Burford Capital - Q4 2022

Transcript

Operator (participant)

Hello, welcome to Burford Capital's 2022 annual financial results. My name is Harry, I'll be your operator. If you're joining us over the phone and would like to ask a question during Q&A, you may do so by pressing star one on your telephone keypad. It's now my pleasure to hand you over to Christopher Bogart, Chief Executive Officer, to begin. Christopher, please go ahead when you're ready.

Christopher Bogart (CEO)

Thanks very much, Harry. Hi, everybody. Thank you for joining us once again for some discussion about Burford and its performance. As usual, with me is Jon Molot, Burford's Chief Investment Officer, and Jordan Licht, Burford's Chief Financial Officer. You're gonna hear from both of them during the course of the call as well. We're very pleased to be doing this today, which meets our prediction about when we would have full-year results for you. While you already had a sense from our call in March that those results were gonna be strong, today really confirms that and our performance. We're gonna do a few different things on this call, and they are summarized on slide 3.

First, we're gonna talk about our audited 2022 financial results, which show our EPS more than doubling with strong growth in both capital provision and asset management income, which adds to the strong cash performance that we reported to you in March. Jon is gonna say a few words about early 2023 activity and just how much is going on in the portfolio right now, as well as touching on events in the YPF matter. We've talked before about our data science work, and we'll update that a little bit in the context of rapid developments in AI. Jordan will spend some time walking you through our revised fair value methodology, how it works and what its impact is, as well as touching on liquidity, and we'll leave a substantial amount of time for your questions.

Turning to slide 4 to talk about results. You know, in the context of an environment where courts were still suffering meaningfully from the effects of the pandemic, we had a really strong 2022 and look forward to 2023. Just looking at the numbers on this page, our net income more than doubled, our asset management income doubled, and our capital provision income, effectively our core business, rose 64% on a consolidated basis and 30% on a Burford-only basis. That was happening because of the increased velocity in the portfolio as courts came back to life and cases started to move forward again. That velocity shows itself in two ways. Sometimes it's with cases that actually conclude either by settlement or adjudication, but it's often by cases simply moving through adjudicative milestones that takes them closer to that conclusion.

We had both species of those things going on, and we continue to in 2023. Jon Molot will talk in a minute about the velocity we're seeing in 2023, but the short version is that it has increased considerably even over 2022's levels. Beyond the numbers that are on this page, our story is actually even stronger than those numbers indicate. As Jordan Licht will go through in a few minutes, our new valuation methodology caused 2021's numbers to improve a fair bit while also imposing a penalty on 2022 for the increases seen in market interest rates. While our net income more than doubled under our new approach, it would have at least quadrupled under our prior approach. So we're pretty pleased with where things stand.

With that, Jon Molot will talk about 2023 and YPF.

Jon Molot (Chief Investment Officer)

Thanks, Christopher Bogart, and thanks to you all for joining. Turning to slide 5, it really picks up on a theme I mentioned a few weeks back when we updated you on 2022 performance that the portfolio's activity is at a level we just haven't experienced historically. Remember, our business expanded dramatically in the years just before COVID, one would have expected this larger, more robust portfolio to lead to much more activity, but for COVID slowdowns. 2022, we saw a resumption of activity, but on a much larger portfolio than we had had before the pandemic. 2023 has seen that pace continue unabated, so that if you look at Q1 2023, we had 23 case milestones.

We've had five already in Q2, with 17 more that would be expected based on court schedules. The pace is expected to continue into the second half with more than 40 expected case milestones based on court schedules, I mean, court schedules. What is a milestone? It's trials, it's appeals, it's rulings on dispositive motions. It's the important motions and rulings that affect a case's value and trajectory. Sometimes those dates do get pushed back as calendars shift. The court may schedule a trial and then push it back a couple of months. Sometimes they pop up when not expected. A motion could be pending for a long time, and a court just decides it out of the blue, as we'll talk about on the next slide.

The message is that the large, valuable, robust portfolio we put on, that I've been talking to you guys for a while about how pleased I am with the deals we are doing, that portfolio is now actually moving through the litigation process at a very good clip, and that's what we like to see because that's what leads to results. We'll have more to say about all this when we release our Q1 2023 earnings, which we expect to do in early June. Turning to slide 6, I'll just say a few words about the YPF matters, which we've obviously put out a release about when it happened. To go over it again, the ruling resulted in summary judgment on liability against Argentina and summary judgment in YPF's favor.

Importantly, the court rejected Argentina's efforts to evade damages or reduce them through a variety of legal arguments, and it reserved just two issues for a short trial on damages. Those issues are the precise date of the breach, which would be somewhere between April 16th and May 7th, 2012, and the prejudgment interest rate to be applied from 2012 to the present day. The court did rule that the rate would be the higher commercial rate rather than the lower administrative rate that Argentina had argued for, but it reserved the question of precisely what rate to apply.

We don't have much more to say than what was in our release right after the opinion was handed down. After the court rules on the damages hearing and issues a final judgment, there'll be appeals, though the judgment would be immediately enforceable absent a stay or Argentina posting a bond. I suppose that there'll be more about this as time goes on. We're not in the same, you know, long-term waiting pattern that we were for a while before March 31st. With that, I will turn it over to slide 7.

Christopher Bogart (CEO)

Thanks, Jon. Just on the, on the subject of YPF, I know, you know, we all know that people would love to ask a lot of questions about it, and would love for us to go into great detail about our strategy and our thoughts and our methodology. You know, I understand the human desire for that, but as everybody steps back and just thinks about it, you know, it's pretty obvious why that's a bad idea, and, you know, ranging from, you know, hurting the case to angering the judge. We're just not gonna be in a position to do that. You know, while we love your questions on every topic, we're just not gonna be able to say anything more about YPF than we have already said.

The procedural posture is clear, and we're now just waiting for the next step. Please avoid torturing us by trying to get more out of us because it's just actually not good for the company and for shareholders to try to make that happen. On slide 7, I'm just gonna talk for a minute about AI. Given that we have a lot to show you about our revised approach to fair value, I'm not gonna spend a lot of time here, and instead, I'm gonna talk more about it in the future.

Given the speed of change that we are seeing in the world of data science and machine learning, I wanted to give a little bit of an update from the discussion we had on this topic at our investor day about 18 months ago. What we said then is that we have a few significant things going on in Burford's business that set us apart from our competitors and create a significant advantage, a significant competitive moat for us. In the succeeding 18 months since the investor day, we have invested more, we've expanded and built more, and we've deepened that advantage. The real root of our advantage comes from the substantial amount of proprietary data we have about litigation outcomes, combined with years of investing in data science and quantitative analysis.

Today, the outputs from that work are an integral part of our investment decision-making process, both at inception and throughout a matter's life thereafter. Given the increased cycle times of AI development, we can make increased use of machine learning as part of our process at ever more attractive cost, and we can also use AI to increase our use of the truly massive amount of data available publicly about litigation that is difficult to integrate and to assess on a human level. Fear not, however, ChatGPT is just as afraid as everyone else who looks at our space to make predictions, and you can see the ChatGPT output sitting there on the slide. It's worth reading and just smiling at it.

We're a very long way away from lawyers and judges being replaced by sentient AI adjudicators, AI is a big net positive for our business, and we're gonna continue to talk more about it in the months to come. Now, let's turn to fair value, and start with slide 8. I said in March, on our call, that while I regretted the timing and the resulting delay in the release of our financials, I was actually pretty pleased about this happening and about our engagement with the SEC. The reason that I was pleased is that I hope never again to need to have six slides in a presentation deck on fair value. Indeed, I hope after today that I never have to talk about it again.

Just as when you listen to Blackstone or KKR's earnings call, they don't talk about their approach to fair value. It just is. You know, financial firms fair value their assets. They're required to do so. We will now be doing so under an approach that looks and smells just like other finance firms and has been the subject of extensive engagement with the SEC so that we now have something we think is an industry standard, certainly for U.S. GAAP firms and likely for IFRS firms, as there is very little difference between GAAP and IFRS on this point. Jordan's gonna take you through the details of this, but I'm just gonna make a couple of broad points at the beginning. First of all, the fundamentals of our approach remain the same as they always have.

The largest driver of value in this business is court decisions. They will remain the key driver of our valuations, just as they have been since our founding 14 years ago with, by the way, 14 years of unqualified audit opinions on this very topic from Ernst & Young. Second, the quality of our modeling and our investment work is such that we're ready to join the mainstream and also take into account other typical valuation factors, like the passage of time, changes in interest rates, foreign exchange, and other non-litigation risk. Some of this is really just common sense.

You know, while court decisions are a critical element of our asset valuation policy, I think we can all agree that if I offer you two choices, you know, behind door number one are 10 brand-new litigation cases just filed, and behind door number two are 10 identical cases that, while they have not had any court decisions, they've all been running for two years. You'd pay more for what's behind door number two, and you do that just because the cases are closer to the end. That's an appropriate thing to take into account when we think about fair value. Importantly, though, and I really wanna underline this, as I have said for years, we run this business on a cash basis. I can't spend fair value. It is just an accounting concept. We don't pay people on the basis of fair value.

While we obviously have to comply with the accounting rules and put out audited statements for all of you, all of what we're talking about here really has very little to do with our day-to-day lives in running the actual business. Now here's Jordan to take you through this.

Jordan Licht (CFO)

Thank you, Chris. Good morning or good afternoon to everyone. I've been at Burford now for eight months, and I've spent though my entire career in specialty finance, whether it was a banker, a consultant, or a senior executive. What I see here is Burford and the litigation finance industry continuing to evolve similar to how other industries have in the past. We're adopting a valuation approach that's more consistent with specialty finance firms or other financial assets more generally. While doing this, though, we're retaining, as Chris mentioned, the key valuation principles of the asset class, namely using case milestones to continue to drive value, but also building in traditional metrics like time value and duration. On slide 9, what I'll walk through here is the theory behind our prior approach and our revised approach.

The top of the slide shows our historical approach or what I like to refer to as cost plus. We deploy cash, and we put that deployed cash value on the balance sheet. In each period, deploying more cash would increase the fair value by that deployed amount. When we experience a case milestone, we would write that asset off or down pursuant to ranges in our valuation policy when we witness an observable event. However, that approach doesn't incorporate traditional valuation factors like time, value, and duration. Our revised approach now moves us to the mainstream of fair value. Instead of just holding our assets at cost and building up value over time, we start with expected value, what we call our win node.

Our win node is what our modeling suggests is the most likely outcome if the case goes all the way through the litigation process. Everything in litigation starts from that point. A great example which most of you or many of you have seen recently is the case of Dominion Voting Systems against Fox News. That case claimed $1.6 billion, settled for $757 million. Everyone who talks about that settlement considers it against the perspective of the original damages claim. We have our win node. We work backwards. We take the win node and discount back to the initial NPV, and we show that on the graphic as t equals zero, which is where deployed cost equals fair value.

Case milestones still drive the bulk of future valuation changes, but duration, discount rates, and other factors are relevant to the changes. I think, though, this is gonna be a little bit easier, not in theory, but in some numbers. Let's turn to the next slide, and I'm gonna start with an example. On slide 10. We start with expected outflows, the cash flows we expect to provide to the case over time. For simplicity, let's use a single outflow of 100 at t zero, which is how a monetization would work. We consider expected inflows. I just discussed the concept of the win node. In this case, that is 200. We have a market-observed discount rate and a duration predicted by the individual case dynamics and the experience in the underlying court.

At this point now, if we were to simply discount back on that basis, $200 at 7% over three years, we would end up with a much larger present value than the $100 of deployed cost. If we force the discounting to get to the present value of $100, we would end up with a very high discount rate. As we've said before, we don't think it's appropriate to accrete income on that purely time-based approach. What do we do instead? At this point, we calibrate the modeling to the present value of $100. We look at the future value of $100 at the 7% over three years, that gives us $123.

We'll use that as our market and time-based component, which is going to accrete over time, and it's going to adjust every period based on changes in interest rates, duration, and other factors. However, we're expecting $200 from the win node, which leaves $77 for what we call the litigation risk premium. That premium just sits, not on the balance sheet, but waiting for case milestones. As case milestones occur, some of that premium, the $77, will come into income just as it did under our prior methodology. Let's now walk through how that happens. Turning to slide 11. In the first period, that's the left-hand side, we demonstrate no case activity. All that happened was that the duration of the case declined from three years to two.

That reduction in duration causes some accretion of income, 7 in this example, as opposed to no revenue recognition under our prior approach. That part's easy. Let's move to the second period. On the right, we show the impact of some positive case activity. Here again, our approach has not changed. This case success under old regime would have resulted in a 50% write-up. Under our new approach, we also take 50% of the litigation risk premium. That premium was 77 originally, half of that takes us to 39 with some rounding. Two ways to look at this. We take the 123 and add 39, which takes us to 161. Again, ignore the rounding. You could have just started at the 200 win node and reduced by 39 to 161.

Again, it is just adjusted by the remaining duration at this point of one year. At the end of the day, under our old approach, we would have taken $50 of revenue from the case milestone in year 2. Under the new approach, we've taken $51 of revenue, $7 in year 1 and $44 in year 2. Hopefully, that example helps. I'm gonna now turn the page to slide 12 and go from kind of the specific to the general. What this slide shows is a few macro points about this new approach. A key point is the impact of a rising discount rate on asset values. As you can see, our discount rate has increased from 4.1%-7.3% in the span of four years.

That's had a meaningful downward effect on asset values as we're discounting at a higher rate than the previous years. The graphics then on the right-hand side attempts to quantify that effect and basically shows around $400 million in foregone income from the portfolio because of that increase in discount rate. Of course, this doesn't change the ultimate resolution of the case, and we would recognize this income, assuming the case performs eventually as expected. Going forward, we can expect to see sensitivity to interest rates. That increases in interest rates can cause declines in asset value and vice versa. I turn to slide 13, another illustration of the macro effects of this policy. To begin, you'll see that deployed cost is the same across the board. No changes there.

The YPF asset value didn't move meaningfully, we do adjust the model every period based on all the factors we've already discussed previously. Fundamentally, you're seeing moderate increases in total non-YPF fair value based on the methodology that we talked about, but it's not in any way a dramatic change. Overall, you'll see the deployed cost still makes up around 50% of the value of CPAs on our balance sheet, including YPF. Also, you'll see that fair value mark, excluding YPF, as a percentage of deployed cost, is about 24%, which is similar to the 20% under the old methodology. Before I move on, in conclusion, we have a valuation approach that at its core, similar to many financial assets with respect to time value and duration.

We've been consistent with our principles that case milestones continue to be the principal determinant in driving fair value. We're happy to present this to you today. Excited to continue being the leader in the industry, whether as the leading global finance provider or in setting the standards for fair value. I move on now, you know, to slides that you've all seen before, so I won't go into all the details. Two simple takeaways. Low leverage remains, and I'm on slide 14. Low leverage remains, and that was, you know, our leverage level was slightly improved upon with the updated methodology given the slight rise in asset value, and we continue to maintain an appropriately laddered maturity schedule. Overall, we'll continue to be prudent users of leverage in our capital structure.

You know, we'll deploy capital as appropriate into, you know, litigation finance opportunities. Finally, slide 15. On the left-hand side, we see a bridge of our cash movements in 2022. I'd highlight the $328 million of cash receipts, which was up 17% from the prior year. Finally, while we're planning on releasing our full Q1 numbers later in June, our cash balance at the end of the year represented $210 million, with an additional $115 million in receivables. We show our Q1 balance of $183 million, with $99 million of receivables, the bulk of which we expect to receive this year. With that, I look to hand it back over to Chris.

Christopher Bogart (CEO)

Great. Thanks very much, Jordan. Turning to slide 16, I think that, you know, we've probably exhausted you on the question of accounting, although we're happy to take your questions about our new methodology. Let me come back to the basics of the business here. This is a slide that you saw in March, but I think that it really does sum up the value proposition of holding Burford equity. We think an investment in Burford gets you four things. It gets you a $6-plus billion portfolio of legal finance assets that have produced high returns in the past and whose velocity is accelerating after several years of COVID slowness.

It gets you the industry's leading origination platform, which has done more than $1 billion in new business in each of the last two years. It gets you the sector's largest asset management business, whose income doubled last year as BOF-C, our large fund with our sovereign wealth fund partner continues to mature. It gives you what remains, in our view, close to a free option on the YPF matters, which we now know are going to result in a multi-billion dollar judgment. We're pretty pleased with where the business stands. It's been an aggravating couple of years as we've seen the courts really impacted by COVID and really slowed to a crawl, which has had an impact on our portfolio.

There's a great sense inside the business of excitement and enthusiasm, about not only being back to sort of a normal pace, but also having the court system, increase its velocity to try to catch up and to clear that backlog. With that, we will take some questions.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question and you've joined us over the phone, please dial star one on your telephone keypad now. We'll just leave a moment for any questions to be registered. Our first question of the day is from the line of James Hamilton of Numis. James, your line is now open if you'd like to proceed.

James Hamilton (Senior Analyst)

Thank you, and thank you for the presentation. A couple of them may. Firstly, you had 28 milestone events so far, and you've got a further sort of 61 in the pipeline, useful sort of data point. I just wondering if you can compare that to the same time last year in terms of number of milestones you've had and expect. Secondly, in terms of the relative quantum of the deployed capital in those cases where you have had milestones and expect milestones. On the second one, you had record commitments and deployments again, you know, the sort of future value pipeline. I was just sort of wondering how does the pipeline for commitments and deployments look as we stand today?

Christopher Bogart (CEO)

Let me take them in reverse order, 'cause I'm gonna do the first one, and then Jon Molot will do the second. As I've said before, when you think about our pipeline and how much new business we're gonna do in any particular period, that's really a function of two almost separate things. First, we have an ongoing level of business activity, just as the largest player in the space with, you know, just a sheer number of cases that we look at. That has now turned itself into, you know, almost just sort of an ongoing annuity-like approach to things. These are really the cases where we're putting out, you know, $10 million, $20 million, $30 million against pieces of litigation.

That's something that we are sort of constantly looking at. We've got a flow of those cases. The other part of the pipeline and what really ultimately determines the fundamental numbers that you see are whether we end up doing, you know, sort of zero, one or two, you know, really big chunky deals on top of that run rate business. Those deals are much more episodic, and they're much more difficult to predict or to, yes, just to predict. In any period, it's really a question of whether that's gonna happen, and if so, in what kind of size. You know, you've seen big numbers in the last couple of periods because we had big deals in those last couple of periods. It's not necessarily the case that every single time we'll have that.

You will see some volatility in that number, but the fact remains that we're still seeing and originating a very significant amount of business. There's no question that there has been demand. You know, we've also been a lot in the news of late for a variety of reasons, and all of that, frankly, has contributed, I think, to the corporate sense that we are the place to be with, if you will, the clear leader. Sort of like, you know, if you're gonna try litigation for the first time, you know, sort of the old tech adage, nobody ever got in trouble for buying IBM. Burford has sort of fallen into that category, I think, for users of litigation finance.

Jon, do you wanna give a little more color on the sort of the forthcoming case events and how they relate to the last couple of years?

Jon Molot (Chief Investment Officer)

Sure. I can tell you that anecdotally there is a marked difference that in the feeling in the team in 2022 was it is very much a relief to have things back to where they were. You know, that basically to feel like things were moving through again after I don't know how many earnings calls it was, probably three during COVID, where we would say, you know, not much has happened. Nothing bad has happened, but there just hasn't been the things moving through to in 2022, it's like things are finally happening again. 2023 is a whole new level. Just the number of things each week on calls, getting updates on, you know, there'll be a single underwriter who's got, you know, multiple cases that are having major events that week, and that's across the whole portfolio.

There's a marked change. In terms of, you know, what that bodes for the portfolio, you know, more important than the actual numbers, we give you the numbers. You know, that's my concrete way of conveying the sense of the business of what's happening. Basically, you know, we had modeled our entire portfolio based on our underwriting, which we update every quarter. We had a sense internally that as courts resume, this is the trajectory we would expect things to follow. Now we are seeing things follow that trajectory.

I wouldn't say that there's, you know, any surprise in what's happening in the portfolio, only it sort of reaffirms the investment thesis we had when we made each individual investment and our overall sense of the value of the portfolio to actually see things moving through. In a way that 2022 was reassuring that finally the world's come back to life and the courts are actually operating. We hadn't yet seen the robust level of activity that was leading to conclusions that we would have predicted when we put the investments on.

James Hamilton (Senior Analyst)

If I could have a sort of a quick follow-up to apologize to everybody else. Would you describe what you're seeing as catch up from the backlog that COVID produced, or would you say that, you know, core capacity is core capacity, and we're now at a sort of a new normal?

Jon Molot (Chief Investment Officer)

That's a really good question. I'd say that it's somewhere between those two. That's anecdotal. I think there is some catch up. As I say, it's not, it's not unexpected. It's not that all of a sudden there's more going on in the portfolio than we would expect to given the case stage. You know, that Chris has said from the beginning when we founded this business, the great thing about this asset class is there are stages of litigation. They go through a motion to dismiss. They go through discovery. They go through summary judgment for U.S. commercial litigation. There's similar stages in international arbitration, the jurisdictional phase and a merit phase, quantum.

We're basically just once again seeing things move through those phases as they should be, rather than at some unexpected, you know, lightning pace that to catch up for the past. I think probably there was a moment where we were doing catch up, but probably when we were doing catch up, that meant an older case was moving, but a newer case wasn't yet. Now I think we're moving toward sort of the new normal. That I think that's probably the best way to. The new normal is the old normal, so it'll be expected, but it's just on a much larger portfolio than we had before COVID.

James Hamilton (Senior Analyst)

Thank you very much.

Christopher Bogart (CEO)

No, thanks, James. You know, the other part of what I've always said, which I think it's important to underline here in this context, is, you know, especially as we go into a period of some economic turbulence, is that unlike many other kinds of investments, like private equity and venture capital, for example, we don't need a positive market to exit our investments. We don't need a buyer. We don't need a process. We don't need an IPO. The litigation system delivers us an exit in every single investment that we make, just by the passage of time. As Jon said, that was slowed because of COVID. It is now resuming, but the fundamental point remains absolutely true, and it's why this business doesn't have any correlation to, you know, sort of underlying economic trends and conditions.

We've got a question on the webcast from Julian Roberts at Jefferies. Julian asks: One of your largest investments saw a partial resolution in the second half. Resolutions relating to about half of the deployed capital have been reached at an ROIC of over 40%. Is it reasonable to suppose that the other half is also quite close to resolution too? Is the timing difference related to differing jurisdictions? Jon, would you like to comment on that?

Jon Molot (Chief Investment Officer)

You know, I can't really say too much about an individual investment, but, you know, if I recall the investment that you are referring to, Julian, is the IRRs were also, in excess of 40%. We've said, with respect to the portfolio generally, and I don't wanna speak to or make predictions about any particular investment, but that very often if we have an early resolution, it can lead to, you know, higher IRRs, lower ROICs, and later ones can lead to the reverse. I don't wanna make a prediction that this one will follow that. I don't know that you can draw a conclusion about the exact return levels you're gonna get from this other than to say it is always a positive when we have a successful partial resolution.

It bodes well that the investment is going well, that the investment thesis is borne out. I don't really think I should say more about the trajectory of an individual case in keeping with our policy.

Christopher Bogart (CEO)

Another question from the webcast, this is from Jeff Keane at Waverton, who has taken a break from making money from charity by handicapping The Masters. Thank you so much, Jeff, for doing that. I think that's a fantastic thing that you do. Jeff's question is: You have referred to the fact that the portfolio has the potential to release a significant flow of realizations ex YPF. Are you confident that you have enough opportunities to redeploy those proceeds? I think the answer from us is yes. You know, it's obviously a high-class problem to have, and not one that we've had for the last couple of years because of COVID. I think the answer is yes, and I think the reason the answer is yes is a couplefold.

Number one, you've seen us continue to migrate the business towards higher levels of deployment in cases, higher average deal sizes, and a good deal of that is happening because of the presence of corporate deals and corporate monetizations. When this business was younger, much of what we were doing was what we today call fees and expenses business. In other words, we're just financing the legal fees and expenses associated with bringing the case, and those don't correlate necessarily to case size. It can cost the same amount of legal fees to bring a $50 million claim and a $500 million claim.

However, if the underlying investment transaction that we're going to do is a monetization for the corporate client, then it makes a great deal of difference for us whether it's a $50 million or a $500 million dollar case, because a $500 million dollar case allows us to monetize at a significant level. You've seen a public illustration of this because you know, one of our large monetization transactions became public during the course of the last six months or so. You've seen, you know, sort of a case study in action of how that capital has been used.

You know, we provided $140 million to Sysco, that's Sysco with an S, not the, computer company, a large food distributor, a Fortune 50 company, against a series of large valuable antitrust claims. When we have the opportunity to do deals like that, those obviously soak up a lot of capital, and we continue to see opportunities like that in the market. Not only do I think we can redeploy our capital, you know, as Jordan said, we've been a regular consumer of some amount of debt in the business as a way of topping up the capital that we generate organically so that we can continue to meet demand. Now there's a question, another webcast question from Alistair Lindsey.

Can you explain please the decision to cease publication of your modeling output? Did the SEC require you to stop? Clearly, you need to report on a fair value basis, but like you, I'm much more interested in cash generation and found the model useful for assessing future cash generation. I think the way to put some color around this is to think about the dynamic in the accounting world where there is a tension between publishing GAAP and non-GAAP information, and our modeling output is clearly non-GAAP information. What we are doing instead, because we are not using today the full panoply of our modeling and our valuation process, we're just, as Jordan described earlier, we're starting with the win node. That constrains our ability to provide the full non-GAAP output publicly.

What we're going to do in the months to come is figure out a way to at least provide something relating to the win node inputs into the fair valuation process. That will give you, I think, a valuable piece of information from the modeling, given that everything else in the model derives from that starting point, from that win node, which is why we're using it for valuation. I think we will find a way to share some meaningful portion of the modeling output. As time goes on and as we, you know, continue to develop the modeling work and continue perhaps to use it more broadly, this is not necessarily a static position.

This is something that I think will evolve, as the business does as well. Now we have a telephone line question, I believe.

Operator (participant)

That's right. We have a question here from the line of David Chiaverini of Wedbush. David, your line is now open.

David Chiaverini (Managing Director of Equity Research)

Hi. Thanks for taking the questions and all the detail. In the presentation, I had a question on the leverage, on slide 14. Curious as to your comfort level on the leverage and if there's any change to that comfort level based on the new fair value approach.

Christopher Bogart (CEO)

I'll let Jordan pick that up. My quick answer to the second part of that is no. Again, because I think of the business in cash terms. When I think about leverage, I think about, you know, how much leverage, you know, Jon and Jordan and I think the portfolio can service and take. I don't really think of it in terms of what the, you know, the sort of the balance sheet numbers provide for.

Jordan Licht (CFO)

Yeah. As you can see, we're well, I would agree with what Chris said. We're also well within whether the covenant levels or what we would consider, you know, prudent leverage. Like, I'm quite comfortable and I think while the valuation approach obviously does change asset values ever so slightly, I think, you know, it fits neatly into the way we've constructed our current debt structure, capital structure.

David Chiaverini (Managing Director of Equity Research)

Great. That makes sense.

Jordan Licht (CFO)

Oh, sorry.

Christopher Bogart (CEO)

Yeah, go ahead.

David Chiaverini (Managing Director of Equity Research)

I just had a quick follow-up. Wanted to ask about, the competitive environment. You know, you noted how Burford has been in the news more recently, and it's really, you know, drawing attention to how attractive this asset class is. Can you comment on any new entrants and if they're impacting your business at all?

Christopher Bogart (CEO)

Well, as you know, I've long been a fan of entry and competition in this business. The reason I say that is because I think a business like this does better, with a robust market instead of trying to be a sort of an esoteric monopolist. The more credible people who are out in the market talking up, the use of capital in law, the better from my perspective. I remain, you know, close to 15 years in, entirely unconcerned about Burford and its team's ability to meet any sort of competitive threat that we face. Indeed, you know, I think the passage of time has only solidified that position for us. You know, the reality is we are still just scratching the surface of this stuff.

You know, the legal market is absolutely enormous. You know, the top 100 law firms in the United States employ 100,000 lawyers. The law firms around the world bill close to $1 trillion a year in legal fees. I'm not suggesting all of that is addressable for us, not at all. I am suggesting that this is an enormous market. When we get very excited about doing, you know, one big deal a year, you know, great, we did $140 million with Sysco, a Fortune 50 company. Well, you know, and we've done a couple of other, you know, big company deals, but that still leaves the vast majority of those companies still out there for us to bring into the fold. What I'm after more than anything else is ubiquity.

I want a world where corporate CFOs and corporate chief legal officers, just as a routine matter for every new substantial case that they are contemplating doing, you know, run the same kind of analysis they do before they buy a new photocopier. Am I gonna buy it? Am I gonna lease it? Am I gonna rent it? In our case, am I gonna use legal finance for it? That's what I, you know, that's what I think of when I, when I think about competition. Yes, there hasn't been really any notable entry of late, but there are lots of players in this market, and it's a, it's a competitive market, and I think that's a terrific thing. Our numbers suggest that we keep on winning the race.

Jon Molot (Chief Investment Officer)

And-

David Chiaverini (Managing Director of Equity Research)

Great. Thank you.

Jordan Licht (CFO)

If I could just add, I know Chris has been preaching this for a long time. I really do think his point about experience has borne it out. I just wanna echo that because we've seen entrants generate interest among counterparties, among, you know, law professors writing about it, judges talking about it. It's just become a much more commonplace thing to discuss. As a result, as Chris said, CFOs are starting to ask not just general counsels. As that begins to happen, the expansion opportunities are tremendous. We've reaped the benefits of it because we really can compete head-to-head when we're forced to, and very often we're not forced to.

David Chiaverini (Managing Director of Equity Research)

Thanks very much.

Christopher Bogart (CEO)

Sure. Thanks. Next, we have a webcast question from Dominic Warren. Why is there a large difference between net income of $97 million, but with only $30 million in income attributable to shareholders? Assuming this is linked to a lag in fund fees, what is the time frame for fund fees to be received by Burford and to be seen in the results? Jordan, do you wanna take that?

Jordan Licht (CFO)

Yeah. I'll take it in the reverse order. We don't go out there and try and predict the duration of when those fees will come in, and so I'm gonna skip that part. What I will comment on is a couple of points. One, while you do see the difference between consolidated and income attributable to shareholders, that's just demonstrating the fact that as the portfolio and the business is coming out of COVID and demonstrating the strength of the portfolio, it's natural to see the funds perform slightly beforehand, given the fact that the expense base is borne by the company. We'll see that expand, meaning what is attributable to shareholders and hopefully in the coming years, to the extent that the portfolio continues to perform.

I think that the other piece is important to note that, you know, we continue to focus on deploying capital to the balance sheet. On those asset classes with, you know, generating the 20+% IRRs, we're focused on, you know, retaining 75% of those assets to the Burford only balance sheet, as opposed to historical years, where that might have been a different split. The last piece I would say is that as the funds perform, we perform, and you can see that in the growth in asset management fees in 2022 versus 2021.

Christopher Bogart (CEO)

Great. Thanks. Next from the webcast from Trevor Griffiths. Could you give a breakdown of operating costs split between those associated with the in-force portfolio and those associated with new business, such as marketing, business development, due diligence, and case selection? Unfortunately, the answer is not really, and here's why. The way that we operate the business, we do have a dedicated marketing team. The costs associated with what we spend on marketing, you know, are sort of, you know, in the low single-digit millions. That is a cost that we can isolate. After that, though, we don't have very many people who are specific to one or the other of those functions.

In other words, you know, when, you know, the fictional John Smith who works for Burford, you know, that person is going to be out in the market talking to lawyers and law firms and corporate clients. That person's gonna be looking at cases as they come in the door. That person is gonna be doing diligence and underwriting on those cases, assisted by others and with a heavy overlay of our quantitative and data science work. That person, you know, may well, if we close that deal, may well continue to own both the case and the client, and go forward into continuing to case manage. The expenses there don't really fall out.

You know, if you look at our overall OpEx, we've got, as I said, marketing, we've got, what seems to me to be an ever more expensive finance and operations function, just by virtue of how big we are and our dual listing. Then everything else in the business is devoted to making money, is devoted to bringing in the business, doing the business, and getting that business to its logical conclusion.

Jordan Licht (CFO)

Could I just say.

Christopher Bogart (CEO)

And-

Jordan Licht (CFO)

Oh, go ahead.

Christopher Bogart (CEO)

Yeah. Jon wanted to add something, and then we'll take a what probably will be a final question from the phones.

Jon Molot (Chief Investment Officer)

I just wanted to point out, I think the last three questions are very much related, and they're all great questions about costs, about, you know, management fees, and about competitors. I think part of the reason we've really reaped the benefit of competition, and we've excelled in comparison to competitors, is a lot of them have their own capital structure. As Jordan said, we're gravitating toward more balance sheet investing, and that's what you need to do so you reap the benefits and you reap the rewards when you have wins. A lot of competitors are not reaping enough of the rewards to cover costs and generate the kind of returns that they need to interest and reward their investors. They generate a lot of interest, but we ultimately are able to do the deals and reap the profits.

Christopher Bogart (CEO)

Yeah.

Jordan Licht (CFO)

It's been a very good cycle for us.

Christopher Bogart (CEO)

Yeah. It's a terribly important point. It's one that we wrote about in, I believe, last year's annual report. It's, as I said, as Jon and I have said to you before, it's really what's driving our approach to capital allocation, to capital management, to our funds business, and so on. We are unique, I think, in our industry about being able to do that. Let's take the final question from the phones.

Operator (participant)

Thank you. Our final question here is from the line of Mowakay, Yagnesh. Mowakay, your line is now open if you'd like to proceed.

Yagnesh Moorthy (Investment Analyst and Portfolio Manager)

Yes. Thank you for taking the question. You said that obviously you don't want to comment anything on YPF. I just want to confirm that the valuation of YPF is being conducted the same way as the rest of the portfolio. Let's say in 2022, where there were no milestones in the case itself, any changes to valuation would have been purely from passage of time, changes in expected duration, and discount rate. Is that correct? Do I have that right?

Jordan Licht (CFO)

Yes, that is correct. YPF, just like any other asset, to the extent there was a market transaction, and so for us, in this case, there was a market transaction in June of 2019, allows you to calibrate the model. From that point on what you described is exactly what would happen. You know, to the extent that there is a case milestone, then that would be a, you know, a factor in it, or the passage of time change in discount rates.

Yagnesh Moorthy (Investment Analyst and Portfolio Manager)

Right. In 2022, there was no actual case milestone because there might have been submissions, but submissions to the court don't count as a case milestone. Do I have that correct?

Jordan Licht (CFO)

Yeah.

Yagnesh Moorthy (Investment Analyst and Portfolio Manager)

Okay. Got it.

Jordan Licht (CFO)

Correct.

Yagnesh Moorthy (Investment Analyst and Portfolio Manager)

Thank you.

Christopher Bogart (CEO)

With that, thank you all very much for joining. It was nice to talk to you twice in the space of two months, and we're actually gonna look forward to talking to you again within one month when we put out our Q1 numbers. With thanks for all of your thoughtful questions and your time and attention and your support for Burford, thank you very much.

Operator (participant)

This concludes today's call. Thank you all for joining. You may now disconnect your lines.