Burford Capital (NYSE:BUR) (LON:BUR) has been in the news off and on over the past year, especially in connection with its case involving YPF in Argentina. Unfortunately, all that drama may be working against the company’s stock price, which hasn’t moved much over the past year. However, a number of hedge funds continue to hang onto the stock, seeing tremendous value in its pending cases.
Mordechai Yavneh of Focus Capital featured Burford Capital in the Q4 2023 issue of “Hidden Value Stocks,” while Rob MacDonald of City Different Investments highlighted it in the Q1 2024 issue. More recently, Rocklinc highlighted the firm in its Q3 2024 letter.
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Background on Burford Capital
Burford is a niche asset manager that invests in litigation claims, paying legal expenses in exchange for a share of the payout if or when it wins the case.
Burford provides financing at any stage of the litigation or arbitration process and covers fees and expenses for ongoing disputes. It also advances part of the expected entitlement of a pending claim or unenforced judgment or award.
Before we take a look back at Yavneh’s and MacDonald’s theses for Burford stock to see how well they fared, let’s get an update on the number one case that’s been keeping the firm in the headlines off and on over the last year.
The YPF case
In short, Argentina now owes about $16 billion according to a court order, of which Burford Capital’s share is about $6 billion. That $6 billion compares to Burford’s market capitalization of about £2.3 billion. In pursuit of that, the firm has been funding a case against the country in connection with the nationalization of YPF, its biggest oil and gas company. Argentina lost that lawsuit in 2023 but has since been exhausting every possible appeal.
More recently, the Buenos Aires Herald reported that Argentina agreed to comply with the judge’s order to provide Burford Capital with information on the gold reserves and other assets of its central bank. The firm is attempting to claim some of Argentina’s assets as a partial payment of what is owed.
Argentina has refused repeatedly to delver the information to Burford, but the judge’s order halted those delays. Once Burford has the information, it will review everything and decide whether Argentina has anything it could demand as partial payment of what’s owed.
Rob MacDonald/ City Different on Burford Capital
Turning to the theses highlighted in “Hidden Value Stocks,” a little over a year ago, MacDonald said they were drawn to Burford because of their past success investing in U.S. alternative asset managers like Blackstone and Apollo Global. He noted that when these companies initially went public, investors were unsure about how to value them due to their complexity. MacDonald observed a similar situation with Burford Capital.
“Burford is a great business, generating tons of cash, with high barriers and lots of opportunities for continued growth,” he wrote in the Q1 2024 issue of “Hidden Value Stocks.” “The stock trades at a discount because investors doubt the cash-generating ability of the business model. We think events over the coming years should shed light on the value of the business.”
MacDonald noted that Burford’s backlog of court cases was already starting to pick back up at the time of his thesis. He added that the company would demonstrate its underlying value as it generated cash flow, hopefully quieting doubts about its complicated accounting and “lumpy investment returns.”
“An interesting aspect about litigation finance is that downside is limited to the money invested in the case, but upside can sometimes be very large,” MacDonald added.
Although Burford may not recover the entire amount owed from Argentina, MacDonald estimates that it may get between 25% and 60% of the value it is owed, amounting to between $7 and $17 a share on a $14 stock.
Mordechai Yavneh/ Focus Capital on Burford Capital
In the Q4 2023 issue of “Hidden Value Stocks,” Yavneh said they bought into Burford stock at an average of $5.80 a share, so he’s already seen significant upside. However, the stock was trading at around $15 at the time of his thesis and has since stalled out at around $14 a share. Nonetheless, Yavneh is in Burford for the long haul and sees plenty of room for additional upside going forward.
To determine the company’s valuation, he starts with its deployed cash, which is what it has already invested into various litigation matters. Yavneh then adjusts that for the age of the portfolio and the annualized investment rates of return to determine a value for the present portfolio. Then they add cash, subtract debt and take other typical steps to reach an adjusted net asset value of about $2 billion for Burford.
Massive compounder
Yavneh noted that the $2 billion net asset value then compounds at a rate of 20% to 25% a year, even after accounting for operating expenses, debt load and taxes. At the then-market cap of around $3.3 billion, he said investors were paying a relatively small premium at 1.7x book value for a rapidly compounding company.
“In fact, being that they’re adding $400 million to $500 million of value a year on average, this amounts to a return of 12% to 15% a year on the market cap,” Yavneh said. “This rate of return can be expected to continue for years to come and actually go higher as capital reinvested by the company compounds at the higher rate of 20% to 25%.
That doesn’t even account for Burford’s third-party fund business, which he estimates to add another $400 million to $500 million in the coming years, and a more-than $50 million annuity the firm is receiving from one of its arrangements. These numbers also don’t account for the YPF case.
“Putting everything together, the valuation the market is ascribing to Burford is breathtakingly low,” Yavneh said. “Essentially, you are able to buy a profitable compounding machine at an excellent price and get all the rest for free. And what a rest it is!”
Update on Yavneh’s thesis
While MacDonald could not be reached for an update on his view of Burford Capital, we did follow up on Yavneh’s opinion of the stock through his fourth-quarter letter to investors.
He noted that Burford continued to put up solid growth in 2024 with business as usual, including high commitment levels and deployments and strong internal rate of return. Yavneh added that realizations and realized gains surged year over year for the first three quarters of 2024.
That’s purely counting cash gains, not including any fair value adjustments,” he wrote. “Their income from managing third-party funds, especially their Sovereign Wealth Fund arrangement, remains strong as well, in the ~$40 million to $50 million range for 2024.”
YPF-like cases
Recalling what he said in his 2024 update on Burford, Yavneh provided updates on a number of cases similar to the YPF case, some of which could bring sizable payouts for the firm.
First, Sundance Resources is facing off against Congo and Cameroon in a dispute over the Nabeba iron ore project. Sundance is seeking $8.8 billion in damages in connection with Congo’s revocation of its permit on the project. The nation then awarded it to a little-known company instead.
Sundance held its arbitration hearing against Congo in November, and there were headlines in mid-2024 suggesting the case had been settled. However, Congo didn’t end up producing the cash necessary to finalize that settlement. Meanwhile, the case against Cameroon was scheduled to go to Paris arbitration in January 2025, but there’s been no news since then. According to Yavneh, the cases against Congo and Cameroon “are proceeding normally.”
Greenland Minerals and Sysco
Greenland Minerals is battling Greenland and Denmark, although there wasn’t much to report, except that the arbitration tribunal chose to bifurcate the proceedings. It will first release a judgment on jurisdictional issues, followed by the merits, which will delay the ultimate resolution of the case. Yavneh warned that this resolution is “years away at earliest, assuming that Greenland Minerals will prevail on the jurisdictional question,” which he expects.
Unfortunately, the case involving Sysco isn’t going so well for Burford Capital. The judge in the pork and beef cases denied Burford’s request to substitute for Sysco — even though Burford bought Sysco’s rights. Yavneh noted that the firm faces an uphill battle in the pork and beef cases because of this decision, although it doesn’t affect the chicken and turkey claims.
“Separately, it was ruled that Pilgrim Pride’s settlement with Sysco was indeed valid and effective, over Burford’s complaints and arguments to the contrary,” Yavneh added in his January letter. “All this points to Sysco as having a sharply lower chance of being an outlier winner for Burford.”
Update on YPF and Argentina
On the other hand, Yavneh continues to see Burford Capital as “highly undervalued on the basis of their regular, steady business.” He noted that the YPF case continues to dominate the headlines — and sentiment among investors, and for good reason due to its size.
Yavneh recalled the decision to force Argentina to turn over information on its assets, although he said it isn’t expected to uncover enough assets to satisfy the huge $16 billion judgment with interest.
“Rather, the point is to increase pressure on Argentina, essentially harassing them legally until it makes more sense for them to come to the negotiating table to settle than to continue trying to evade payment,” he explained.
Legal tussles
Meanwhile, Burford continues to try a variety of legal tactics, both in the U.S. and internationally. Argentina continues to kick the proverbial can down the road with various tactics to delay payment. However, Burford has won most of those attempts.
Politically, Argentina President Javier Milei continues to express interest in “returning to the international financial fold” and paying down the nation’s debts and legal liabilities, especially Burford’s claim. Yavneh also noted that the Argentine economy has been recovering under his reforms, which provides hope that there will eventually be a settlement.
“We continue to expect settlement to be the ultimate endgame here, after Argentina exhausts all its legal appeals,” he concluded. “Although the pace of legal matters is notoriously difficult to predict with any accuracy, and delays are always possible, we do think that the appeals court is likely to rule on the YPF appeal by late 2025. When negotiations will result in a settlement is anyone’s guess.”
Rocklinc on Burford Capital
One other firm that’s covered Burford Capital in a recent letter was Rocklinc, which highlighted it in its Q3 2024 letter to investors.
The Rocklinc team noted that the firm’s business model looks “risky and unstable” at first glance. They described Burford’s cash flows as “irregular” and earnings as sometimes “unpredictable,” which makes it “unattractive to many investors and underappreciated by the market.”
However, like Yavneh, the Rocklinc team said the correct way to look at the firm’s business is over the long term.
“When we look at the business we see a business in a growing sector with a longstanding track record of generating significant, predictable, cash-on-cash returns,” they wrote. “Since courts operate independently of most economic factors — such as changes in interest rates, inflation and geopolitical issues — Burford’s returns are largely uncorrelated with broader market conditions.”
The Rocklinc team also sees the firm as a major compounder that will be able to provide “tremendous value” to investors via its unique strategy. They noted that Burford’s business model is often compared to private equity. PE investors are locked into their holdings for a long time, depending on an active market to exit and realize returns.
“In Burford’s instance, not only do investors earn impressive returns from cases that typically conclude within two to three years, but every single case benefits from an assured exit due to the nature of the court system,” the Rocklinc team added.
Other hedge funds holding Burford
Focus Capital, City Different and Rocklinc aren’t the only hedge funds holding this somewhat under-the-radar value stock. According to 13F data, funds that maintained their holdings in the latest quarter include Mithaq Capital, Pictet North America Advisors, Bandera Partners, Penderfund Capital Management, Claar Advisors, and Hyperion Capital Advisors.
Meanwhile, Emeth Value Capital, Breach Inlet Capital Management and Rangeley Capital established new positions in Burford during Q4. Antara Capital, Sycale Advisors, Old Well Partners and DG Capital Management were among those that added to their positions during the fourth quarter.
On the other hand, a relative few funds trimmed their stakes in Burford, including Greenlea Lane Capital Management, Greenhaven Road Investment Management and Onex Canada Asset Management.
