest payment), but the interest rate
was not to exceed 6.00% per annum.
As at 1 January
Loan notes issued
Finance costs
Interest paid
Loan notes redeemed
As at 31 December
Split:
Loan notes
Loan interest payable
Total loan notes
2017
$’000
43,874
–
1,275
(1,399)
(43,750)
–
–
–
–
2016
$’000
–
43,750
124
–
–
43,874
43,750
124
43,874
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. Changes in liabilities arising from financing activities
Liabilities arising from financing activities include loan capital and loan notes. A summary of the
changes arising from cash flows and non-cash changes is shown below.
79
At 1 January 2017
Cash flows:
Principal – issuance/(repayments)
Interest paid
Non-cash charges:
Interest expense
Amortisation of bond issue costs
Foreign exchange losses
As at 31 December 2017
At 1 January 2016
Cash flows:
Principal – issuance
Interest paid
Non-cash charges:
Issuance for acquisition of subsidiary
Interest expense
Amortisation of bond issue costs
Foreign exchange (gains)
As at 31 December 2016
17. Intangible asset
At 1 January
Additions
Amortisation
At 31 December
Acquisition of subsidiary
Accumulated amortisation
Net book value at 31 December
Loan capital
$’000
Loan notes
$’000
Total
$’000
234,258
43,874
278,132
222,633
(21,281)
(43,750)
(1,399)
178,883
(22,680)
22,233
743
33,742
492,328
1,275
–
–
23,508
743
33,742
–
492,328
Loan capital
$’000
Loan notes
$’000
134,454
143,798
(11,994)
–
13,504
480
(45,984)
234,258
–
–
–
43,750
124
–
–
43,874
Total
$’000
134,454
143,798
(11,994)
43,750
13,628
480
(45,984)
278,132
2017
$’000
39,395
–
(11,703)
2016
$’000
–
39,666
(271)
27,692
39,395
2017
$’000
39,666
(11,974)
2016
$’000
39,666
(271)
27,692
39,395
GKC was acquired on 14 December 2016. The intangible asset represents an assessment, for
accounting purposes, of the value of GKC’s future investment management income at the date of
acquisition. The intangible asset has an estimated useful life extending to 2020 and is being amortised
over this period on a systematic basis as the Group realises the benefit from this asset.
Burford Annual Report 2017 Continued
18. Goodwill
Goodwill arises on the acquisition of subsidiaries and represents the excess of the purchase
consideration over the fair value of the Group’s share of the assets acquired and the liabilities
assumed on the date of the acquisition. The goodwill allocated to each of the Group’s cash
generating units (CGUs) is set out in the table below.
Carrying value of goodwill
80
At 1 January 2017
Foreign exchange gains
At 31 December 2017
107,991
–
107,991
25,020
–
25,020
Investments
$’000
Investment
management
$’000
New
initiatives
$’000
Investments
$’000
Investment
management
$’000
New
initiatives
$’000
Total
$’000
133,932
90
921
90
1,011
134,022
Total
$’000
1,109
133,011
(188)
1,109
–
(188)
921
133,932
At 1 January 2016
Additions
Foreign exchange (losses)
At 31 December 2016
–
107,991
–
107,991
–
25,020
–
25,020
As goodwill does not generate cash flows independently of other assets or groups of assets the
recoverable amount, being the value in use, is determined at a CGU level. The Group’s CGU’s are
consistent with the operating business segments in Note 5.
Our value in use calculations require estimates in relation to uncertain items, including management’s
expectations of future revenue growth, operating costs, profit margins, operating cash flows, and the
discount rate for each CGU.
The future cash flows are discounted using a pre-tax discount rate that reflects the time value of
money. The discount rate used in each CGU is adjusted for the risk specific to the asset.
The Group is required to test goodwill acquired in a business combination annually for impairment.
This was carried out for the period ended 31 December 2017.
Key assumptions and sensitivities
The value in use of each CGU is determined using cash flow projections over a five year period, based
on past experience of business performance.
Discount rate
The discount rates applied to the cash flow projections are a pre-tax discount rate derived from the
Group’s weighted average cost of capital. The discount rates used in performing the value in use
calculation in 2017 were 9.7% except for investment management where we have used 8.6% reflecting
the lower risk and volatility of income in this CGU.
Growth
The perpetuity growth rates are determined based on the forecast market growth rates of the
economies in which the CGU operates, and they reflect an assessment of the long-term growth
prospects of that market. For all CGUs this rate is 2%.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 81
18. Goodwill continued
Return on investments
The rates of return are determined based on historical experience. The rates used in performing the
value in use calculation in 2017 were 22.5% per annum except for investment management where
we have used rates of between 6.5% and 22.5% reflecting the differing rates of return expected on
the different funds.
Sensitivities
There is significant headroom in all the CGUs. No reasonably possible changes in the key assumptions
would cause the carrying amount of the CGUs to exceed the recoverable amount.
19. Fair value of assets and liabilities
Valuation methodology
The fair value of financial assets and liabilities continue to be valued using the techniques set out in
the accounting policies in Note 2.
Fair value hierarchy
31 December 2017
Investments*
Investments – equity securities
New initiatives investments
Equity securities
Cash management investments:
Listed fixed income securities and investment funds
Financial liabilities at fair value through profit or loss
Loan capital, at fair value**
Investment sub-participation
Total
31 December 2016
Investments*
New initiatives investments
Cash management investments:
Listed fixed income securities and investment funds
Loan capital, at fair value**
Investment sub-participation
Total
Level 1
$’000
–
64,453
–
6,058
39,933
(36,242)
(536,177)
–
(461,975)
Level 2
$’000
Level 3
$’000
Total
$’000
–
–
–
–
–
–
–
–
–
1,009,988
–
10,189
–
1,009,988
64,453
10,189
6,058
–
–
–
(3,152)
39,933
(36,242)
(536,177)
(3,152)
1,017,025
555,050
Level 1
$’000
Level 2
$’000
–
–
11,098
(250,427)
–
(239,329)
–
–
–
–
–
–
Level 3
$’000
549,173
2,337
Total
$’000
549,173
2,337
–
–
(2,865)
11,098
(250,427)
(2,865)
548,645
309,316
* The carrying value of other investments held at amortised cost of $1,500,000 (2016: $10,514,000) approximate fair value and have not
been included in the above tables.
** Loan capital is held at amortised cost in the consolidated financial statements and the figures disclosed in the above tables represent
the fair value equivalent amounts.
Burford Annual Report 2017 82
Continued
19. Fair value of assets and liabilities continued
All transfers into level 3 are recognised as if they have taken place at the beginning of each reporting
period. Transfers into level 3 during the year of $261,487,000 (2016: $nil) relate to investments where
the underlying asset no longer has a quoted price and becomes subject to the Group’s valuation
methodology for level 3 financial instruments as set out in Note 2.
Movements in Level 3 fair value assets and liabilities
The table below provides analysis of the movements in the Level 3 financial assets and liabilities.
As at 1 January 2017
Additions
Transfers into level 3
Realisations
Net realised gain
Fair value movement
Foreign exchange gains
Investments
$’000
New initiatives
investments
$’000
Total Level 3
assets
$’000
Level 3 liabilities:
Investment
subparticipations
$’000
549,173
234,303
261,487
(364,681)
134,045
191,933
3,728
2,337
6,467
–
–
–
1,096
289
551,510
240,770
261,487
(364,681)
134,045
193,029
4,017
(2,865)
(433)
–
146
–
–
–
Net Level 3
assets
$’000
548,645
240,337
261,487
(364,535)
134,035
193,029
4,017
As at 31 December 2017
1,009,988
10,189
1,020,177
(3,152)
1,017,025
Investments
$’000
New initiatives
investments
$’000
Total
Level 3 assets
$’000
Level 3 liabilities:
Investment
subparticipations
$’000
As at 1 January 2016
Additions
Realisations
Net realised gain
Fair value movement
Foreign exchange (losses)
319,615
264,742
(164,909)
47,474
87,818
(5,567)
3,509
4,274
(11,590)
7,514
(1,110)
(260)
323,124
269,016
(176,499)
54,988
86,708
(5,827)
–
(2,865)
–
–
–
–
Net Level 3
assets
$’000
323,124
266,151
(176,499)
54,988
86,708
(5,827)
As at 31 December 2016
549,173
2,337
551,510
(2,865)
548,645
There were no gains or losses recognised in other comprehensive income with respect to these assets.
Sensitivity of Level 3 valuations
Following investment, the Group engages in a semi-annual review of each investment’s fair value.
At 31 December 2017, should the value of investments have been 10% higher or lower than provided for
in the Group’s fair value estimation, while all other variables remained constant, the Group’s income
and net assets would have increased and decreased respectively by $101,703,000 (2016: $54,865,000).
Reasonably possible alternative assumptions
The determination of fair value for investments and new initiative investments involve significant
judgements and estimates. Whilst the potential range of outcomes for the investments is wide, the
Group’s fair value estimation is its best assessment of the current fair value of each investment. That
estimate is inherently subjective being based largely on an assessment of how individual events have
changed the possible outcomes of the investment and their relative probabilities and hence the
extent to which the fair value has altered. The aggregate of the fair values selected falls within a wide
range of reasonably possible estimates. In the Group’s opinion there is no useful alternative valuation
that would better quantify the market risk inherent in the portfolio and there are no inputs or variables
to which the values of the investments are correlated.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
83
20. Risk management
Market and investment risk
The Group is exposed to market and investment risk with respect to its cash management investments,
its investments and its new initiative investments. The maximum risk equals the fair value of all such
financial instruments.
With respect to the Group’s cash management investments, consisting of corporate bonds and
investment funds, market risk is the risk that the fair value of financial instruments will fluctuate due to
changes in market variables such as interest rates, credit risk, security and bond prices and foreign
exchange rates. Investments in cash management investments are made in line with pre-agreed
parameters and subject to Board oversight. At 31 December 2017, should the prices of the investments
in corporate bonds and investment funds have been 10% higher or lower while all other variables
remained constant, the Group’s income and net assets would have increased and decreased
respectively by $3,993,000 (2016: $1,110,000).
With respect to the Group’s investments and new initiative investments, market and investment risk is
the risk that the fair value of the investments (which tend to be of durations in excess of one year) will
fluctuate substantially during the life of the investment and indeed that the investments may ultimately
result in widely varying ranges of outcomes from a total loss to a substantial gain.
With respect to the Group’s financial liabilities at fair value through profit and loss the market risk is
negligible as the positions are held exclusively as economic hedges against gains and losses arising
on offsetting long positions included in the Group’s investments. The fair value of the Group’s offsetting
long positions is approximately $36,162,500 at 31 December 2017.
The Group only makes investments following a due diligence process. However, such investing is high
risk and there can be no assurance of any particular recovery in any individual investment. Certain of
the Group’s investments or similar investments comprise a portfolio of investments thereby mitigating
the impact of the outcome of any single investment.
Liquidity risk
The Group is exposed to liquidity risk. The Group’s investment in investments and new initiatives investments
require funds to meet investment commitments (see Note 26) and for ongoing settlement of operating
liabilities. The Group’s investments (as described in Note 2) typically require significant capital contributions
with little or no immediate return and no guarantee of return or repayment. In order to manage liquidity,
risk the Group makes investments with a range of anticipated durations and invests in cash management
investments which can be readily realised to meet those liabilities and commitments. Cash management
investments include investments in listed fixed income instruments and investment funds that can be
redeemed on short notice or can be sold on an active trading market.
During 2014, 2016, and 2017, the total issues of $519 million retail bonds raised sufficient extra capital to
help mitigate liquidity risk. Interest payments on the bonds will total approximately $204 million over the
remaining five-year, seven-year and nine-year periods until maturity in August 2022, October 2024 and
December 2026, respectively, at which point the principal amounts shall be repaid.
Burford Annual Report 2017 84
Total
$’000
65,184
10,048
14,000
233,588
435,360
Continued
20. Risk management continued
The table below summarises the maturity profile of the Group’s financial liabilities based on
contractual undiscounted payments.
cash outflows
61,233 203,832 493,115
31 December 2017
Less than 3 months
3 to 6 months
6 to 12 months
1 to 5 years
Greater than 5 years
No contractual
maturity date
Total undiscounted
31 December 2016
Less than 3 months
3 to 6 months
6 to 12 months
1 to 5 years
Greater than 5 years
No contractual
maturity date
Total undiscounted
Current
liabilities
$’000
Loan
capital
interest
$’000
Loan
capital
$’000
Deferred
tax liability
$’000
Investment
sub-
participations
$’000
Third-party
interests in
consolidated
funds
$’000
3,951
10,048
14,000
–
61,233
–
–
–
–
– 111,998 121,590
63,835 371,525
–
–
–
–
–
–
–
–
–
437
437
–
–
–
–
–
–
–
–
–
–
3,152
143,639
147,228
3,152
143,639
905,408
Loan capital
and notes
interest
$’000
Loan capital
and loan
notes
$’000
Deferred
tax liability
$’000
Investment
subparticipations
$’000
Current
liabilities
$’000
90,848
–
–
–
–
3,598
4,862
8,460
63,306
29,804
–
–
–
43,750
233,757
–
–
–
Total
$’000
94,446
4,862
8,460
107,056
263,561
–
–
–
–
–
2,865
3,092
2,865
481,477
–
–
–
–
–
227
227
cash outflows
90,848
110,030
277,507
Credit risk
The Group is exposed to credit risk in various investment structures (see Note 2), most of which involve
investing sums recoverable only out of successful investments with a concomitant risk of loss of investment
cost. On becoming contractually entitled to proceeds, depending on the structure of the particular
investment, the Group could be a creditor of, and subject to direct or indirect credit risk from, a claimant,
a defendant, both or other parties. Moreover, the Group may be indirectly subject to credit risk to the
extent a defendant does not pay a claimant immediately notwithstanding successful adjudication of a
claim in the claimant’s favour. The Group’s credit risk is uncertain given that its entitlement pursuant to its
investments is generally not established until a successful resolution of claims and the Group’s potential
credit risk is mitigated by the diversity of its counterparties and indirect creditors.
The Group is also exposed to credit risk in respect of the cash management investments and cash
and cash equivalents. The credit risk of the cash and cash equivalents is mitigated as all cash is
placed with reputable banks with a sound credit rating (A-2). Cash management investments are held
in a listed fund investing in senior short duration floating rate corporate debt and investment grade
corporate bonds. At the year end the bulk of cash management investments are held in a listed
investment fund.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 85
20. Risk management continued
The Group is also exposed to credit risk from opponents in litigation insurance. The underwriting
process includes an assessment of counterparty credit risk and there is a large diversification of
counterparties and therefore no concentration of risk.
The maximum credit risk exposure represented by cash, cash equivalents and investments is as stated
on the Consolidated Statement of Financial Position.
Currency risk
The Group holds assets denominated in currencies other than US Dollars, the functional currency
of the Company, including Sterling, the functional currency of Burford UK. Further, the Group
issued Sterling loan capital during 2014, 2016, and 2017. It is therefore exposed to currency risk,
as values of the assets denominated in other currencies will fluctuate due to changes in exchange
rates. The Group may use forward exchange contracts from time to time to mitigate currency risk.
At 31 December 2017, the Group’s net exposure to currency risk can be analysed as follows:
US dollar
Sterling
Euro
Investments
$’000
1,053,663
27,705
17,759
Other net
assets/
(liabilities)
$’000
164,524
(465,206)
119
1,099,127
(300,563)
At 31 December 2016, the Group’s net exposure to currency risk could be analysed as follows:
US dollar
Sterling
Euro
Investments
$’000
576,383
24,478
12,376
613,237
Other net
assets/
(liabilities)
$’000
199,873
(216,960)
9
(17,078)
At 31 December 2017 should Sterling have strengthened or weakened by 10% against the US Dollar
and all other variables held constant, the Group’s net profit and net assets would have decreased and
increased respectively by $43,750,000 (2016: $19,248,000) from instruments denominated in a currency
other than the functional currency of the relevant entity.
At 31 December 2017 should Euro have strengthened or weakened by 10% against the US Dollar and
all other variables held constant, the Group’s net profit and net assets would have increased and
decreased respectively by $1,788,000 (2016: $1,239,000) from instruments denominated in a currency
other than the functional currency of the relevant entity.
Burford Annual Report 2017 86
Continued
20. Risk management continued
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. The Group’s exposure to market risk for changes in
floating interest rates relates primarily to the Group’s cash, certain cash management investments,
loan notes outstanding and certain investments. All cash bears interest at floating rates. Loan notes
also bear interest at floating rates; however, there is a cap on the maximum interest rate charged
so exposure is limited. There are certain investments, due from settlement of investments and cash
management investments that earn interest based on fixed rates; however, those assets do not have
interest rate risk as they are not exposed to changes in market interest rates. The Group’s loan capital
incurs interest at a fixed rate and so is not exposed to changes in market interest rates. The following
table sets out the Group’s exposure to interest rate risk.
Non-interest bearing
Interest bearing – floating rate
Interest bearing – fixed rate
Total net assets
2017
$’000
787,882
370,790
(360,108)
2016
$’000
541,638
114,621
(60,100)
798,564
596,159
The interest bearing floating rate assets and liabilities are denominated in both US Dollars and Sterling.
If interest rates increased/decreased by 25 basis points while all other variables remained constant, the
profit for the year and net assets would increase/decrease by $927,000 (2016: $287,000). For fixed rate
assets and liabilities, it is estimated that there would be no material profit or net assets impact. Fixed rate
liabilities include the loan capital and loan notes as disclosed in Note 14 and Note 15, respectively.
The maturity profile of interest bearing assets and liabilities is:
Maturity period at 31 December 2017
Assets
Less than 3 months
3 to 6 months
6 to 12 months
1 to 2 years
Greater than 2 years
Liabilities
Greater than 2 years
Net assets/(liabilities)
Maturity period at 31 December 2016
Assets
Less than 3 months
3 to 6 months
6 to 12 months
1 to 2 years
Greater than 2 years
Liabilities
Greater than 2 years
Net assets/(liabilities)
Floating
$’000
Fixed
$’000
Total
$’000
208,384
–
–
–
162,406
3,078
551
1,515
3,291
124,572
211,462
551
1,515
3,291
286,978
–
(493,115)
(493,115)
370,790
(360,108)
10,682
Floating
$’000
Fixed
$’000
Total
$’000
158,371
–
–
–
–
26,978
1,024
2,005
9,113
134,537
185,349
1,024
2,005
9,113
134,537
(43,750)
(233,757)
(277,507)
114,621
(60,100)
54,521
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 87
20. Risk management continued
Management of capital
The Company’s objective is to provide shareholders with attractive levels of dividends and capital
growth. Cash management assets are managed to ensure adequate liquidity to meet commitments
and to ensure resources are available to finance investments as opportunities arise. The Company
issued loan capital in the form of retail bonds in 2014, 2016, and 2017, which addressed this potential
risk by raising significant amounts of capital.
21. Investments in consolidated funds
Burford may invest in funds that it manages and may be deemed to control such funds, which results
in their consolidation on a line-by-line basis as detailed below.
Investments in funds are not actively traded and the valuation at fund level cannot be determined by
reference to other available prices. The fair value of the investments in the fund is determined in line
with the accounting policy of the assets held in the fund. The fair value hierarchy of financial assets is
disclosed in Note 19.
Line-by-line consolidation
The following tables reflect the line-by-line impact of consolidating the results of the funds with the
stand alone results for Burford (i.e., if Burford only accounted for its investment in the funds) to arrive
at the totals reported in the Consolidated Statement of Comprehensive Income and Consolidated
Statement of Financial Position (2016: nil).
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
Investment income
Investment management income
Insurance income
New initiatives income
Other income
Third-party share of gains relating to
interests in consolidated funds
Total income
Operating expenses
Amortisation of intangible asset
Banking and brokerage fees
Operating profit
Finance costs
Profit before tax
Taxation
Profit after tax
Other comprehensive income
Burford
$’000
318,234
15,626
7,613
2,968
(3,199)
–
341,242
(52,269)
(11,703)
(3,838)
273,432
(24,251)
249,181
123
249,304
(28,206)
Funds
$’000
6,673
–
–
–
535
–
7,208
(2,278)
–
–
4,930
–
4,930
–
4,930
–
Adjustments and
eliminations*
$’000
Consolidated
total
$’000
(3,805)
(1,168)
–
–
–
(863)
(5,836)
906
–
–
(4,930)
–
(4,930)
–
(4,930)
–
321,102
14,458
7,613
2,968
(2,664)
(863)
342,614
(53,641)
(11,703)
(3,838)
273,432
(24,251)
249,181
123
249,304
(28,206)
Total comprehensive income
221,098
4,930
(4,930)
221,098
* The adjustments and eliminations are required due to the services provided by the Group to the consolidated funds as investment
manager and the Group’s investment as a limited partner in the funds. Accordingly, these adjustments and eliminations do not have
an effect on the net income or total net assets of Burford.
Burford Annual Report 2017 88
Continued
21. Investments in consolidated funds continued
Consolidated Statement of Financial Position
As at 31 December 2017
Investments
Due from settlement of investments – total
Investment income receivable
Receivables and prepayments
Due from broker
Cash management investments
Cash and cash equivalents
Other assets
Burford
$’000
982,177
4,765
–
6,772
–
39,933
91,473
192,899
Funds
$’000
Adjustments and
eliminations*
$’000
Consolidated
total
$’000
249,644
–
4,765
282
41,678
–
43,942
–
(155,880)
(1,517)
–
(1,580)
–
–
–
–
1,075,941
3,248
4,765
5,474
41,678
39,933
135,415
192,899
Total assets
1,318,019
340,311
(158,977)
1,499,353
Payables
Financial liabilities at fair value through profit
and loss
Due to limited partners
Loan interest payable
Other liabilities
Third-party interests in consolidated funds
Total liabilities
Total net assets
23,538
1,614
(1,319)
23,833
–
–
5,397
490,520
–
36,242
2,675
–
–
–
–
(1,517)
–
–
143,639
519,455
40,531
140,803
798,564
299,780
(299,780)
36,242
1,158
5,397
490,520
143,639
700,789
798,564
* The adjustments and eliminations are required due to the services provided by the Group to the consolidated funds as investment
manager and the Group’s investment as a limited partner in the funds. Accordingly, these adjustments and eliminations do not have
an effect on the net income or total net assets of Burford.
Due from broker includes restricted cash and margin balances held by the broker in relation to the
financial liabilities at fair value through profit and loss.
22. Share capital
Authorised share capital
Unlimited Ordinary Shares of no par value
Issued share capital
Ordinary Shares of no par value
2017
$’000
–
2016
$’000
–
Number
Number
208,237,979
208,237,979
80,000,001 Ordinary Shares were issued at 100p each on 21 October 2009. A further 100,000,000
Ordinary Shares were issued at 110p each on 9 December 2010. A further 24,545,454 shares were
issued on 12 December 2012. A further 3,692,524 shares were issued on 14 December 2016 as part
of the GKC acquisition as noted in the 2016 Annual Report.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22. Share capital continued
At 1 January
Share capital issued
At 31 December
89
2017
$’000
351,249
–
2016
$’000
328,749
22,500
351,249
351,249
Also, the GKC acquisition included $15,000,000 of contingent equity consideration. In calculating the
fair value of the contingent consideration a discount of 10% was applied for non-performance risk,
hence the contingent equity consideration is valued at $13,500,000 at acquisition. Shares of 2,461,682
will be issued only after GKC’s investment funds contribute more than $100 million in performance fee
income (and, in certain instances, fee income from new funds or other investment income) to Burford
within the prescribed timeframe. If the $100 million income target is not achieved no contingent
consideration is payable.
23. Long Term Incentive Plan
In 2017 the Group introduced a long term incentive plan (“LTIP”). Participants will only be entitled to
these shares at end of a three-year period if the Group has met the relevant pre-determined corporate
performance measures over the three-year performance period and they are still employed by the
Group. The 2017 award is equally weighted between the Group’s total shareholder return as compared
to a group of comparable public companies; earnings per share growth adjusted to remove amortisation
and other non-cash items; and growth in aggregate asset value defined as gross investment assets
plus gross cash receipts from investments. Expense arising from equity-settled share-based payment
transactions amounted to $1,652,000, of which $1,152,000 is recognised in other capital reserve.
Movements during the year
The following table summarises the fair values and key assumptions used for valuing grants made
under the LTIP in 2017:
Dividend yield (%)
Expected volatility (%)
Risk–free interest rate (%)
Expected life of share awards (years)
Weighted average fair value ($)
Weighted average share price ($)
Model used
2017
2.8%
25.8%
0.15%
3.0
7.26
10.27
Monte Carlo
The expected life of the share awards is based on historical data and current expectations and
is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the
assumption that the historical volatility over a period similar to the life of the awards is indicative of
future trends, which may not necessarily be the actual outcome.
Burford Annual Report 2017 90
Continued
24. Profit per ordinary share and comprehensive income per ordinary share
Profit per ordinary share is calculated based on profit attributable to ordinary shareholders for the year
of $249,304,000 (2016: $108,270,000) and the weighted average number of ordinary shares in issue
for the year of 208,237,979 (2016: 204,727,055). Comprehensive income per ordinary share is calculated
based on comprehensive income attributable to ordinary shareholders for the year of $221,098,000
(2016: $143,191,000), and the weighted average number of ordinary shares in issue for the year of
208,237,979 (2016: 204,727,055). The effect of dilution is attributable to the addition of 298,575 shares
related to the LTIP (2016: nil).
25. Dividends
The Directors propose to pay a final dividend of 7.95¢ (United States cents) per ordinary share in the
capital of the Company during 2018. Together with the interim dividend of 3.05¢ paid in November
2017, this makes a total 2017 dividend of 11.00¢. A resolution for the declaration of the final dividend
shall be put to the shareholders of the Company at the Company’s forthcoming Annual General
Meeting (scheduled for 22 May 2018). If approved by shareholders, the record date for this dividend
will be 1 June 2018 and payment of this dividend would then occur on 22 June 2018. The proposed
dividend will be paid in US Dollars and will be converted to and paid in Sterling for non-US shareholders
not electing to receive it in US Dollars.
The Directors proposed and paid a 2016 interim dividend of 2.67¢ in October 2016 and a final dividend of
6.48¢ per share on 17 June 2017 to shareholders on the register as at close of business on 27 May 2017.
26. Financial commitments and contingent liabilities
As a normal part of its business, the Group routinely enters into some investment agreements that
oblige the Group to make continuing investments over time, whereas other agreements provide for
the immediate funding of the total investment commitment. The terms of the former type of investment
agreements vary widely; in some cases, the Group has broad discretion as to each incremental
funding of a continuing investment, and in others, the Group has little discretion and would suffer
punitive consequences were it to fail to provide incremental funding.
The Group’s funding obligations are capped at a fixed amount in its agreements. At 31 December 2017,
the Group had outstanding commitments for $504 million, of which $503 million are for investments and
$1 million are for other commitments (2016: $297 million outstanding commitments, of which $290 million
are for investments and $7 million are for other commitments). Of the $504 million in commitments,
the Group expects less than 50% to be sought from it during the next 12 months. In addition, at
31 December 2017 at current exchange rates, the Group had $61 million of exposure to investments
where the Group is providing some form of legal risk arrangement pursuant to which the Group does
not generally expect to deploy capital unless there is a failure of the claim, such as providing an
indemnity for adverse costs.
27. Related party transactions
Directors’ fees paid in the year amounted to $348,000 (2016: $315,000) and one director holds
an interest of $708,000 in the consolidated funds at 31 December 2017 (2016: $nil) on which no
management or performance fees were charged. There were no Directors’ fees outstanding at
31 December 2017 or 31 December 2016.
There is no controlling party.
Burford Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 91
28. Subsequent events
On 12 February 2018, Burford Capital Finance LLC issued the first ever US-dollar-denominated bond
offering on the London Stock Exchange’s Order Book for Retail Bonds to the value of $180,000,000.
The bonds will mature on 12 August 2025, and pay a fixed rate of interest of 6.125% per annum.
On 13 March 2018, the Company announced the sale of its Teinver investment for $107 million in
a transaction scheduled to close by 22 March 2018. The Teinver award is the subject of ongoing
annulment proceedings (a limited form of appeal). Were the award to be annulled, the sale
transaction could be rescinded at the option of the buyers; in that event Burford would retain a $7
million fee and would also have its original entitlement back and be free to pursue the claim again.
Burford Annual Report 2017 92
Administrator and Company Secretary
International Administration Group (Guernsey)
Limited
PO Box 282
Regency Court
Glategny Esplanade
St Peter Port
Guernsey
GY1 3RH
Registrar
Computershare Investor Services (Guernsey)
Limited
3rd Floor, Natwest House
Le Truchot
St Peter Port
Guernsey
GY1 1WD
Advisors to the Company on Guernsey law
Ogier
Ogier House
St Julian’s Avenue
St Peter Port
Guernsey
GY1 1WA
Independent Auditor
Ernst & Young LLP
25 Churchill Place
Canary Wharf
London
E14 5EY
Directors
Sir Peter Middleton (Chairman)
Hugh Steven Wilson (Vice Chairman)
David Charles Lowe
Charles Nigel Kennedy Parkinson
Registered office
Regency Court
Glategny Esplanade
St Peter Port
Guernsey
GY1 1WW
Advisors to the Company on US and English law
Freshfields Bruckhaus Deringer LLP
65 Fleet Street
London
EC4Y 1HS
Nominated Adviser and Joint Broker
Macquarie Capital (Europe) Limited
Ropemaker Place
28 Ropemaker Street
London
EC2Y 9HD
Joint Brokers
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London
EC2Y 9LY
Numis Securities Ltd
The London Stock Exchange Building
10 Paternoster Square
London
EC4M 7LT
Burford Annual Report 2017CORPORATE INFORMATION B
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