Yet Another Value Podcast - Artem Fokin from Caro-Kann on Burford's bull case

Episode Date: July 18, 2021

Artem Fokin, founder of Caro-Kann Capital, discusses the bull case for Burford (BUR). Burford is a litigation finance firm, and Artem makes a compelling case that they are both undervalued on an asset basis and have a moat giving their scale.Caro-Kann's website: http://caro-kann-capital.com/My thread on Burford prep: https://twitter.com/AndrewRangeley/status/1415795903751983109?s=20Chapters0:00 Intro1:35 Burford Overview6:00 Does Burford bring something other than money to the table?13:45 Is Burford's scale a competitive advantage?19:30 Why can't a major PE or IB launch a Burford competitor?23:10 Are the returns to litigation financing sustainable?37:10 How do you value Burford?42:20 Burford's first component of value: Balance sheet investments49:05 Buford's second value component: Asset management54:50 Burford's third value component: YPF case58:30 How Burford has valued YPF over the years1:10:25 Why should YPF settle in dollars instead of pesos?1:14:20 Discussing the bear case around the management team1:23:45 Closing thoughts

all right hello and welcome to yet another value podcast i'm your host andrew walker and with me today i am so excited to have my friend artem fokin artem is the founder and a founder and portfolio manager at caro con capital artem how's it going hi andrew thank you for inviting me over when you first invited me i was very excited for at least two reasons first it's always nice to talk to you second i thought it would be really fun to have a historical recording probably i don't know and now along with my COVID hair. Because in a few years, when we look back, we would not even remember the spirit. And now we will have some evidence that, yes, it happened.

You know, one of the first podcasts we did, somebody emailed me and was like, hey, really enjoying the podcast, but you don't look good, man. And I had grown the COVID beard out and stuff. And I was like, thank you. I don't know how to feel about that. So I certainly hear you there. But hey, let me transition and start this podcast the way I do every podcast. First, just want to remind everyone a disclaimer.

Nothing on this podcast is investing advice. Everyone should do their own diligence and remember that. But second, my more traditional way, let me start this podcast by giving a pitch for you, my guest. I think the best pitch I can give you is you and I were talking before this, I'm getting ready to go on vacation. I'm a brother-in-law's house in Jersey, but I was so excited to have you on the podcast. I brought all my equipment, set it up just so I could get a podcast with you before I went on vacation. But you know, I've been talking for years. You're super sharp investor.

and I'm just really excited everybody's going to get it here. You talk about one of your more concentrated, convicted positions today. So that out the way, let's turn to the company we're going to talk about today. The company is Burford. The ticker is B-U-R, and I'll just toss it over to you. What is Burford and why are you so excited about them? Okay, terrific. And look, as soon as we are done with the recording this podcast, enjoy the vacation.

I appreciate it. So, okay, so first, Caracan Capital, LLC, and or its affiliates, loan, Buford shares, and any other related securities. So this is a disclaimer. We're alone. I'm obviously biased. Do your own researches and the same. Okay, so Buford.

So Buford is the biggest player in the litigation finance space. In case you're wondering, what is litigation finance? Let me give an example. Think about a startup in Silicon Valley that developed a new best product in something. And then that startup finds out that the big gorilla in the industry is violating their patterns. And startup is genuinely upset, which I can relate to and I would understand that feeling. And also they think that it will serve as an impediment towards the prospect of their new product once they launch it. Natural reaction would be to go and defend their rights.

But this is a startup. they don't have that much money. So let's say they go to their board, which is full of venture capital investors, and says, guys, this is what happened. Give us more money. We will go and sue this big industry gorilla, and then we're going to pay a lot of money,

and then we'll launch our product, and then we'll get injection, and we'll get damages, and we'll get this. It'll be great. And obviously, VCs, we'll look at that and say, okay, first of all, we're in the business of funding great teams with great product and great vision.

We're not really in the business of giving money for you to sue someone. And by the way, it's also impossible that we may be even selling some of our other companies to this big gorilla. That doesn't sound like a good idea at all. No, no, no, let's not do that. So it's catch 22. Does is there an option. Yes, there is an option.

You can go to a law firm and say, listen, take my case on contingency. Charge me zero. But if we win, you'll get paid 33%. That's kind of the market trade for contingency litigation law firms. That's possible. There are a couple of disadvantages. So, first of all, 33% is a lot of money. Second of all, and that's more important, not every good law firm will go with contingency model. Many of them would say, no, we want our $1,000 rate for a partner or more, whatever it is these days,

slightly less than what is for an associate, obviously. No, you need to pay us up front as we go as we bill you on the hourly basis. That's a problem. And this is where customer needs are not met. and this is where litigation finance comes in. Someone like Burford and there are other players in the space as well will come in and say they will analyze your case, sign in the DA, analyze the case, it's all privileged, and then they will say,

yeah, we like your prospects. We think the legal theory is strong, the ability of the potential defendant, if the defendant loses the case to pay, very good. You know, many of those will be, for example, public companies you can easily analyze financials and everything. Yeah, we're happy to finance you. So the question becomes, what are the terms?

And the terms are general, again, generally, tend to be better than 33% charge by a law firm. Every case is unique. So whatever I mentioned, this is really crude generalization. Don't take it literally. But an arrangement may look something like this. If the company, if the plaintiff loses the case, a litigation funder will get zero. However, if there is a victory, first, the company, the founder will get the principal back. And then they would also get, let's say, 12% prefer the return a year for the duration of litigation.

And let's say it goes for three years as an example. And then from the remainder, they will get, let's say, 20%. So that's a typical arrangement with a caveat that nothing in this industry is typical. Let me pause here and see whether you have any follow-ups on the industry or dynamic or customer value problem. Look, A, I think that was a fantastic example you gave. You know, Ardham and I are taping this. What is it? Today's July 16th.

Burford actually had a little bit more of a sexy settlement this morning that they pre-yard and they got $100 million. They were involved in a multi-multipillionaire's divorce and it settled today. So I thought you might go there. But I actually like your example more because it shows all the different conflicts of interest that can happen. And, you know, a small company suing a big company that is just right for things. But I guess my first question would be, and the example you gave Burford was it's kind of dumb money, right? They came in and they did diligence, but they basically just said, hey, we're going to write a check and fund it. And I think the first thing you think when you think Burford and all these guys are, is it just dumb money or are they bringing something more to the table? Are they helping craft legal strategies? And I'm hoping you could kind of dive into that. Okay. Yeah, that's an excellent question. Before we dive there, since you mentioned the press list today, I want to clarify a couple of things. So first of all, when people, when some people here litigation finance, they think about these personal injury cases. Yes, yes.

walk has come, something bad happened with a human being, and then a very nasty person comes and says, listen, you're in an economically challenged position and I'm going to take advantage of you, and let's do this to you someone, right? That's not what Burford does. Burford doesn't touch personal injury or personal claims. Generally, it's two companies, big corporations, student, or maybe a startup is in my example, maybe student someone. I appeal litigation. This is not as best as litigation. This is not personal injury. This is not that type of business. That's number one. And second, the divorce proceeding that you mentioned, to clarify, Burford was never involved, as far as I know, in the divorce proceedings. They were

involved only in the enforcing of a judgment that was issued after the divorce proceedings. So, just wanted to put those things, especially personally injury type of situations on record. Okay, so now back to the question that you asked about dumb money versus smart money. Okay, so first, the qualification generally if you look at litigation finance space there are and this is again broad generalization two type of investment professionals tend to work there either it's people coming from law background or finance background and obviously it's both have advantages to be clear at the same time both have disadvantages a good litigator who comes from top law firm may not necessarily view the world through an investment lenses.

So he or she needs to make this transition. Similar, finance people come. They view finance through finance lenses, which is wonderful as they invest us. But they may know nothing about law. So you need to have a team that combines both. And if you look, a number of people in this space actually have GDMBAs. Or maybe they did a few years of banking and a few years of big law. then they got into litigation finance.

There is a variety of backgrounds. If you look at the Bulford and you can go on LinkedIn and do searches, it's all public information, and you can look both at top management and you can look at middle management. If you look, the credentials are generally impeccable. Many people have done clerkships with various U.S. judges. For those who are watching this podcast and may not necessarily be familiar with legal education in the U.S., very often if you go to top law school, and then you want to become a litigator, it's considered to be super prestigious and really good for your career to go and do

one, sometimes maybe two year of clerkship for a judge. And the higher the judge is the better. So trial court would be less prestigious than Supreme Court, to say the office. And there are different outlet courts. So, and many people at Buford have done something like this. And you look at their resume as it's like, yeah, top law school, great clerkship, top law firm, big law, then move to Bufordford. So this is very highly qualified people. in the area that they do. Now, are they involved in crafting litigation strategies and things like that? There is a very delicate line there. And first I will talk about the component, how these things, as far as I understand, I've regulated, based on legal ethics. Again, this is my understanding.

Talk to your lawyer, friends, to learn more. I'm just sharing my diligence through my conversations with people in space. And then I will share a little bit more what I think may be happening in practice. So Burford cannot dictate the legal strategy. Burford or any other litigation finance provider cannot tell a plaintiff to settle or appeal or not appeal. That's not allowed because Burford or anybody else is not a client. The law firm owes the duty of loyalty, of right representation and all those legal ethics things to the plaintiff. They are declined. Now, a litigation finance provider can, through structuring an agreement, incentivize certain

type of behavior. I'll give you an extreme example. You don't want someone to keep suing and filing various motions against the defendant when it's clear that the case will be lost, but they want to go and create nuisance and like, hey, we're not paying. But is this litigation finance people? Those are paying. I will ask my lawyer to keep filing different motions.

Yes, you can structure an arrangement to dissentive that, but you cannot say stop. Now, based on what I've heard through conversations with various lawyers in the space, they say that, yes, litigation finance providers very often will get involved and provide a third opinion, or they will help with other elements of strategy. So there is a value add there, but at the same time, if it's too much value add, so to speak, the plaintiff lawyer might say, listen, I am the one who is going to court. I'm the one who is appearing in front of the judges. I'm the one who is putting my reputation and my name on the lie.

I don't need too much of your involvement. So it's a delicate balance. Long story short, if it's a value add, that's great. For example, lawyers are very famous for doing mock trials. If it's like, think about presidential debates, all candidates will be doing more debates, right? And some of them will pretend in the Republican candidate or Democratic candidate, and they will be trying to come up, like, I know your opponent will probably go in this style after this. I'll do it for you, too, to train you.

So lawyers very often do the same for big trials. So this is where litigation finance providers can be helped. This isn't super pertinent to the investment case, but it's just my question. Burfer is paying the money. you know, Ardham, you are a plaintiff, if you don't have the money, I am the litigation financer, you have a third-party lawyer. Could I go to you and say, hey, Artem, I don't think your lawyer is doing a good job. I'm not going to continue funding this unless you switch lawyers, or I guess that probably

in the contract, but could you come into a case where Burford wanted their lawyer changed? I think it will be, if it's in the contract that a litigation finance provider can dictate the change of counsel and the X, Y, Z circumstances, that's possible, right? So now, keep in mind that when a litigation finance provider with a board for doing anybody else finances those cases, they're dealing with pretty sophisticated people, meaning think about a big company with sophisticated general counsel, with multiple lawyers behind the general counsel. These are smart people. So if the plaintiff council is not doing job good enough, most likely they will be getting themselves. So they probably will see. Look, in the dream case scenario, litigation finance provider and a client should be seen I2I. They should get together and say, yeah, this law is not good enough. Let's go to someone else. If they don't see ITI, it can not be a potential area of some friction.

Yes, you know, is anything in business? Perfect, perfect. Okay, so I think we've covered the kind of overall landscape. So that's litigation financing as a whole. You're obviously interested in Burford, right? Burford is the largest player in litigation financing. So I guess the two questions, and this is starting to go into the bull case for the company, they're the largest player in the space.

So do they get any advantages from being the largest player in the space? So I think they do. The analogy that I use very often is if you look at Blackstone, for example, and there are certain deals that probably only Blackstone, maybe a couple of other P firms can do. I don't know whether you read it or not. it's a wonderful book, what it takes by Steve Schwartzman, his autobiography,

it got published, I think, sometime in second half, 2019, wonderful book. And he gives some examples there that are like, yeah, we did this super complicated,

huge deal, and I don't think anybody else would be able to pull it off. And if I'm not mistaken, he's using an example of Blackstone buying bits and pieces

and selling immediately, sorry, buying entire real estate empire from Sam Zell, and immediately selling a bunch of pieces and keeping some of that. Like, really complex deal, a lot of money, very difficult to pull it off. And as far as I remember, Mr. Schwartzman makes a point that I don't think anybody else will be able to pull something like this.

So I think similar dynamic exists in the litigation finance world. So now, let's take two extremes. Yes, please. Number one is a case that will require $5 million of legal fees. And by the way, on average, on a rough average, Burford deploys about $10 million into into a typical matter. So that's a big bill. So five is a lot smaller, but it happens.

There are probably many litigation finance providers who can fund something like this. Take another extreme, a company, not a law firm, but a company comes to litigation finance provider and says, listen, we want to figure out how to use our legal resources, our legal assets more effectively and monetize them better. We have this big portfolio of various matters. We want you to fund all. all of them on a portfolio basis cross-collarize. And it's going to be $150 million in liberties or some number like this.

I'm picking a random number here. Not many people can fund something like this. Because many litigation finance hedge funds would be $300 million in assets, 400 million in assets. There are some bigger ones around a billion, but a kind of a median would be $300 million. You cannot just take so much risk, even though it's a diversified pool of betters.

still one client, just a few law firms, et cetera. So that's where it's scale matters. So that's number one. Number two, the awareness of litigation finance as a tool for general counsel, chief lawyer within a company or CFO has been increasing, but it's still relatively low. It's better to be known as the biggest name because you think about it like, well, litigation finance provider? Yeah, we have these assets

and we don't want to pay legal fees GCN's CFO conversation, GC general counsel. Hmm, let's call someone. Or I've heard Burford. They did this event. Or I've read an article by them. Like if you go and sign up

on Burford website, they published a thought piece probably every week and it's a good piece, right? And I skim through them from my investor perspective. But I think if I was a general counsel of a company or a CIFO,

I probably would be reading them with a lot more interest. So that brand recognition helps because the more inbound inquiries, high-qualified, like promising leads come in, they're better. That's number two. Number three, if you do more matters, like very often, legal matters are brought by a law firm, not by a client. That's the dynamic.

Client comes to law firm, says, company B hurt us, we want justice, we want damages, analyze the case, what's the budget, et cetera. Law firm comes back and says, hey, we think it will cost you $15 million if you go through all stages. And the client may say, okay, how about contingency? Law firm says no.

Any other alternatives? Law firm says like, well, we can get litigation finance provided involved. And the client may say, it sounds great. Could you find me a couple of offers, right? Could you get some inputs and then we'll decide which one to pick? Bourford, because it has more, has done more cases than I believe anybody else,

they are more likely to have more relationships than anybody else, just by a share number of deals done, and those law firms are more likely to go back to them. So that's another advantage. And the final advantage is this. The situation where nobody wants to happen is this. The Cigational Finance Company runs out of money. Imagine you're a law firm, you have a client, you're suing, you're winning,

things are going well, you're about to go into the final motions or the final hearing or whatever, and then, oh, sorry, litigation finance provider and out of money. That doesn't sound like fun. It's like if you're doing a surgery and then insurance company runs out of money and someone else is, you know, about to go into operating rule. That's a pretty horrible outcome. So, and with big players, and to be clear, Burford is not the only one who would like, no, no, we're solid. But with Burford, I think is there is an extra layer of comfort for clients when a corporate, all of firms, because they're very well known. They're in the space. They have all the financials. They're out there. So there's a few advantages that I attribute to scale. That's perfect. Yeah, I just want to,

one more question on scale, right? So Burford's the largest player. The benefit because they have relationships with all the lawyers with all the lawyers who lawyers are making most of the references and everything. But the one thing, I've always had, whenever I look at this company, the one thing I've had in the back of my mind as a risk is what would happen if Blackstone, KKR, you know, these guys love to launch new verticals. What is preventing Blackstone from going, hiring 50 lawyers launching this vertical, it would be non-correlated to the rest of their returns. Anytime one of their legal, anytime one of their portfolio companies got its legal trouble,

they could kind of direct them over to their litigation financing side or something like, what's stopping, what's the big moat that's preventing someone from creating a Burford competitor? Okay, that's a question. And when I was doing my initial work on Buford, that's something that I have in mind as well. What should prevent some big hedge funds or big private equity firms poaching a good team from different people, giving them a lot of money, and saying, go make us money. So I will share a couple of historical examples, and then we can talk at more conceptual level. So a number of years ago, investment banks used to be a lot more active in litigation finance pays than there. Some banks had those investment type of arms or teams who

were doing something. And that pretty much died down. One of the reasons which industry observers quote is the various conflicts. And you don't want your banking team doing a money deal for this company and then your other team is suing them or funding someone to sue them. It creates all way dynamic. So that's number one. Number two, so investment banks tried and did not really stay in the space. Second, there was a very big hedge fund that has a reputation of an activist hedge fund that supposedly tried to launch a litigation finance arm, let's call it that way. They got a very experienced in the trade sector.

who actually at some point worked at Burford and then that initiative didn't really go anyway as far as I know and that industry executive left and went to another firm so I don't obviously know what happened there

but my suspicion is that if a big hedge fund especially if they have activist flavor launches this team many clients will not necessarily want to open their kimana and show very private litigation matters to someone who can tomorrow say, we think CEO is not doing a

good job. We think we should eliminate three people to the board out of nine, let's say it's staggered board with three years, and we think we should push for changes and maybe span one division, shut down with another division, and do a share buy-back. It doesn't feel right for many companies. That's what I've heard from talking within the strip service. Could it change at some point, maybe, right? Something that we need to be watching. That's, it's such a good point because I don't know if you've ever been involved in litigation discovery. I have a couple of times, fortunately, not like getting sued, but you know, if you see someone a lot of times, they'll get discovery against you as well. And it is not

fun. And things that are put in email, you know, it's the famous thing, never put anything in email. But I remember once we were involved in one in a very small way. And it was like, the CEO, it turned to, he sent a joke email that said, I'm sending this while, I'm taking a crap or something. And like, you could imagine a hedge fund coming at them and like taking that out of context in a great activist case. So I think that makes all the sense of the world. Last question here. So Burford's returns, and we'll talk about the returns in this in a second, but Burford's returns on these cases and their litigation financing has been absolutely phenomenal. You know, we're talking super, super high double digit IRAs and everything.

And the last where I would have is Burford's the largest, but you know, there's other large players out there. And in your example, you gave earlier, you mentioned a company going to the lawyer and saying, hey, we want to get some litigation finding scene. And the lawyer saying, great, we'll get you a couple bids and stuff. I think people worry that there's going to be continuous bakeoffs in these things, right? Where Berford says, we're going to bid this down to a 25% IRA. And then I come and say, I'm going to bid it down to 22%. And then you just kind of compete, compete, compete until eventually you're funding all these deals at your cost of capital or maybe even below your cost of capital because you're just so desperate to compete for deals and stuff.

So can you talk about why that kind of what people call the bake-off risk or the winner's curse risk isn't going to apply here? Okay, so there are several lists there that are relevant. So let's start kind of top down at the very high level, then we'll go more and more granular. So number one, Burford is not the only one who is generating very attractive returns. And we're speaking about, call it 20 plus IRR if you look at the variety of cases. So Burford is not the only one who generates good returns. There are a number of other skillful litigation finance players who generate returns that are very comfortable, sometimes high, sometimes slightly lower.

So here we're not talking about a phenomenon where there is one player. They're very big and they're generating insurance that nobody else can and then eventually people will come after them. No, the entire industry is doing well as long as they have skill. Because obviously, most likely if Andrew and I partner up and decide to launch a little Investigation Finance Hatch Fund, then I'm not sure that we'll do particularly well. Maybe we will, but, you know, we're not probably qualified. So, skillful players do well in general.

That's number one. Number two, sure there is more capital coming in. But at the same time, the penetration and use of litigation finance is expanding. It's difficult to quantify. There is no thing where you can look and say, you know, if you look at smartphone penetration or broadband penetration, we can look at. look at some numbers for the industry and get a decent sense, how many people have smartphones in the world, or how many people, how many are sold, we get decent estimates,

or how many households in the US already have a broadband today versus 2010. We can do all the type of things. With lead finance, it's a lot more difficult. So anecdotally, and observing this space, the penetration is still very, very low. And it's growing slowly. So that new capital that is coming in, being attracted by strong returns, are being absorbed due to increased penetration. And by the way, one thing that I want to highlight here, and then we can maybe talk within another sub-question about this, these returns, what makes them so desirable,

they are truly uncorrelated. There is a legal case. There is a lawsuit. It will be resolved eventually one way another. It always happens, settlement or education. It will be the winner loss. And that process has very little to do. with whether interest rates go up or down, GDP up or down, market is up or down. So that's

the kind of nirvana for a skill. So but going back, penetration, it's slow. That's why I think the capital is being absorbed and it's working fine. That's number two. Number three, litigation finance has been expanding the total addressable market. What nobody can calculate with any degree of precision is that some cases that would have never been brought to courts are being pursued now because there are litigation finance funders who are willing to finance it. The best analogy I can come up with, and it's probably partially dictated by me living in Northern California, is think about what would have happened with innovation and all tech companies, if there were no venture capitalists who were willing to finance and invest in

young startup teams that are coming with great visual product and maybe beta, but not much beyond that. Imagine if that market did not exist, our world probably would be a lot worse than it is today, and we would not have had many products that all of us enjoy using. So that's reason number three. So that's kind of like macro drivers that I see why I am watching, but I'm not always. overly concerned about the inflow of capital and some new players pop in up. Now, let's- Can I just pause you there just to make sure? Because I think that was a great point.

So the summary of that point would be, yes, there is capital coming into the space because across the space, the scaled players are realizing great returns. But what you're saying is, A, there's a huge market out there because there's so much of this litigation financing, so much litigation that could be financed on corporate balance sheets and everything. And B, the market's probably even bigger than that, because historically, and your original example, that startup that wanted to go to Google or Facebook, whoever broached them, you know, five years ago, that lawsuit just would have died because they couldn't get the funding, the VCs would want them. But today, litigation financing means that can, so there's a lot of the market to be tapped and the market

will grow as there's more litigation financing. Correct. Perfect. Excellent. So those were macro reasons. Now let's go more to mechanical micro reasons. And this is again based on me talking to various people in the space. Like, how does it normal happen? So generally, so in some cases, they will be where a law firm has a preferred relationship. And they're like, we really like working with XYZ. And all the clients really, or corporate client really what likes working with XYZ, what is work for anybody else? And they may be like, yeah, let's go to that. Right. So that's so very, very possible. Now, in some cases, the client will be, okay, let's try to figure out the best price. Now, the best price. Now, the best price is.

is actually kind of difficult to figure out because there are many levels you can put in. Interest trade versus the percentage payoff after all that interest has been paid in principal return. There are many drivers. Plus, remember, this is not you buy a commodity, so to speak, where we can say like, hey, we're buying this company at 12 times EBIT. And someone will say, like, we'll buy it at 12.5. In this case, it can be certain matters in the contract. like, oh, we will give you more control, we'll give you less control. That's really custom made. Or I'll give you another example.

So there are all those cases where everybody thinks that they will settle within a year and they go for seven years. But imagine this. Everybody thinks litigation finance provider, client, law firm. They all think like, yeah, slam down. The defendant will settle. in a year, max. The education finance provider will be saying,

listen, we cannot give you like this law. It's generally structured as a lending agreement. We cannot give you this money and just get 12% and something because we'll be settled so quickly. It's not really interesting for us. We want more upside if it settles really quickly.

And the client may be like, no, but what if it doesn't, so there is this debate and it's inherent. And if someone takes a differentiated view and says, okay, we'll do it in a different way. There are so many ways how it can be, how the potential protocol can be cut, that creativity and the structure is very, very important. And I'm not saying that P.E. is not a creative, of course they are. But I think here, it's more difficult to price purely on some metric, which is easy to grasp.

Does Burtford get a data advantage where, hey, you know, they are the largest people, they're the largest litigation financer. They've done the most of these. So when you get those type of debates, Burford knows the exact, Burford's got better data on the exact terms that they can cave on or the exact terms they should push on or that type of stuff. So Burford talks about the data advantage that they have. I think there is a data advantage. Can it be overcome by someone else? Maybe. The thing is that. So think about this way. Generally, and I'm sure there are exceptions. generally, if a matter gets to litigation, and then it goes to, gets to court, and then the court decides, generally those things will be public. Generally, I'm sure there are exceptions.

Now, in theory, a smart data-driven team can get that somehow. I don't know how, but I'm sure technical people can solve that if necessary, and aggregate the data and try to run regressions based on the judge or based on these, based on that. I'm sure it can be probably done. I'm not sure that anybody has done it, but in theory, at least it's plausible. Now, there are always cases that are settled. More cases are settled. I think they say 67% of cases are settled, right? Most cases are settled.

And in that case, very often, the terms will be confidential. Yep. Pats is decided to make a peace, judge, approve the settlement, everybody agreed that the terms should be confidential, move on, right? And that data advantage is a lot more difficult to obtain if you're a small player, because that's very confidential. How are you going to get that? So I do believe that Bush has a advantage, data advantage.

It's difficult to quantify it, quite frankly. So if I was only relying on that advantage as a source of competitive mode, I probably would feel less comfortable. But when you combine the data advantage with multiple hours that I talk to, I feel like that's fine. That should be work. It's a nice addition. That's great.

You did the only other thing, and then I would move on to valuation, their relationship with lawyers, it's not a perfect, it's not perfect, but it reminds me a little bit of the title insurance companies. I don't know if you've ever looked at them, but how the title insurance companies, title insurance is a pretty pure commodity, right? Like, you're just ensuring that nothing bad has happened in the past. But the title insurance companies get, their agents get great relationships with realtors, lawyers, those type of guys. And then when you go in, you know, you only do a mortgage once in your once every 10, 15 years, you go in and say, I need title insurance. They go, oh, great. I got a guy. And you don't even think about it, right? It's a small cost. And with litigation financing, maybe you do the bake-off. But if the lawyer says, we work with Burford all the time, these guys are the best, best terms, best value add. Like, I do think there is real value. And probably from people like you and I who are very financial-minded and just kind of look at the numbers, we might not see that value in that relationship. Look, I think there's a lot of truth to that. Again, difficult to quantify. But before we dive into this excellent question, Andrew, on the bake-off, right?

One of the reasons, so can a law firm or client go to two or three litigation providers? Yeah, it happens, I'm sure. However, you cannot really compare this type of bake-off with private equity. Because think about it. There is a company that is up for sale. There is a sell-side banker. They got the mandate. They do that together with the company.

And then they can blast it with almost zero incremental cost. to, I don't know, thousands, hundreds of potential buyers, right? Maybe not a thousand because there are probably not a thousand potential buyers. But if they were,

like, you know, just adding one extra line in that BCC email, right? There's almost a thousand spags out there. There might be a thousand buyers. True, true, true. So there's not that much and then they compete, right?

And also, if a seller completely exits, you get the money, you move on with life. Done. It's very transactional. Now, if it's a, partial sale and you just get the 30% and there is a board seat. It's a continuous relationship. That's different. But with Burford, you can't BCC a thousand people because it's your internal

confidential data. So you could really only bake off two or three people at most. So exactly. First of all, it's a lot of privilege and information. So you probably don't want to communicate to the entire world. That's number one. Number two, because you are risking, first of all, too many people will know. Second of all, there is always a reads that you will do something silly and then you will waive a Tony Klein privilege or work product privilege, those things that protect that information. So you don't want to do that. And on top of that, think about it. So this is a law firm. They call Burford and call 25 other litigation finance providers as a hypothetical example and say, we have this case. Would you like it? Then all litigation finance providers

want to talk with the lawyer. The lawyer generally will keep billing, client, right? Having the same conversation with 25 times. Now, if it's only one lead finance provider, is the matter of course. I see law firms sometimes may weigh those fees. Maybe if it's two. But if it's a lot, like, no, you need to. That's a week's worth of work if they do that. Heck yeah, yeah. So, like, it doesn't really lend well. So is there some competition for cases? Of course. We in the United States, or they also operate in England and some other countries. We are living capitalism, right? There is a competition. That's a wonderful thing about. this country and about, you know, like the way we'll eat. So, because there is

competition. They got to be. But it's not a fierce competition. Artum, this is why they pay you the big bucks. Because in my mind, I always kind of thought, you know, at some point that bake-off's going to come to that, that bake-off is going to catch up to them and returns are going to have to drop drastically. But I think you just laid it out, like, these are advantage situations where if you got a relationship with the lawyer, at most, you could bake off two to three people. You're going to be one of those two to three people. And when you have a bakeoff with only two to three people, there's probably going to be pretty advantage terms.

I think we've done a great job of covering the business overview, some of their scale advantage and stuff. So I want to switch now to valuation, probably touch on the YPF Peterson case at the end of it, and then we'll talk downside. So let's just move into valuation. You know, this is difficult to value because you can't use LTM earnings because if they have one big case that wins them hundreds of millions of dollars, the LTM earnings are going to look unbelievable.

If they don't have a settlement in the past year, LTM earnings might not look that great. So I think the best way to look at is probably their book value right now is around $7.70. They're charity in the U.S. around $10.50. So you know, you're paying approaching 50% above book. Obviously, the market's pricing in a little bit. They're going to continue realizing great returns on their assets for a long time to grow into that book. Or they have an understated book value or some combination of both. I think it's probably both. But I want to toss it over to you. When you look at that valuation,

how do you look at that valuation? What do you think Burford would kind of be worth in a base case scenario, the different sum of the parts and everything? Okay. So you hit on many interesting points here, right? And yes. That's why they pay me the big bucks. Exactly. Earnings from any period may or may not be meaningful. Because if you have a big settlement, a big court victory, you can get a big payout. Alternatively, it can be a very slow period. Just like no cases, no big cases got to the finish line, either settled or adjudicated. Both could happen.

So the way I, so first of all, I don't really like price to book. Like I haven't, like if someone wants to use it, you know, be my guest. So I will talk a little bit about price to book methodology first with a car that I don't really like it and I don't employ it. I will just share conceptual ideas, and then I will move on into my preferred way. Let's just go into your preferred way, then. There's no need to talk about it if you don't think that's the right way to talk about. No, no, I will mention because some people really like it.

So, I may respect that. So if you were to go with price to book, remember a couple of things. You need to incorporate your view on return on equity. What is REO? Because if you believe that REO is 10%, yeah, it probably should be trading. In my world, it should be one-time's book, but I think market is more generous these days. and probably will push it a little bit higher, 1.2, 1.4. If you believe that ROE is 20, 25% and that's sustainable,

that's not two times book. That's a lot more because of the compounding map. If you believe there is the constant three investment opportunity. Now, if you believe that ROE can be even expanding over time, then you know, you need to be pushing your multiple even higher than that. So just keep this in mind to try to do ROA. So I personally prefer some of the parts here. And this is how I think about it.

There are three different components of value. Let's mention them and let's go through them. So component number one is balance sheet investing business. So think about them as there is a Burtford. They have money. They have different already investments that they made and they keep reinvest in those. Whatever they earn goes to them. It's their money.

And indirectly, this is something. that shareholders should benefit over time. That's one component of value. Second component of value is their asset management business. A few years ago, Burford through acquiring a boutique, no boutique, through acquiring a litigation finance fund or private litigation finance fund, got into asset management business where they managed money for their LPs,

limited partners. And they charge fees for them. so obviously asset management is a very asset-like business so that's pretty exciting thing and then asset management there is a cross rate there is a broad range of fees there probably 20 is the most typical but in one case they charge zero and 40 for zero so you know you're in the asset management business I'm in the asset management business we can say that zero and 40 is pretty good extraction so I wouldn't mind some zero and 40 capital myself.

Exactly. So it's a big sovereign wealth fund whose name has never been publicly disclosed. But obviously, there are not that many in the world so we can make some guesses. And they manage, you know, that's an management business. So we should value that separately. I'll get into that. And then there is a third element of value, which is one extraordinary large case that right now is the trial. it's in the process of being litigated in the Southern District Court of New York.

It's a big litigation where Burford-Kline is opposing the government of Argentina and oil company YPF. And that's such a big case. And obviously, it's a binary outcome, right? They can win or they can lose. Like, who knows? So that's why I want to value separately. So those three elements. Now, let's go one by one and go through some.

concepts and some numbers. So balance in business, the way I look at it is this. I say, okay, they got this pile of assets, which they keep investing. And I make some adjustments, such as I take out goodwill, because goodwill is goodwill. You cannot invest goodwill into someone else litigation,

finance claim, and get paid. I also take completely YPF out. Because we're a value. They value separately. And by the way, I'm sure at some point you will ask me about fair value and how they mark the books. So, you know, we'll get there. But, you know, I take all those, whatever related to IPF, I take it out. And then I say, okay, also there is a minority interest, which Burford consolidates one of the hedge funds of their balance sheets.

So we need to make sure that we take that out. I think it's about to kind of assimilate. So when we take all these numbers out, I think we're getting roughly. to $1.5 billion and change of investable assets. Now, you know, those are roughly from memory. So I'm making sure that people don't think that I'm precise to a penny. You know, do you almost ask my goal here's outline the concept and give some rough numbers, but don't take them to literally.

And that's okay, so that's some pool of money. And they should be able to invest that and generate some return. Then I said, okay, what's the return? And remember, that will be jumping. Sometimes it may be low, sometimes it can be really high. If we look historically, the IRR has been around 24%. Now, if you look at Burford numbers, they report high IRR, like I think around 30, but that includes that extraordinary case against Argentina, well, they already made some money.

So to be conservative, I say, you know what, let's assume that that case will never happen again or something like this. And by the way, it may happen, right? we don't know, but let's say no. Let's say 24% IRR and work from that. And by the way, if you don't like 24, you can take 20. You can put whatever number you like, maybe you think that the insurance will compress. Use 20 or 15, whatever you like, I'm just outlined the methodology here.

And then it's okay, so on this asset base, apply 24% error. This is the amount of gains that Burford should be generating in a normal year with a caveat that none of those years in the future will probably be normal. But if you average it out, probably that's how it would look like. Assuming no reinvestment, but they obviously would be reinvesting. And I said, okay. Now, let's take out apparating expenditures, mostly sellers and goodwill. I'm ignoring goodwill.

They also amortized some of the intangibles. So I'm kind of ignoring those, not goodwill, obviously. I'm ignoring that, signal as I did not goodwill in my asset population. I'm taking out some intangible amortizations. So, and I take out OPEC, mostly sellers. Burford has some bonds. They're not very leveled, but they do have some bonds because it makes sense to have when you generate such high returns and your interest probably six or six

in a quote or something like this. I take that interest out. I take some taxes out. Burford has been an incredibly tax efficient because mostly I believe, I believe a couple of reasons. First, historically, it has been happened to be a company in Guernsey. Yep. And second, I think they do really thoughtful, you know, tax planning and thinking about

their structuring. So if you look, the effective rate is very low. They say it will go up all the time. Makes sense. So I'm already putting the rate that they say probably will be in a few years. I'm already putting it today, which I think is over the conservative. What's their future rate? I'm just wondering for my own personal.

So the company have been saying that it should go all the time to meet teams. Makes sense. Okay. Makes sense. So it cannot be 15, 16, 17, or 14? who knows, right? But now it's a lot lower than that. So that's what I'm using. And after those, you get through your normalized net income. Again, it's normalized. It will never really happen that income, but it's a rough number. And that's how I am getting to call it 70, 75 cents of

EPS. Again, this is normalized hypothetical. You will not find that number. If you go to financial, you'll not find it there. So that is, just to be clear, that is their current. asset base excluding the YPF investment. If they earn kind of their historical rate with the tax rate you talked about and all that, that's what they would earn consistently. And I think a key thing in that, what you just said, 70 to 75% is 70 to 75 cents per year is you are not assuming reinvestment of the proceeds, right? Because if they took that 70 cents, they reinvested at a 20% rate. Next year, it's 84. The next year it's a person in a dollar. So you're not just on this asset base, 75%. Perfect. Yes. So that's the range.

I mean, this is my estimates. Do your own work as always. So that's component of value number one. And now, by the way, before we move on, like, what's the multiple? Right. So you got this EPS number. Let's assume that it's roughly right. What's the multiple?

Look, you know, multiples is a contest in your preferences. Some people will like Spain and some people will like Italy or France when they go for vacation. So that's all varies. You know, people should decide on their multiple. The way I think about it, there is a disadvantage, which is it's a capital-intensive business. You're invested in money. It's like a bank, right? Or something similar.

That's a disadvantage. It's not capital light in that sense. On the other hand, there is a strong growth runway, industry losing position, in my opinion, strong competitive advantage and a very long reinvestment opportunity. Non-correlated too is huge. Non-correlated is huge for this as well. Non-correlated is massive, right? So I'm like, okay, so what should it be?

You know, be my guest, you can put 10, you can put 20, you can make an argument for 30, and then multiple goes down all the time. You know, pick the number you like, right? I think it deserves 20. Can I prove that mathematical? No, I cannot. But when I try to figure out my normalized return on equity, obviously at that point, you're working with normalized earnings and normalized equity, which is really a lot of normalization

and it's difficult to prove, I think it should dissolve 20 or more. But this is a subjective judgment call, so someone else can disagree. So 20, 70 cents earnings, 20, we can do the math pretty quickly. That's $14 per share is the value of their non-YPF assets. According to the math, we all just walk through. Yeah, like 14, 15, that type of range, right? Again. On a $10, $10, $10, $10, $10, $10, $10, $10, $50,000, something like this.

Okay, so now there's a second component there, which is asset management business. so Burford and depends on how you want to count capital that has been because Burford manages several hedge funds some of them have been already fully deployed and they let's call them in harvesting mode similar to private equity structure some of those pools of capital being invested as we speak and obviously that's different and in some of those situations they charge management fees in some situations already don't charge management fees because it has been full investment. So there's a variety of assets. Depending on how you count, you can say that they're managing $1.5 billion or more billion dollars. So again, numbers will be a little bit

different. You can look at those numbers and figure out for yourself what number you like using. So the question is this. You've charged management of this. That's wonderful. But you also charging incentives, right? And this is where the interesting phenomenon happens. There is this way to calculate incentives, or rather crystallize them, called European waterfall. I'm not sure why it's called European waterfall. Maybe it's Europeans who first come up with it, or maybe for some other reasons, I don't really know. Maybe it's like American options and European options. I think it's because European, they crystallize at the end, if I remember, and European options, you can only exercise it at the end. So that would be my guess. That was my analogy too,

but I've never actually found out exact reason. So, but what it means? This is what that means, until the initial capital investor has not been returned to limited partners that invested in the private litigation finance fund, the litigation funder does not recognize the incentive fee on its book and records. It means that if you took $100 million and invested that into 10 matters, and the first matter comes out and it's a home run, I'm taking an extreme example here, you just made 100 million dollars of profit. So you got 10 minutes back and 100 million. You as a litigation finance provider, using European waterfall structure, will not recognize any incentive fees.

You will only start recognizing things when your second matter is resolved and if you bet some money, you will get incentive fees on the second matter. And then you will keep going. But first big win, even though it's amazing. And it's kind of clear, like, unless you really mess something up with all other matters, you're probably going to do okay on this fund, but you recognize zero. And right now, Burford has recognized very few, very little incentive fees from most of the funds. As those funds get more and more to harvest mold, those incentives fees should kick in disproportionate. That's my expectation. So we'll see, right, but it will be interesting to watch. Now, how do we value that business? There are some expenses.

But I simplified my math. So this asset management income, management fees and incentives, and then there is OPEX and then obviously some tax. I simplified my math and I said, you know what, let's just put all appurating expenses into the balance should invest in business. So I will penalize them there in my first component of value so that I will simplify my mass in the second. And there is also a decent, I think also there's a good conceptual argument,

for doing so, because most, there are exceptions, but most litigation matters are allocated between balance and funds. There's a second formula which they set and they fall. And the way, you know, I encourage people to think is, especially in the hedge fund business, think about your own fund that you manage. And you probably have your own capital in the fund. And you have other people capital in the fund. So think about as you manage your own capital, but you also get the benefit of fees for

managing people are the people's capital, and you get paid for that if you deliver good results. So here it's a little bit the same, except that Burr for Balanchet is an incredibly incredible large. So, and in other words, all those expenses that occur to source, diligence, underwrite and monitor the legal matters, it will happen no matter what, whether they invest from your balance rate or from both balance, your hedge and your private funds. So allocated just all there. So now, the question is like, okay, what the multiple? And so, and incentives, right? So this is more difficult to calculate. The concept there you can use is to look at the Burford's capital that they mentioned for

other people, apply the historical IRA, put some incentive fee, call it 20%, in some cases as Chololol, and try to come up with normalize incentives. Will it exactly happen that way? I'm sure it will not. Because here we're working with a lot of stylized and hypothetical mass just to get to some average points, but that's the framework that I will encourage people to use. And they can plug their own assumptions. So obviously, if you look at private equity players, and I think, Andrew, you know that world

better than I do, because I know you looked at a number of those public companies, they almost historically had difficult time getting a high multiple on the incentives, even though it kind of happens pretty irregularly. It's getting pretty high now, though. They're starting to get credit now. Good. So similar. Look at that as a proxy for what Wurford would get and apply your own multiple, right? So I think it's reasonable to say that it can be any way between call it $2 and $4.50, roughly, maybe slightly more. Big range, I intentionally put in very, very wide strokes so that we see that there is a lot of discretion here.

And then there is a case. The third component of value, which is Patterson, also white, IPF. So quick background. YPF was an Argentinian oil company. It was owned by the government a long time ago. Then it went public on the New York Stock Exchange. It was also public in Argentina. It went public in Argentina and New York Stock Exchange,

if I'm not mistaken. And that's a background. Now, investors were concerned that what if the government at some point will take it back? What if the Argentine government screws out my outside shareholders? What? Does that happen? Look, I've been to Argentina.

a wonderful country, so I'm not going to say anything negative. It's a wonderful country and wonderful people and wonderful wine and wonderful food and wonderful steaks. So that's a terrific place to go. So now, the government said, okay, why don't we create a provision in bylaws that will force us under certain circumstances to do a tender offer? So if you're minority shareholder who bought shares on New York Stock Exchange and have them, and then government takes the YPF back, and then we will do a tender offer for everybody else, there is a certain formula, and we'll buy you out. Sounds fair? And people are, yeah, that sounds like a good idea. Obviously, it happened like decades ago, so I'm really

reading the C-Lens and trying to figure out how those conversations probably went. And they invented public, and it was public for a long time. There was a big shareholder, Rapsol, obviously big, well-known company, that owned either 50 or 51%, I think, either 50 plus one share, or literally 51%. And there was another big shareholder, which was Patterson. And there were a bunch of minority shareholders, mostly public shareholders. Retail or hedge funds, mutual funds, you name. And at some point, Argentina took shares from Repsol and said, we'll take him back.

And that was, in theory, according to the plaintiff, in the current case, the time for the government and to go and say, and now we're tendering for everybody who has shares. They didn't do it. And that's the legal background, factual and legal background of the current litigation, where Patterson and another hedge fund called Ethan Park that also invested in YPF shares.

I don't believe the hedge fund is operational now, and that's one of probably reasons why they use. Burford to finance this litigation. Now they're suing YPF and Argentina government to get money for the tender offer that was not done. So that's the little bit of that. And the interesting thing that if the plaintiff win, Burford, who is financing the case, would get anywhere between different ranges of outcomes, but probably somewhere in the range of call it $2, $3, $4, $5 billion, is the very likely range. And to put things into context, Burford Market, it will be more than Burrford Market Gap.

Yeah, there are market caps about $2 billion right now. So even on the low end. I'm putting $2 billion in change or something like this. So we're talking about numbers that are incredibly, incredibly many. That is perfect. So YPF, and look, anyone who's listening, we've kind of saved the best for the end, right? Because YPF, as you said, they win. it's the market cap or more possibly.

So I was hoping we could start by talking about people can go make their own assumptions on the legal place, the merits that's been talked about, it's been written about us where I don't think we have the time to do that. But Burford has marked YPF up over the years, right? And there are reasons for that, and I'm going to let you talk about them. But I think if we could talk about the YPF valuation on their balance sheet and how they've written up over the year, I think that will also help people get an understanding of how Burford has valued the billion and a half of other claims on their balance.

that we talked about earlier. So can we talk about that? Yeah, yeah, sounds good. Okay, so think about this way. So Burford started financing the YPF litigation in a year ago. And then certain things happen in the case, positive in this case. And Burford said the probability of us winning eventually goes up. And by the way, if you want to think about it, and this is like quick side note. If you think about what litigation finance providers do, I think the best book for that is thinking of the best. I've read it as soon as it's released. I pre-ordered as far as I remember, and it's a wonderful book. And that's what exactly I think litigation finance providers do in the most absolute intellectual sense of the world, right? Because there's no tailwind. What was the book?

And Duke, thinking best. Oh, yes. Okay. Okay. Great. So that's what they do. And normally, Wurford, when case makes certain progress, Wurford may mark it up because the probability of success goes up. Now, it's not based on sentiment or whether the judge today looked favorably at us when we were making an argument. Like, no, there must be complete, there must be concrete milestones, a certain motion granted, a certain decision is made, or jurisdiction.

is established. So that's very concrete. So that's what's happening in YPF space. So with YPF or Peterson. By the way, when I say YPF or Peterson, I use them interchangeably. Right? Just want to make sure. Even the company does too. So just so everyone knows it's not just you. Yeah. Yeah. So now another thing was what's happening in this case, which is interesting, the secondary market transaction will happen where someone, you know, hedge funds, I don't know exactly who they were never named, even though I believe I spoke once with an investment vehicle that actually bought years ago a small piece of this litigation. And they would be like, that's a great interesting action. We won't in. And Burtt all the time would sell bits and

pieces to those interested parties. Why did they do that? Well, I think we should ask Buford management, but if I watch your guess, I think it was a prudent portfolio management. It's similar. in your business and my business. If we will, you know, fortunate and smart and lucky enough, all those three combined, buy and make an investment that has gone up tremendously, and now it's a big part of our portfolio, we probably cannot let it run to 50%.

That would not be prudent, right? So you may need to trim at some point, whether you trim at 10 or 12, 15 or 20. That's a matter of everybody's style and everybody's unique, but the idea is the same. So I think Bufra was doing a reasonable thing. So they were derisking that and taking money. me out. And all the time, Burford has been marking up YPF. Now, in late 20 on, as of December 31st,

2019, Burford disclosed and Burford never said exactly the way it's marked. And it drove people nuts. And Burford says, look, if we mark something and we'll tell you where it's marked, we're risking to weigh a Tony product privileges. Because that will may convey whether, how we view the case and what we know, et cetera, et cetera, et cetera. We couldn't do it. And all this, public investor was like, right? That was not very well understood.

Now, by the way, funny enough, if I'm not mistaken, over the past call it 12 months or so, actually lawyers for Argentina and YPF made the case. Like, hey, they were with the privilege. as far as I remember what I was reading the filings, and Buford Laws were like, no, they didn't. So it was actually did come up. So they would do the right thing by not giving the number. Not only are you just, not only might you be breaching attorney-client privilege, but if you and I had a case and we went, we were a publicly traded company and we said,

oh, yeah, we're valuing this case at $10 million. We're negotiating against ourselves, right? Because then Argentina or whoever, and a settlement, they can just come and say, you've got it, March it, your books on this, we'll give you 95% of that, right? And the Bax will give you as 100% of that. So you're hurting your negotiations, but neither are you know there. But by the way, just to clarify so that, you know, again, none of us is here's practicing lawyers. But I think it's not a tonic client privilege.

I think it's a Tony work product privilege. Okay. There's a bunch of different privileges. And some people will say like, listen, management is not saying the truth here because it's not a tonic line privilege. Most likely, again, that's not legal advice. I'm not practicing lawyer. Most likely it's not. But it's another type of privilege.

So you still don't want to. to violate it and waive that. But in 2019, Burford, and also, that's a big deal. So when someone fuse a foreign government, foreign government generally has what is called sovereign immunity, meaning a person cannot just go and sue the government of XYZ in the US because they did something wrong. That's not a matter for US court to hear. That's what called sovereign immunity.

Now, if the sovereign nation actually acted in its commercial capacity, then it can be sued in the court in the U.S., assuming that there's certain what called nexus is met. Nexus means U.S. cares about that case. And Argentina, of course, said, we're sovereign nation. You cannot view us in the Southern District of New York. The judge in the trial court said, no, that's fine. subsequent court said, yes, it's okay, and eventually, Eugene Ciner exhausted all rights of appeal. It went to the Supreme Court. Okay, so the way legal system in the U.S.

again, this is not your legal basics. I'm not trying to educate anybody on legal basics, but normally, there is a certain number of appeals that anybody is entitled to. That's a matter of right. You cannot be denied that. To get to the U.S. Supreme Court, generally, it's up to the U.S. court, Supreme Court, to say, yes, this case is important enough, either as a legal theory or for any other matter that will take it. And it made it all the way to the U.S. Supreme Court. And eventually, the Supreme Court said, like, no, we're not going to take it. There you go.

So sovereign immunity in that point was settled, like done. Meaning now, and by the way, it took years. So that is a big, big, big deal. So at that point, and it happened in 2019, and after that, Burford sold a very sizable chunk for about a hundred million of its entitlement. So it was valued like one billion, and they sold 10% of that as far as I remember. And do you know what they originally invested at? Look, I believe that the current number, the cost basis today, is about 40, 40,

plus million dollars. It's 40 plus million and it's on their balance sheet for... We'll get there. Okay, okay. So remember, when they sold it, it was 2019. So the cost base is most likely, and we can check those numbers, were probably lower. But, you know, they spent 2020, obviously, the legal moves, their emotions, there's something happening.

So that cost probably lowly going to up. So at that time, Burford, later that year, said, okay, you know what? We will do this. since everybody asks us about the mark for YPF, we will mark the case just based on the value in the secondary market. We're just going to do that. It means that we're using zero confidential information. Market participants said that the value will value that at that level.

Like, that's all. That's what happened. So, and if you look today, the YPF, the entire complex, is credited about I believe $773 million and about 41% 41 million of that is cost

so that's the market now to be clear Burford already got more than 200 million of care back so they like they got their cost basis

multiple times over so even it becomes a lot which is possible it already has been a huge good for them from them

deriving perspective it's like you invested in a company it went up 5x, it went up 10x, you sold some, and then it went down to zero, right? You already made a lot of money. Now, it's kind of upsetting that you didn't sell everything.

You wish you had sold it all, yep. Exactly. But in this case, you couldn't really sell everything for Bufor. So that's the market. Now, and so think about this. This is a 700 plus million mark, 773, right, close to 800, quite frankly. one big case. It's technically two legal cases, but same underlying theories. So that they have. That's why I value separately. But as Andrew said, that's also a good illustration how they were slowly

marking up based on both court decisions, intermediate court decisions, and also the secondary market transactions. Yep. And this is how they mark their whole portfolio. This is how they mark the whole portfolio. So now, and remember, they marked at 770 right now, and if they win, it's going to be billions of dollars. So it's still marked reasonably. Can it be zero? Yes, it can be zero. But they're not trying to market like, hey, listen, we can win maybe four billion or five billion or six or seven or whatever the number is. Like, no, they are marking it at a very reasonable way. So let me pause here and see whether you have any full-up questions about the best. Patterson and YPF or anything else so that, you know, we can talk about it.

That was perfect. We've been running, I think, well over now at this point, so I want to be very cognizant to time. So I want to ask you one more question on YPF. Andrew, before that, one last time. So if you look at Burford-Beranget and how what they marked up, so fair value adjustments, they have about 915 million of fair value adjustments. 773, sorry, 732 of those is YPM. The rest of the rest of the amount. The rest of the amount of is 183. That's some other cases. We don't know them. But my point is this. Some people say, oh, work for the accounting is so complicated and the mark things up and it's black box and I don't understand it. I don't agree with that it's a black box. I don't think so. But let's pretend that

we agree. Sure, only 183 million of roughly 1.5 billion of investable assets is fair value adjustments that you cannot link to particular cases. I think it's not. that material. Even if you wanted to take that away, the cost of the rest of their portfolio would be $1.3 billion. So it doesn't really change the initial math. Let's talk about YPF real quick. Okay. YPF, I think the biggest question I got when it came to asking, when it came to people questioning the case, right? And again, everyone can go do their own diligence on YPF, but a lot of people were wondering, why wouldn't this, why wouldn't they get paid out in pesos instead of dollars. And if they got pesos instead of dollars, obviously, that would be, you know,

the Argentina and... That would be less valuable. That would be less valuable. Yeah, exactly. So why shouldn't they get paid in pesos? Because YPF is an Argentinian company and I think the ultimate assets were Argentinian. Okay. So now, the legal fears there are pretty complex, right? So we'll try to simplify it as much as I can. But remember, I am not litigation law. I'm not an arbitration law. I'm not a trial lawyer, right? And there are top law firms on both sides, fighting each other. Those are like one of the most brilliant legal minds in the US today, fighting in court, right? So it will be really silly for me to pretend that I can explain those things better. And I'm sure if Argentina

loses and that argument will be made. I'm sure, right? So this is how I understand. What is important is that, and by the way, some people quote a case from early 20th century, I want to say it was 1918 or 1917 or something like this, where someone made a deposit in German bank, probably in Deutsche Marx because it was way before Eurozone came to existence. And then that person came to the US and that person made a lawsuit against that bank, if I'm not mistaken. Remember, I read that case a long time ago. And eventually, that person got paid in German marks, which depreciated as a result of the First World War ending in German.

Germany was in very challenging economic conditions. And the court said, like, listen, you were in Germany, transacted with a German company, make it in German pesos. Now, that's like what you should be getting paid. Like, leave us alone. Now, and some people quote that case as a legal rationale why Burford and Paterson, if they win the case, would get paid in local currency. Now, there is another case, which for some reason people don't quote at all. And if you go and do enough legal research, you can get this restatement where all that legal is a summarized, right?

But then obviously people are trying to apply it in court to real life situation, which is difficult. And another case says, I will oversimplify that, grossly oversimplify that. You should get paid your damages or whatever you owe to in the currency in which you were hortic. And in this case, the argument goes like this. Sure, the shares were trading in pesos in Argentina. ADRs or ADS were trading in the US, in US dollars. and U.S. has sufficient nexus to this case because many American investors look at Ethan Park, a hedge fund. They were, I'm sure, many others who invested, they should get paid in that money, in that currency.

So again, we can probably do another podcast just about that issue where I can actually go and reread and reread whatever I read whatever I read about. that legal matter and legal theories, and we can go through them in gross details. So, but that's always, again, gross law and simplifying, but that's the point. Perfect. No, that's great. All right. We actually hit many of the, you know, Burford is a battleground stock. There's been public short thesis out there.

People can go look that up. We've actually hit many of the bear cases that I wanted to hit. We talked about competition. We talked about the quote unquote black box of the valuation. But there is one particular point I wanted to talk about, and that is the management team here. For years, Burford has a long history. For years, this was a kind of compounder, value investor, darling, and there were some red flags floating around.

Like, the CEO's wife was the CFO for a long time, was one of the big red flags out there. And there have been some other, some other, I guess, sketchiness around the company, I guess. So I just wanted to talk to you for a second about, I think that's the last remaining bare case we haven't really addressed, the management, the history with the CFO, all of that. Okay, so first of all, I don't like the most sketchings. So I want to be on the record to say that I disagree with it. I revoke my sketchiness thing. You know, I'm doing this off the top of my head.

I'm revoking sketchiness. Well, okay. So now let's go back. Until either late August or September, early September, I think late August, 2019, Burford management team. And I'm missing some highly qualified and really important people on the management team right now because they're more, a little bit behind the scenes, doing real work, running the team, looking for cases, evaluating them, making investment decisions.

So I'm skipping them. Those are really, really good. The JD MBAs that you talked about at the beginning. I'm talking only about what people would normally talk about management team when they talk about a public company, right? Whether it's making widgets or extracts oil or does software coding, right? So there was a CEO, there is still CEO, Chris Bonner. He's a lawyer.

will practice at one of the best law firms in the U.S. And then he was General Counsel either for Time Warner or one of the parts of Time Warner, then he did something else, and then he launched Burford back and all that, right? So if you look at his resume, it's kind of how the best legal careers are made. So then there was CIO, Chief Investment Officer, the gentleman named Jonathan Mollett. And he's more, as far as I understand,

is more of, the way I would describe him, is more of this legal scholar, brilliant mind. If I'm not mistaken, he worked, he clerked for Supreme Court justice early his career. Look at his bio, that's what I remember. But we're talking about, like, again, top law firm, top law school, you name. So those two people in management team.

And then CFO was Elizabeth at the time, who was Elizabeth McConnell, if not mistaken, who is CEO's wife. It has been on the website. So if you go read her bio, it would have said back in 2018 or 2019 that CFO and CEO merit. And obviously, some people felt not comfortable with that. And so to me, the way I thought about, I'll share my thinking back then, is this. So, first of all, I spoke with CFO, Elizabeth, several times. And I think she was in trouble her numbers.

She knew the strategy. She knew the business. So it's clearly, to me, it was very clear that it's not a case for nepotism. She has great background, one of the top business schools in Canada, banking for many years, managing director, clearly qualified, in my opinion. And my personal interactions with her on the phone that was such that, yes. She knows this. She's great. Really nice talking to her. That's number one. Number two, some people say, hey, hey, it's still really strange. And I say, sure, it's really strange because it's unusual. And my pushback would be like, first of all, how many couples will be such

that one of the spouses qualified to be CEO, and another spouse qualifies to be CFO? That's probably kind of rare. Then the question is, how many couples will actually want to have two spouses what can see on the CFO because, you know, you interact professionally, interact professionally. That's tough, right? Like, for example, I have friends who did a startup the number of years ago, husband and wife. And they would tell me that they got a lot by venture capital investors. What happens if you got into a fight and, God forbid, you know, you decide to split, right? My friends had to ask a lot of questions about that.

So because that's stuff working together, right? And I get that it's unusual. So that's what second layer of analysis for me. The third layer of analysis for me was this. I've heard, and I cannot find the source, so maybe I heard it in just a rumor, who knows. But I've heard that some hedge fund seed investors really prefer two founders of hedge fund because they believe that the risk of inappropriate behavior goes down tremendously than if it's one person. And they even quoted some numbers.

this is what I heard. Again, I cannot find a source. I can be totally wrong about that. And I thought, and I applied the same concept here. I said, okay, so if we view CEO and CFO as one actor, and I'm not saying, by the way, it's reasonable. I'm just, let's pretend. In that case, they steal Jonathan Mollock, who is critical for the company success. And he's not. So he's a separate person. Unless they're running a really interesting relationship, he's not involved with them. So in that case, there are really two actors, and that's all. And if it's only two actors, how is it different from CEO, CFO, or two actors? So that's how I get comfortable.

Again, three levels, right? So first of all, very highly qualified CFO. Second, just judging base rates how likely that anybody will be working two spouses working on CEO and CFO. And third, there is another person involved in the top management team. So now, fast forward, new CFO, temporary CFO, CFO came in, again, I think it was late August 2019, maybe over September, who was coming, who was senior banker at Morgan Stanley for a long time, who knew Burtford before, and he came as this temporary CEO for up to two years, I think, what that was announced, and I think he was great, too. and if I'm not mistaken, he was the vice chair of Morgan Stanley's MNA practice. Again, check his bio, I can't be mistaken. So Jim was great.

And recently, the prominent CFO was established because what happened, because when his shareholders complained and said, listen, you know, CEO, CFO related, et cetera, et cetera. Wolframson said, okay, Elizabeth will become chief strategy officer and will bring this CFO, who knows the company, we're being humane, but it's, temporary, later on, we'll find a permanent CFO, which makes sense. Like, and by the way, if you look at Burford, what number of changes that Burford made after August, September, and for the next few months, that's tremendous. They said, okay, you don't like that CFO and cell related, we'll change CFO. Fine, done. You really want YPF disclosure, wait smart, okay, we'll figure out a way and they gave the disclosure

reward for the numbers. you don't like something else also people were complaining this is really funny by the way so you know how in the US generally it's good as if your chairman and CEO is the same person

it's negative right it's too much power etc etc I see the intellectual argument there in this case CEO was not even on the board of directors and people will complain like why you're not on the board of directors

I'm like hold on a second some people will complain about one of the biggest banks in the U.S. that CEO and chairman was the same person, and you can figure out probably which bank I'm referring to, and people were complaining, and there was some pressure, et cetera, et cetera. Here, people are complaining about the opposite. The CEO is not even on the board. So, what are saying, okay, you don't like that CEO is not on the board? Chris Boggart will join the board. Fine. People were complaining that compensation of CEO and CFO and CIO was not disclosed. So, okay, we'll disclose compensation of two chief officers, CIO and CFO.

And by the way, my response was like, do you really care the compensation is, what the compensation is when you see the underlying the final numbers? If you're happy with that income, that's it. It's like, you know, hedge funds, like, why do you care about hedge fund fees? You either like after tax after feed a chance or you don't. So I always felt like it's irrelevant in the big scheme of things. Warford disclosed that numbers. And by the way, speaking of that, both see or.

a CEO and CIO makes 10 times or more less than the value of the store that they own. So the incentives are, in my opinion, pretty clear. So, and there was a lot more things that Buford and its management gave to shareholders after August September 2019 because people were, you know, asking and begging for them. Because if you look at one of the calls that happened in August 2019, there were like a lot of panicking shareholders on the line. And it was really interesting, you know, to listen and read where, like, shareholders were really like, oh, my God, oh, my God, oh, my God. So what about this?

What about that? And so, Wolfram gave all the data. Like, here you go. Perfect. Look, Artem, we have covered, it's been over an hour and a half, I think. We've covered so much, but, you know, I want to give you the last word. Is there any point you wish we had hit harder? Any point you don't think we addressed here?

Any last words you wanted to add on here? Okay. So, first of all, given that we spoke one hour of 30 minutes, I would say that it reminds me of a quality attribute to Mark Twain. I didn't have the time to write a short letter, so I wrote a long one. So that's what it reminds me. So that's number one. Number two, you asked me about a Bayer case, right? And we mostly talked about, you know, management team and such.

So the real Bayer case is this. And even though we talked with you about competition, and I presented why I believe Burford can sustain any increasing competitive pressures. and it's due to the industry dynamics and customer value prop and scale and data advantage and all those things. It's still something that if you tell me, Artin, five years from now, Burford is not a successful investment for you. Why did it happen? Like, Andrew has a crystal ball. I know five years from now it will not be successful investment. Why is that?

I would say because of competition. Because people are creative and there is always a risk. So it's something that I always watch. Well, it would have to be YPF fails. right? Because if YPF works, this is going to be a home run. So YPF would fail, which 100% can happen, right? That 100% can happen. I wouldn't say it's a 100% could happen. There is a southern probability, which is greater than zero and lower than 100.

I said can happen. That will happen. But yes, there is absolutely a chance why it would be YPF fails and the competition develops. Yeah. Yeah. Yeah. Cool. Anything else you want to hit on? No, I think that's all. Thank you for having. Well, hey, no, I really appreciate it. Everyone can tell. much appreciated it because I think this might be the longest podcast we've done. But look, I loved having you on. I know you've got, you and I talk relatively frequently. I know you've got a lot of great other ideas. So we'll just have to have you on back again to talk about some of those other ideas. But Ardenfoken, Caracom Capital, you know what? Your Twitter's

not super active. How can people reach you if they want to reach out to you? Okay, my tweet is not active at all. I'm not sure 100%, but I think I've never tweeted. I have an account. I don't think you have either. I think you've got like five follow, you're following five people or something, but how should people reach to if they want to follow up on this? But maybe five people follow me. And now I'm wondering, who are those my most loyal friends? I should send them a big gift for following me when I know Twitter. I'm one of them, man.

I tagged you for the podcast. So, no, no, so I don't tweet. So, yeah, my tweet is very next. Honestly, the best way is either through LinkedIn, just by my name, you'll find me there. Or you can also go to Karakan Capital.com. there are two hyphen scaro dash can double n dash capital dot com or just google and there is a form there to get in touch uh with me that's also a way but linkedin is good perfect well i will include a link to his to caro con's website in the show notes if anybody's looking for that artem phoken

isn't a super popular name so i'm sure you can find him on lincoln if you're looking for him there but artem thank you so much for coming on i'm going to head over to spain and go on vacation now and looking forward to having you on again.