Shares in litigation finance firm Burford Capital (BUR:AIM) are flying high, up 15% to £14.98 after the firm announced that it had secured funding for $1.6bn (£1.25bn) in new investments.
The money is coming from three sources: an unnamed sovereign wealth fund (SWF), a new private investment fund and Burford’s own reserves.
To begin with Burford has formed a strategic relationship with an SWF to create a $1bn (£790m) investment pool. The firm is putting up one third of the capital and the fund is putting up two thirds.
Half of each new litigation finance investment will be funded by this pool for the next four years or until the pool is fully invested, whichever happens first.
Once the pool has recovered its original investment, Burford will receive 60% of the profits for just 33% of the outlay as well as an annual $7m payout to cover its running costs.
The SWF has said it is interested in investing in ‘other opportunities’ with Burford as the business expands.
THE PENNY HAS DROPPED WITH BIG INVESTORS
Burford’s remarkable returns are clearly attracting attention not just from sovereign wealth funds but from big institutions wanting to invest directly in litigation finance.
As a result it has raised $300m (£235m) of private institutional money which it will use to finance a quarter of new investments for the next three years or until the cash is fully committed.
Despite having none of its own money in this new fund, Burford will get a 2% annual management fee as well as a 20% performance fee as long as the fund makes at least an 8% profit.
This ‘two and 20’ model is more common with hedge funds than litigation funds and suggests Burford is now on the radar of asset allocators wanting to spread their risk across different asset classes.
Finally the firm will use $300m (£235m) of its own capital to finance the remaining quarter of each new investment and will keep all of the profits on that slice of the 'pie'.
Adding all of these percentages up, Burford itself will invest 42% of the capital for each new investment but will walk away with 60% of the profits.
Despite today’s pop the shares are still trading nearly 20% below the level that they were placed with institutions back in October.
LITIGATION FINANCE SECTOR GAINS MOMENTUM
At the end of last week smaller rival Manolete (MANO:AIM) celebrated its debut on the junior market with the shares closing at 194p against their initial price of 160p as investors raised their bets on the sector.
Today the firm released its earnings for the six months to end-September which showed revenues up 31% to £6.5m on investments up 75% to £13.9m.
It has invested in 31 new cases in the first half of the year against 21 cases in the same period last year and its average return or ‘money multiple’ is 3.6 times its investment, i.e. a profit of 2.6 times.
Today also saw the debut of Litigation Capital Management (LIT:AIM) after the company raised £20m, benefiting from increased investor demand for exposure to the sector.
Shares are trading up 20% at 63p against a placing price of 52p giving the firm a market capitalisation of just under £70 million.
DISCLAIMER: The author owns shares in Burford Capital.
