Burford Capital Limited, the leading global finance and asset management firm focused on law, today announces the extension of its arrangement (“BOF-C”) with its sovereign wealth fund strategic partner (the “SWF”) through December 31, 2023.
While BOF-C was nearly full at the end of 2021, with $633 million in active commitments out of its $667 million fund size, only $274 million was deployed. It is our judgment that BOF-C is able to support additional commitments, and we have thus agreed with the SWF to extend the investment period by one year to permit that to occur. If BOF-C reaches the point prior to the expiration of the extended investment period where we regard it as fully committed, we expect to cease allocating new matters to BOF-C. Until that time, we will allocate 25% of each new matter that meets the relevant investment criteria to BOF-C, and the balance sheet will take the remaining 75%. This change from the current 50%/50% allocation permits the balance sheet to take more of each new core legal finance asset in light of Burford’s recent incremental capital raise while providing a greater diversity of matters to the SWF.
Burford is very pleased with the constructive and ongoing relationship with the SWF, as reflected not only in these changes but also in the SWF’s provision of a $100 million sidecar facility during the course of 2021.
In light of this amendment to BOF-C and our recent successful $360 million debt offering, it is opportune to comment on our approach to the fund management business more generally, building on the commentary in our management letter included in Burford’s 2021 annual report.
We think about our business in three broad ranges of potential returns, <12%, 12-20% and >20% internal rate of return (“IRR”), and we take a considered approach to balance sheet structure and capital allocation within each range. Of course, these return ranges are anticipated and actual returns may vary.
In our lowest range of potential returns, <12%, which typically includes our post-settlement products, we act solely as a fund manager. We do not allocate balance sheet capital to this range of returns. The assets we consider for this range of returns are generally more efficient to manage, and we are able to operate our funds on a standalone profitable basis while also providing a service to clients.
In our middle range of potential returns, 12-20%, we operate through our new fund, the Burford Advantage Fund, in which our balance sheet makes a 20% investment. Again, by making capital available in this range of returns, we provide a service to clients and we expect to operate on a standalone profitable basis, including an attractive return on our capital committed to the Burford Advantage Fund, given the characteristics of the underlying matters and our profit-sharing arrangement with limited partners.
The highest range of potential returns, >20%, is our core legal finance business which is characterized by the need for extensive diligence and ongoing case management performed by highly qualified professionals along with assets that do not scale particularly well. Thus, a traditional 2% management fee does not cover our operating costs, and we view a 20% performance fee as inadequate compensation for the approximately 30% IRR we have historically generated. While we will continue to explore alternative structures and fee levels, as illustrated by BOF-C and by our new Burford Advantage Fund, we are disinclined to continue allocating high-return assets to a classic 2&20 private fund and, in light of our recent incremental capital raise, do not plan to raise a successor to the Burford Opportunity Fund at this time but instead allocate more of our future high-return assets to the Burford-only balance sheet and our public shareholders.