Burford Capital Limited (BUR) 20-F2020 FY Annual report (foreign)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark one)

☐  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

⌧  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2020

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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Commission file number: 001-39511

BURFORD CAPITAL LIMITED

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

Guernsey

(Jurisdiction of incorporation or organization)

Oak House, Hirzel Street, St. Peter Port GY1 2NP, Guernsey

(Address of principal executive offices)

Mark N. Klein

Telephone: 212-235-6820

350 Madison Avenue, New York, NY 10017

Fax: (646) 736-1986

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d) OF THE ACT: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or ordinary shares as of the close of the period covered by the annual report. 219,049,877

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ⌧

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ⌧

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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If an emerging growth company that prepares its financial statements in accordance with US GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15U,S,C, 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing. US GAAP ☐

International Financial Reporting Standards as issued by the International Accounting Standards Board ⌧ Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

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Forward-looking statements

In addition to statements of historical fact, this report contains “forward-looking statements” within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended (the “Exchange Act”). The disclosure and analysis set forth in this report include assumptions, expectations, projections, intentions and beliefs about future events in a number of places, particularly in relation to our operations, cash flows, financial position, plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These statements are intended as “forward-looking statements”. In some cases, predictive, future-tense or forward-looking words such as “aim”, “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “forecast”, “guidance”, “intend”, “may”, “plan”, “potential”, “predict”, “projected”, “should” or “will” or the negative of such terms or other comparable terminology are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. In addition, we and our representatives may from time to time make other oral or written statements which are forward-looking statements, including in our periodic reports that we file with the US Securities and Exchange Commission, other information sent to our security holders, and other written materials. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and are based on numerous assumptions and that our actual results of operations, including our financial condition and liquidity and the development of the industry in which we operate, may differ materially from (and be more negative than) those made in, or suggested by, the forward-looking statements contained in this report. In addition, even if our results of operations, including our financial condition and liquidity and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

Factors that might cause future results to differ include, but are not limited to, the following:

Except as required by law, we undertake no obligation to update or revise the forward-looking statements contained in this report, whether as a result of new information, future events, a change in our views or expectations or otherwise. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

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Definitions

Definitions of certain terms used in this annual report are provided in the sections titled “Key definitions” and “Glossary of terms” beginning on pages 13 and 155, respectively.

Presentation of industry and market data

In this annual report, we rely on and refer to information regarding our business and the markets where we operate and compete. Certain economic and industry data, market data and market forecasts set forth in this annual report were extracted from market research, governmental and other publicly available information, independent industry publications and reports prepared by industry consultants. These external sources include publicly available information about the legal finance market as well as certain private third-party reports.

Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. While we believe that these industry publications, surveys and forecasts are reliable, we have not independently verified them and cannot guarantee their accuracy or completeness.

Certain information in this annual report, including, without limitation, statements regarding the industry in which we operate, our position in the industry and our market share relative to our competitors, are based on our internal estimates and analyses or on third-party sources.

We cannot assure you that our estimates or any of the assumptions underlying our estimates are accurate or correctly reflect our position in the industry. None of our internal surveys or information has been verified by any independent sources. All of the information set forth in this annual report relating to the operations, financial results or market share of our competitors has been obtained from publicly available information or independent research. We have not independently verified this information and cannot guarantee its accuracy.

Certain market share information and other statements presented herein regarding our position relative to our competitors are not based on published statistical data or information obtained from independent third parties but reflects our best estimates. We have based these estimates upon internal surveys, information published by our competitors and information obtained from our clients, trade and business organizations and associations and other contacts in our industry.

Basis of presentation of financial information

We report under International Financial Reporting Standards, as issued by the International Accounting Standards Board (IFRS).

IFRS requires us to present financials that consolidate some of the limited partner interests in funds we manage as well as assets held by our balance sheet where we have a partner or minority investor. See note 24 to our consolidated financial statements included elsewhere in this annual report. We refer to this presentation as “Consolidated” “Group” or “IFRS”. We endeavor to provide clarity on Burford as a stand-alone business by furnishing information on a non-IFRS basis that eliminates the effect of this consolidation. We refer to this presentation as “Burford only”, “Burford-only”, “Burford standalone” and “Burford-only balance sheet” as the context requires. We also strive to provide clarity on the business of Burford and its managed funds as a whole by furnishing information on a non-IFRS basis that reflects the contribution of both our consolidated and unconsolidated funds. We refer to this presentation as “Group-wide”. See page 72 for important information about non-IFRS financial measures, including a reconciliation of these non-IFRS items to our financial statements prepared in accordance with IFRS.

We use Burford only and Group-wide financial measures, which are calculated and presented using methodologies other than in accordance with IFRS, to supplement our analysis and discussion of our operating performance. We believe Group-wide financial measures, including Group-wide information on our capital provision assets and undrawn commitments, are useful to investors because they convey the scale of our existing (in the case of Group-wide capital provision assets) and potential future (in the case of Group-wide undrawn commitments) business and the performance of all legal finance assets originated by us. Although we do not receive all of the returns of our funds, we do receive performance fees as part of our income. Further, we believe that Group-wide performance, including the performance of our managed funds, is an important measure by which to assess our ability to attract additional capital and to grow our business, whether directly or through managed funds. These non-IFRS financial measures should not be considered as a substitute for, or superior to, financial measures calculated in accordance with IFRS.

Our financial statements are presented in US dollars.

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History and development of the Company

We are composed of our parent company, Burford Capital Limited, and a number of wholly owned subsidiaries in various jurisdictions through which we conduct our operations and make our investments. Burford Capital LLC is the principal operating entity in the US, and Burford Capital (UK) Limited is the principal operating entity in the UK. These two entities provide various corporate and investment advisory services to other group companies. Burford Capital Limited, the parent company, does not have any operations or employees itself.

We were incorporated in Guernsey on September 11, 2009. Initially, we were established as a registered closed-ended collective investment scheme. Our ordinary shares commenced trading on the London Stock Exchange’s Alternative Investment Market (AIM) in October 2009 and on the New York Stock Exchange (NYSE) in October 2020 under the symbol “BUR”.

In late 2012, we altered our corporate structure by deregistering as a registered closed-end collective investment scheme and reorganizing to implement a new group structure incorporating certain of our wholly owned subsidiaries. In connection with this reorganization, we acquired our investment adviser through a cashless merger.

In 2011, we acquired Firstassist Legal Expenses Insurance, a leading provider of litigation expenses insurance in the UK, which was the basis of our legacy adverse cost insurance business, now in run-off. In 2015, we acquired Focus Intelligence Ltd, a business intelligence firm that specialized in investigative litigation and arbitration, asset tracing and judgment enforcement. In December 2016, we acquired GKC Holdings, LLC, a law-focused asset manager registered as an investment adviser with the SEC. This acquisition added a third-party asset management business to our structure to expand the diversity of capital offerings to investing clients and generate an asset management revenue stream.

Burford Capital Limited has a single class of ordinary shares which are traded on the NYSE and AIM. Subsidiaries have issued bonds traded on the Main Market of the London Stock Exchange. See page 207.

The chart below contains a summary of our organizational structure as of December 31, 2020. The chart does not depict all of our subsidiaries, including intermediate holding companies through which certain of the subsidiaries depicted are held.

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Information about our “significant subsidiaries” as defined in Rule 1-02(w) of Regulation S-X under the US securities law is set forth below:

Geographic activity

We have three offices in the US: New York, NY; Chicago, IL; Washington, DC; and three offices outside the US: London, United Kingdom; Singapore; and Sydney, Australia. We also have individual employees located in various other cities around the world where we do not have formal offices. We have a diverse group of lawyers qualified in the US, England, Australia, Germany, Switzerland, Hong Kong and Israel. See pages 47 for a breakdown of our portfolio by geographic location.

Property, plant and equipment

We do not own any real property. We lease our six principal office spaces in New York, Chicago, London, Washington, Singapore and Sydney from third parties. The following table sets forth information regarding our leased offices:

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Our industry

Despite the overall size and stability of the legal industry, certain trends have fueled the growth of legal finance. In particular, increasing numbers of corporate clients prefer to pay law firms for success rather than on an hourly fee basis. Yet law firms operate as cash businesses with little balance sheet capacity and often need the steady stream of income that hourly fees provide. Legal finance has grown rapidly over the past decade to bridge this gap. In addition, corporate legal departments are under pressure to extract value from their litigation assets, and legal finance gives them a tool to do so.

We believe our addressable market to be three areas of legal activity: (i) a portion of the amount paid to law firms each year as legal fees, (ii) the underlying asset value of claims, settlements, judgments and awards and (iii) the value of assets affected by legal and regulatory processes. We believe that each of these areas is of significant size and much greater than the supply of capital available, and that we are at an early stage of total market penetration.

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Our clients

We engage with law firms and corporate litigants around the world. We have worked with 94 of the AmLaw 100 and 90 of the 100 largest global law firms by revenue according to rankings by The American Lawyer, along with numerous litigation boutiques. As legal finance has become more widely known and as we have developed more direct relationships with corporate litigants, we are sourcing an increasing share of our corporate business directly, including from Fortune 100 and FTSE 100 clients.

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Burford’s products and services

The following is a discussion of our products and services, which comprise: (i) legal finance, (ii) complex strategies, (iii) post-settlement finance and (iv) asset management.

Legal finance

Core litigation finance

Our litigation finance business provides capital and expertise to many of the world’s largest law firms and their clients. We finance commercial high-value single litigation matters or portfolios of matters at any stage of the litigation process, from before inception to after a final judgment has been entered. In some instances, we provide financing to a law firm that has agreed to take a case on a contingent fee or alternative fee basis. In other situations, we provide financing to monetize the value of a claim by offering a client an upfront cash payment for a claim with significant potential value. We in turn receive our funded cost and return from the ultimate settlement or judgment on the claim.

We also provide financing to law firms and corporate clients for portfolios of cases. In these instances, we provide financing for a group of cases with the same counterparty on terms that tend to recognize the lower risk of loss generally associated with multi-case portfolios. We underwrite each case in these portfolios. Typically, the cases in a portfolio are cross-collateralized, such that we can recover losses in one case from successes in another. This structure reduces our risk and allows us to offer more attractive terms while still achieving a similar risk-adjusted return as with single cases. Portfolios allow us to originate larger volumes of assets with greater efficiency, as well as to provide clients funding for cases that would be difficult to finance otherwise (e.g., defense matters).

For corporate clients, legal finance allows them to hire law firms that will only agree to work on an hourly fee basis. Further, our financing could allow corporate clients to avoid incurring legal fees as an operating expense, thereby improving their net income metrics. Monetizations allow corporate clients to obtain value and cash for an asset that otherwise would not appear in their financial statements. We work with all sizes of businesses, including Fortune 100 and FTSE 100 companies, to monetize their litigation positions, to unlock the value of pending litigation and unenforced judgments and to enhance corporate balance sheets.

For law firm clients, our financing allows them to obtain cash to operate their businesses and pay their lawyers even when they have taken a case on a contingent fee basis. It also allows law firms that prefer to operate on an hourly basis to compete for contingency fee work.

Origination and underwriting

We engage in extensive marketing and operate a dedicated origination team. Although a primary focus for the origination team continues to be law firms and lawyers (the traditional source of most of our opportunities), we have also been increasingly directly targeting potential corporate clients, resulting in the procurement of several large financing opportunities.

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Pricing and returns

We use a wide range of economic structures for our legal finance assets. The structure of each legal finance asset varies and our returns can have several components, including:

In a basic single case funding transaction, we pay some or all of the costs of a claimant bringing a litigation matter. In such transactions, we typically use a structure that provides for our capital back plus a time-based return followed by an entitlement to some portion of the net recovery. For example, we might structure our return so that upon conclusion of a successful claim, we would receive our funded cost back plus two times our cost plus 20% of net proceeds from the claim. Alternatively, we might structure our return so that upon conclusion of a successful claim, we receive our funded cost back plus 40% of net proceeds from the claim plus an interest rate on our entitlement that begins to accrue at some point after closing. As another alternative, we might have an entitlement that is based solely on the funded amount and not any percentage of the proceeds, but that increases over time. For example, the structure may be such that if the claim is successfully resolved within one year after closing, our entitlement is our funded cost back plus our cost, if it is resolved more than one and less than two years after closing our entitlement is our funded cost back plus two times our cost, and if it is resolved more than two years after closing our entitlement is our funded cost back plus three times our cost. Terms are bespoke, the foregoing examples are hypothetical, not every investment will have all of these components, and some will have other structures. Moreover, the larger or more complex a matter, the more likely it is that we will use an individually designed transactional structure to fit the needs of the matter, to accommodate what are often multiple parties with different economic interests and to align interests and incentivize rational economic behavior.

We also engage in transactions in which the risk of loss can be reduced, typically by using a portfolio or multi-case structure, but occasionally through a variety of other structures such as interest-bearing recourse debt (sometimes with a premium based on net recoveries) or the purchase of equity or debt assets that underlie the relevant litigation or arbitration claims.

We have built proprietary analytical tools that enhance our ability to analyze and price any legal finance matter. Using the significant data set we have developed over 11 years of operation as well as the views of our experienced underwriters, we employ a bespoke asset return model to calculate the likelihood of loss and probability-weighted risk-adjusted returns for each opportunity considered by the Commitment Committee.

We price our capital commensurate with the risks we identify and quantify. Broadly, as we underwrite new legal finance assets, we are targeting risk-adjusted returns consistent with the historic performance of our concluded portfolio, although returns vary widely across different types of investments.

Asset monitoring and realizations

We have a robust internal portfolio management process to optimize legal finance assets. Each of our matters has a Burford professional assigned to monitor the underlying case. We generally schedule regular calls with clients to discuss case developments. Case updates are reported monthly to senior management. We also conduct a quarterly risk review and provide an in-depth quarterly report on our entire portfolio to senior management and our Board. We conduct an extensive semi-annual review of every legal finance asset for valuation purposes. In addition to receiving reports from counsel, we proactively keep ourselves informed of case developments, including receiving docket alerts and reviewing court documents filed.

Our matters resolve in various ways consistent with the outcomes in the litigation process generally. Many of our matters reach a negotiated resolution—a settlement— between the litigants, either before or after going to trial. Others do not resolve amicably and go all the way through the formal dispute resolution process, including trial and appeal(s). The duration of those outcomes varies widely and depends on the complexity of the matter and the schedule of the relevant tribunal. In a small number of instances, we have made a secondary sale of all or a portion of a legal finance asset prior to the conclusion of the underlying matter.

In many instances, our clients receive full cash payment for the entitlement from matters at the time of their conclusion. However, there are some instances where payments are delayed by agreement (for example, when a

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settlement is paid in installments over time) or where the parties agree on an entitlement that includes non-cash value that must be monetized over time. Because our client is giving up some valuable leverage through the pendency of the litigation process by agreeing to a resolution, clients tend not to do so unless payment is quite certain, and it is very rare in our experience for there to be a default in connection with such payments. There are, of course, some instances where the adverse party loses and refuses to pay, in which case enforcement efforts may be needed.

Once there is no longer any litigation risk on a matter, such as when there has been an agreed (but unpaid) settlement, the matter becomes a receivable, reflected on our balance sheet as a “due from settlement of capital provision asset”. At that point, we record the estimated value to be received (discounted if appropriate) as income, and thereafter recognize separately any further increments in value caused by the passage of time, such as from interest running on the entitlement. Due from settlement receivables for legal finance assets typically are resolved into cash during a financial reporting period, though some can take varying lengths of time before generating cash. In a small number of cases (less than 3% of realizations by value through December 31, 2020), we have received an asset other than cash (such as stock, a mortgage or a note) for our entitlement upon conclusion of a case. In these cases, we estimate the value of the asset for purposes of recording realization income, and then record gains or losses on the asset over time on our income statement until it is resolved into cash. At December 31, 2020, we had no non-cash assets of this type on our balance sheet.

Privilege and confidentiality

In order to make our underwriting decisions and conduct our ongoing asset monitoring, we receive from our clients confidential and legally privileged information (what in the US is called “attorney work product”). That sensitive information can lose its protection and become accessible to a litigation opponent if it is disclosed (a concept called “waiver”), which could have catastrophic consequences for the litigant. We are entitled to receive such information but are under a strict obligation to protect it to minimize the risk of waiver. Among other things, this obligation requires us to tightly restrict access to the information itself and conclusions drawn from it. As an example, the release of individual valuations of ongoing legal finance assets may create a risk of waiver over sensitive information since a court order or other event that might give rise to an asset valuation can only be put in context with the use of privileged information. We thus do not release asset valuations of ongoing matters, including partially concluded cases, and are similarly unable to provide other asset-specific information about our portfolio (including our YPF-related matters which are presently in active litigation) unless that information becomes publicly available through other means.

Legal risk management

In many legal jurisdictions (although generally not in the United States), the loser in a litigation must pay the winner’s legal expenses, creating adverse cost risk. As a result, there is a market for insurance against that adverse cost risk.

In 2011, we acquired a leading provider of adverse cost insurance in the UK. Following certain unfavorable changes in regulations that we anticipated at the time of the acquisition, we stopped issuing new insurance policies through this legacy business at the end of 2016, and it has been in run-off since then, so that only a small number of cases remain unresolved. Our operating profits from this business have exceeded $81 million in aggregate since 2011 against an acquisition cost of $19 million.

Adverse legal cost risk remains a key issue, however, especially in the kind of larger complex litigation that is the focus of our core business. For example, it is difficult to find a path forward on English litigation claims once the adverse cost exposure exceeds a certain size as there is limited capacity in the insurance market for such claims. Moreover, adverse cost protection is often a prerequisite in large cases as individual claimants are typically unwilling to take on the kind of joint-and-several adverse cost exposure that can exist in such cases and large institutional claimants are often unwilling to have exposure to the risk of loss.

Given our historical experience as an insurance provider and our expertise in litigation risk assessment, we re-entered the adverse cost insurance business in 2018 with Burford Worldwide Insurance Limited, our wholly owned Guernsey insurer. Burford Worldwide Insurance Limited offers adverse cost insurance globally in litigation and arbitration cases. It currently takes on 20% of the insurance risk and contracts with reinsurers to take the remaining risk.

Currently, Burford Worldwide Insurance Limited only writes coverage for matters that we are financing as part of our core litigation finance business. We view this business as enabling our more profitable litigation finance business, not as a material standalone business.

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Asset recovery

Once a matter has been litigated through to a final judgment, and all appeals have been exhausted, that judgment is enforceable as a debt obligation of the judgment debtor. While many litigants do pay their judgments when they ultimately lose a matter, some do not, and further effort is needed to collect the judgment debt.

Our asset recovery team provides expert assistance to lawyers and clients on global asset location and enforcement, including providing legal expertise, critical research and investigative strategies as part of a recovery effort. We use global legal tactics and strategies to obtain information and ultimately to seize assets to satisfy judgments.

Asset recovery offers two additional benefits beyond its financial contribution. First, it is an additional service to offer to our clients. Second, our asset recovery team can provide valuable insight into judgment collectability as part of our legal finance underwriting process, as well as critical assistance in enforcing judgments in our own legal finance portfolio should the need arise, although it has done so only rarely.

Historically, we provided asset recovery services on a fee-for-services basis. However, over the past several years, we have been adding a capital provision model such that the bulk of our business is now done on risk in exchange for a share of whatever recovery is generated.

This capital provision approach gives rise to a legal finance asset for our balance sheet. We underwrite, structure and price these asset recovery assets in a similar manner to our other legal finance assets. As a consequence, we anticipate that these assets will have risk-adjusted returns similar to the rest of our portfolio and should ultimately be more profitable than the fee-for-services approach.

Recently, several international banks have contracted with our asset recovery business to outsource on a capital provision basis their asset recovery work arising out of non-performing loans and other similar assets. These arrangements are attractive to us because we can structure desirable economics based on recoveries across the bank’s portfolio as opposed to a single case basis.

In 2016, in order to enhance our ability to serve asset recovery clients, we launched Burford Law, an internal law firm we operate that works closely alongside our asset recovery team to provide a flexible, seamless and cost-effective service to judgment, award, insolvency and other creditors. Burford Law is a trade name and not a separate legal entity; the license to operate Burford Law, issued by the Solicitors Regulation Authority of England and Wales (SRA), is held by Burford Capital Holdings (UK) Limited.

Complex strategies

We began our complex strategies activities in 2017, and these are undertaken largely through a consolidated fund, the Strategic Value fund, in which we have made a substantial general partner investment alongside the capital provided by the fund’s limited partners. With the onset of the Covid-19 pandemic in early 2020, we made a strategic choice during 1H 2020 to accelerate realizations from the portfolio in this fund to de-risk in light of global financial uncertainty, turbulent market conditions and uncertain judicial speed and engagement. Since the pandemic market environment in 2020 was not expected to be conducive to the merger and acquisition activity of the sort that underlies the strategy in the fund, we did not deploy capital into any new assets in this portfolio during 2020 and would not expect to do so in the near term, although we continue to explore potential opportunities.

In our complex strategies business, we act as a principal and acquire assets that we believe are mispriced and where value can be realized through recourse to litigation and regulatory processes, as opposed to our core litigation finance business, where we provide financing for clients but do not acquire an ownership interest in the client’s underlying litigation claims or the assets underlying disputes. We typically acquire complex strategies assets, for example equity interests in companies, in either public or private transactions. We can operate across the spectrum of legal assets with a wide variety of duration, risk and return characteristics in pursuit of desirable risk-adjusted returns. In most cases, there is underlying asset value to support the position, in addition to potential value from legal or regulatory proceedings. Unlike in our legal finance business, where we are financing a client who retains decision-making authority in the litigation, in complex strategies matters, we are the owner of the asset associated with the claim and assert a claim ourselves based on those assets. We control the claim and can manage it actively.

An example of our complex strategies assets is in merger appraisal situations. In these, we typically take largely offsetting long and short equity securities positions in conjunction with merger transactions where we pursue judicial appraisal of the fair value of the acquired company’s share price to determine whether an adequate control premium was offered. To illustrate better how this strategy works, consider that many US companies are incorporated in

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Delaware, which has a statutory provision that permits shareholders of Delaware companies to challenge in court the price at which a company proposes to enter into a merger transaction. By holding shares in the targeted company prior to the transaction closing, we become entitled to pursue that Delaware litigation directly. In such an example, we typically isolate the litigation risk by hedging the underlying equity position. In many jurisdictions, including Delaware, acquirors are required to pay a statutory interest rate on funds owed to a shareholder pursuing an appraisal claim while that claim is pending. As a consequence, acquirors very often prepay the value of the acquisition price even while our appraisal claim is ongoing to reduce the amount of interest owed while the appraisal claim is pending.

Post-settlement finance

In addition to our legal finance business, we also offer clients the ability to monetize post-settlement and other legal receivables. There can be significant delays between the point at which parties to a litigation matter agree upon a settlement and the finalization of and payment under the settlement. Often, those delays are due to the operation of the judicial process, which may require notice periods and fairness hearings before approval of settlements. In the interim period, both law firms awaiting payment of their fees and clients eager for cash to flow may well find it attractive to secure funding against those expected receipts.

In addition, law firms are often looking for funding at various points, particularly over their fiscal year end when cash is needed to pay partners and employees. In those situations, we offer the ability to monetize or purchase a law firm’s receivables, which typically are high quality.

In both types of situations, as well as others where a lower-risk but legal-related financing opportunity arises, we are able to provide capital at pricing levels considerably lower than traditional litigation finance. We provide this type of finance through one of our managed funds, BAIF. Though we manage this fund and receive management and performance fees from it, we are not an investor in it and it is not consolidated into our consolidated financial statements.

Asset management

We operate eight private funds as an investment adviser registered with and regulated by the SEC, in addition to certain “sidecar” funds pertaining to specific assets. A sidecar is a pooled investment vehicle through which certain investors co-invest directly in specific assets alongside our private funds. As of December 31, 2020, we had three active sidecars, including one for $30 million established in 2020 in conjunction with a specific post-settlement finance asset. Our interest in such sidecar funds is generally limited to incentive fees (if any). The discussion of our funds ignores sidecars unless specifically included and we collapse fund structures into overall strategies, ignoring, for example, onshore and offshore separations and parallel funds. As of December 31, 2020, our total funds’ assets under management were $2.7 billion, not including assets held directly on our balance sheet. We believe that we are the largest investment manager focused on the legal finance sector by a considerable margin.

We view our funds business as an important addition to our balance sheet business. Having access to private fund capital has improved our ability to pursue financing opportunities and has also permitted us to engage in larger transactions without seeking external partners.

Under our current internal policy, we allocate certain portions of every new commitment to our own balance sheet and our various funds as follows.

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We generally conduct the sponsorship and management of our funds through limited partnerships. Each fund that is a limited partnership has a Burford-owned general partner that is responsible for the management and operation of the fund’s affairs and makes all policy and asset selection decisions relating to the conduct of the fund’s business. Except as required by law, the limited partners of such funds take no part in the conduct or control of the business of such funds, have no right or authority to act for or bind such funds and have no influence over the voting or disposition of the securities or other assets held by such funds. Each fund engages an investment adviser. Burford Capital Investment Management LLC serves as the investment adviser for all our funds and is registered under the Investment Advisers Act of 1940, as amended.

Strategic Value and BOF may draw upon a balance sheet funded facility at our discretion in order to fund assets in which they are investing while the funds complete calls of capital from their limited partners, at which point the funds repay the borrowed amounts. The purpose of this facility is to allow the funds to consolidate their limited partner capital calls into larger, less frequent calls, which limited partners generally prefer. While balances under that facility sometimes rise at period end given our high level of activity at such times, draws under the facility tend to be modest in size and short in duration, and we retain complete discretion over whether to allow use of the facility at any time. There were no borrowings under this facility during 2020.

See “Asset management” section on page 65 for more information on Burford’s funds.

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Key definitions

Definitions related to Burford’s activities

Throughout this report, we will refer to our activities as follows:

Our funding sources, however, are not organized based on these services but by expected return, risk and life of the assets we originate. We use our balance sheet and certain dedicated funds to provide capital for higher-risk, higher-return, longer-lived assets such as those created in our legal finance business. We typically use dedicated funds, in which our balance sheet is an investor, to provide capital for the kind of lower-risk, lower-return, shorter-lived assets that typify complex strategies activities. And we use still other dedicated funds (without balance sheet investment) for low risk, low return, very short-lived assets, such as post-settlement and law firm receivables financing.

To present our business in line with this stratification of asset types, we provide our financing and other services through three principal operating segments:

In order to provide greater clarity on our capital provision assets, we have sub-divided those assets for purposes of reporting a number of financial metrics into:

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For each of these two categories, we also provide separate asset data tables with a complete list of every asset in each category (available on our website) and separate return metrics (IRR, ROIC, weighted average life).

Definitions related to Burford’s business structure

We use Burford only and Group-wide financial measures, which are calculated and presented using methodologies other than in accordance with IFRS, to supplement our analysis and discussion of our operating performance. We believe Group-wide financial measures, including Group-wide information on our capital provision assets and undrawn commitments, are useful to investors because they convey the scale of our existing (in the case of Group-wide capital provision assets) and potential future (in the case of Group-wide undrawn commitments) business and the performance of all legal finance assets originated by us. Although we do not receive all of the returns of our funds, we do receive performance fees as part of our income. Further, we believe that Group-wide performance, including the performance of our managed funds, is an important measure by which to assess our ability to attract additional capital and to grow our business, whether directly or through managed funds. These non-IFRS financial measures should not be considered as a substitute for, or superior to, financial measures calculated in accordance with IFRS.

To that end, throughout this report, we will refer to our funding configuration as follows:

We use Burford only and Group-wide financial measures, which are calculated and presented using methodologies other than in accordance with IFRS, to supplement our analysis and discussion of our operating performance. We believe Group-wide financial measures, including Group-wide information on our capital provision assets and undrawn commitments, are useful to investors because they convey the scale of our existing (in the case of Group-wide capital provision assets) and potential future (in the case of Group-wide undrawn commitments) business and the performance of all legal finance assets originated by us. Although we do not receive all of the returns of our funds, we do receive performance fees as part of our income. Further, we believe that Group-wide performance, including the performance of our managed funds, is an important measure by which to assess our ability to attract additional capital and to grow our business, whether directly or through managed funds. These non-IFRS financial measures should not be considered as a substitute for, or superior to, financial measures calculated in accordance with IFRS.

Definitions related to calculating returns

Alternative performance measures:

This report presents certain unaudited alternative performance measures (APMs), which are not presented in accordance with IFRS.

The presentation of APMs is for informational purposes only and does not purport to present what our actual results of operations and financial condition would have been, nor does it project our results of operations for any future period or our financial condition at any future date. The presentation of APMs set out in this report is based on available information and certain assumptions and estimates that we believe are reasonable. Our APMs measure certain

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performance of our assets to the end of the period and include concluded and partially concluded portfolios (as described below).

In discussing cash returns and performance of our asset management business, we refer to several metrics that we have applied consistently for many years in our financial disclosure:

We use the term to encompass (i) entirely concluded legal finance assets where we have received all proceeds to which we are entitled (net of any entirely concluded losses); (ii) the portion of legal finance assets where we have received some proceeds (for example, from a settlement with one party in a multi-party case), but where the case is continuing with the possibility of receiving additional proceeds; and (iii) legal finance assets where the underlying litigation has been resolved and there is a promise to pay proceeds in the future (for example, in a settlement that is to be paid over time) and there is no longer any litigation risk involved in the asset.

In most instances, concluded assets both conclude and result in receipt of all cash proceeds associated with the asset in the same period. Sometimes, non-cash assets are received or cash will be paid over time. In those instances, a balance sheet due from settlement of capital provision assets receivable is recorded, in which event we estimate the future date we expect to receive cash for purposes of calculating return or other metrics such as IRR and WAL. When proceeds are ultimately received, we adjust our presentation of returns to reflect actual proceeds and timing.

For purposes of calculating returns, we must consider how to allocate the costs associated with an asset in the event of a partial conclusion. Our approach to cost allocation depends on the type of asset:

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In the past, we have sometimes referred to “duration” of our legal finance assets to give an indication of their tenor. Duration and WAL are often used somewhat interchangeably in finance, but technically we are analyzing WAL (where time is weighted by cash flows) rather than duration (where time is weighted by the present value of those cash flows).

Unlike our IRR and ROIC calculations, using the aggregate cash flows from the portfolio in making our portfolio level computations will not readily work with WAL computations because our funded assets are originated in different timeframes. Instead, in calculating a portfolio WAL, we compute a weighted average of the individual asset WALs. In doing this, we weight the individual WALs by the costs deployed on the asset and also by the amount of recoveries on the individual assets.

These financial measures are presented as (i) we use them to monitor our financial results and (ii) we believe they are useful to investors, securities analysts and other interested parties. The APMs, as defined by us, may not be comparable to similarly titled measures as presented by other companies due to differences in the way our APMs are calculated. Even though the APMs are used to assess our financial position and financial results, and these types of measures are commonly used by investors, they have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our consolidated financial position or results of operations. Consistent with how management assesses Burford’s business, we also present certain of these APMs on a (1) Consolidated basis, (2) Burford-only, Burford only, Burford standalone and Burford-only balance sheet basis and (3) Group-wide basis.

In addition to these measures of cash returns and asset life, we also refer to two other non-IFRS financial alternative performance measures in this report:

We believe that cash receipts is an important measure of our operating and financial performance and is useful to management and investors when assessing the performance of our Burford-only capital provision assets. See page 76 for a reconciliation of cash receipts to proceeds from capital provision assets.

EBITDA is used by management to assess our business and we believe it is useful to investors because it provides an additional means of evaluating and understanding our operating and financial performance by eliminating non-cash expense. See page 76 for a reconciliation of EBITDA to operating profit.

For a full list of terms we use to discuss our business, please see the Glossary of Terms beginning on page 155.

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Financial and operational review

We have organized the topics in this Financial and operational review in the way that we think about and manage Burford’s business.

As previously noted, we currently report our financial results under IFRS, as issued by the International Accounting Standards Board. IFRS requires the consolidation of certain investment entities that contain third-party capital, principally including the Strategic Value fund and the BOF-C fund, through which our sovereign wealth fund arrangement is conducted. We use Burford only and Group-wide financial measures, which are calculated and presented using methodologies other than in accordance with IFRS, to supplement our analysis and discussion of our operating performance. We believe Group-wide financial measures, including Group-wide information on our capital provision assets and undrawn commitments, are useful to investors because they convey the scale of our existing (in the case of Group-wide capital provision assets) and potential future (in the case of Group-wide undrawn commitments) business and the performance of all legal finance assets originated by us. Although we do not receive all of the returns of our funds, we do receive performance fees as part of our income. Further, we believe that Group-wide performance, including the performance of our managed funds, is an important measure by which to assess our ability to attract additional capital and to grow our business, whether directly or through managed funds. These non-IFRS financial measures should not be considered as a substitute for, or superior to, financial measures calculated in accordance with IFRS.

During 2020, we registered with the SEC as a Foreign Private Issuer (FPI), which allows us to continue to report under IFRS and issue annual results on Form 20-F and semi-annual interim results on Form 6-K. However, if more than 50% of our shares were to be owned by US investors, as determined under the US securities laws, we would no longer be eligible to file as an FPI. In that case, we would be required to begin reporting under US Generally Accepted Accounting Principles (US GAAP) and issue annual results on Form 10-K and quarterly results on Form 10-Q. It is possible that we could lose FPI status during 2021, in which case we would begin reporting under US GAAP as early as the Form 10-K for our 2021 fiscal year. It is also possible that, even if we were still eligible for FPI status, we could voluntarily elect to report under US GAAP. If we were to begin reporting under US GAAP, we would cease reporting under IFRS and we have received permission from London Stock Exchange AIM to do so. Based on our analysis to date, we believe our financial statements under US GAAP would be broadly similar to those we report under IFRS, though there would, of course, be a number of presentational differences, including as to which entities are presented in our consolidated financials.

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Consolidated operating results

Set forth below is a discussion of our consolidated results of operations as reported under IFRS. This Financial and operational review also contains a discussion of certain alternative performance measures (some of which are presented on a non-IFRS basis) that are also used by management to review our ongoing operations. These APMs (described above under “Key definitions”) and non-IFRS measures are supplemental and should not be considered as a substitute for, or superior to, our consolidated results of operation as reported under IFRS.

Year ended December 31, 2020, compared to year ended December 31, 2019

The following table provides an overview of our consolidated results of operations for the years ended December 31, 2020 and 2019.

Capital provision income

Capital provision income decreased by 3% from $352 million for the year ended December 31, 2019, to $340 million for the year ended December 31, 2020. While Burford saw sharply higher realized gains on capital provision assets ($205 million for the year ended December 31, 2020, up 35% from $152 million for the year ended December 31, 2019), increases in gains were more than offset by decreases in fair value adjustments (net of previous unrealized gains transferred to realized) on capital provision assets (down 33% from $204 million for the year ended December 31, 2019, to $136 million for the year ended December 31, 2020) because, while a number of assets recorded unrealized gains due to positive case progress, the $90 million of unrealized gain on our YPF-related assets in 2019 did not recur in 2020. A key driver of our capital provision-direct income during 2020 was a set of ten related assets consisting of 18 cases in which the Group had invested $94 million and had realizations of $267 million for realized gains of $172 million.

Asset management income

Asset management income remained consistent at $15 million for the year ended December 31, 2019, and for the year ended December 31, 2020. The receipt of performance fees offset lower income from management fees. Management fees declined 43% from $15 million in the year ended December 31, 2019, to $9 million in the year ended December 31, 2020, as we are no longer collecting base management fees on some older funds (Partners II, III and COLP) that are past their investment period. Performance fees increased from $0 million in the year ended December 31, 2019, to $6 million in the year ended December 31, 2020, because we received performance fees from Partners I in 2020.

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Insurance income

Insurance income decreased by 50% from $4 million for the year ended December 31, 2019, to $2 million for the year ended December 31, 2020. The decrease was primarily due to the after the event (ATE) business, which provides insurance for legal cost shifting incurred in pursuing or defending legal proceedings, being in run-off since 2016.

Services income

Services income decreased from $2 million for the year ended December 31, 2019, to $1 million for the year ended December 31, 2020. Our fee-for-service income from our asset recovery business declined as we have continued to shift this business to focus on generating capital provision assets as we transition to a contingent risk model.

Cash management income and bank interest

Cash management income and bank interest decreased from $7 million for the year ended December 31, 2019, to $0 million for the year ended December 31, 2020. The decrease was primarily due to lower interest received on cash due to lower market rates, with bank interest income decreasing from $5 million in the year ended December 31, 2019, to $0 million in the year ended December 31, 2020. During the year ended December 31, 2020, we also incurred $2 million of realized losses on disposal of cash management assets compared to $0 million in the year ended December 31, 2019.

Foreign exchange gains/(losses)

Foreign exchange gains/(losses) increased from a gain of $2 million for the year ended December 31, 2019, to a gain of $12 million for the year ended December 31, 2020. The increase was due to increased impact of foreign-exchange movements on the values of our non-US-dollar-denominated assets held by subsidiaries with USD functional currency.

Third-party share of gains relating to interests in consolidated entities

We consolidate two fund entities, the Strategic Value and BOF-C funds, in which we are both the appointed investment advisor and have a significant financial interest. In relation to the Strategic Value fund, Burford has a significant investment in the fund in addition to earning management and incentive fees as the investment advisor. In relation to the BOF-C fund, under the co-investing arrangement with the SWF, Burford receives reimbursement of expenses from BOF-C up to a certain level before Burford or the SWF receives a return of capital. After the repayment of capital, Burford then receives a portion of the return generated from the assets held by BOF-C. Accordingly, under both fund arrangements, Burford is deemed to control the funds under IFRS as it is exposed, or has rights, to variable returns from its involvement with the funds and has the ability to affect those returns through its power over the funds.

Third-party share of gains relating to interests in consolidated entities decreased by 16% from $15 million for the year ended December 31, 2019, to $13 million for the year ended December 31, 2020. The decrease was largely due to lower activity in the consolidated Strategic Value fund with a smaller amount attributable to lower income in the BOF-C fund.

Operating expenses

General operating expenses increased by 10% from $78 million for the year ended December 31, 2019, to $87 million for the year ended December 31, 2020. An increase in compensation expense driven by an increase in headcount was only partially offset by lower travel and marketing expense because of the Covid-19 pandemic. Equity and listing related operating expenses increased 351% from $2 million in the year ended December 31, 2019, to $8 million in the year ended December 31, 2020, due in significant part to one-time costs associated with SEC registration and NYSE listing during 2020 as well as certain other equity-related activity expenses. Case-related operating expenses ineligible for inclusion in asset cost decreased from $11 million in the year ended December 31, 2019, to $5 million in the year ended December 31, 2020, as lower activity in the Strategic Value fund gave rise to a decreased number of situations (including situations where Burford is acting as principal rather than funding a client) where legal fees and other expenditures are incurred that cannot be included in the cost of the capital provision asset.

Finance costs

Finance costs remained consistent at $40 million for the year ended December 31, 2019, and $40 million for the year ended December 31, 2020. With the same amount of loan capital outstanding in both periods, the Group’s loan capital interest expense and lease liabilities interest expense has remained consistent year over year.

Taxation

Taxation expense increased from $13 million for the year ended December 31, 2019, to $37 million for the year ended December 31, 2020. The increase was largely driven by significantly higher realized gains in the US during 2020.

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Burford’s gradual progression from a tax-free fund prior to 2012 to a multinational taxpayer was altered somewhat by the GKC acquisition in 2016. Under US tax law, given that GKC had very few tangible assets, the bulk of the acquisition price of $160 million was characterized as goodwill and other intangible assets for US tax purposes, and those assets are amortized for tax purposes, significantly reducing future US taxable income for some years while the tax benefit of that amortization is used over time. The value of that tax offset was impacted by the US Tax Cuts and Jobs Act of 2017 (TCJA), which lowered US corporate tax rates substantially.

At December 31, 2019, Burford maintained a significant net deferred tax asset on its balance sheet, which arose primarily from future benefits from net operating losses and compensation and benefits expenses, net of the GKC intangibles amortization and net unrealized gains/losses. The TCJA also enacted significant limitations on interest deductibility, such that the Group had not recognized a deferred tax asset for its then unused interest deductions at December 31, 2019.

During 2020, significant realized gains in the US were largely offset by these net operating loss and interest deduction carryforwards, although only the use of net operating loss carryforwards reduced our net deferred tax asset. As a result, we recognized $37 million of book taxes in 2020, while paying only $11 million in cash taxes. Our net deferred tax position went from a net deferred asset of $15 million at December 31, 2019, to a net deferred liability of $22 million at December 31, 2020.

Year ended December 31, 2019, compared to year ended December 31, 2018

The following table provides an overview of our consolidated results of operations for the years ended December 31, 2019 and 2018.

Capital provision income

Capital provision income decreased by 13% from $404 million for the year ended December 31, 2018, to $352 million for the year ended December 31, 2019. The decrease was primarily due to lower realized gains and lower fair value adjustments on capital provision assets. Realized gains on capital provision assets were $152 million for the year ended December 31, 2019, a decrease of 11% from $170 million for the year ended December 31, 2018. The decline in realized gains was attributable in large part to the 15% decline in capital provision asset realizations from $635 million for the year ended December 31, 2018, to $539 million for the year ended December 31, 2019. Fair value adjustments on capital provision assets declined 7% from $310 million for the year ended December 31, 2018, to $290 million for the year ended December 31, 2019, because of the lower net aggregate impact on asset valuations of positive case progress and transaction activity during the period.

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Asset management income

Asset management income increased by 30% from $12 million for the year ended December 31, 2018, to $15 million for the year ended December 31, 2019. The increase was largely driven by the launch of BOF in December 2018, and BAIF in April 2019, which caused management fees to increase 39% from $11 million for the year ended December 31, 2018, to $15 million for the year ended December 31, 2019.

Insurance income

Insurance income decreased by 66% from $10 million for the year ended December 31, 2018, to $4 million for the year ended December 31, 2019, as the legacy insurance business continued to run off.

Services income

Services income increased by 29% from $2 million for the year ended December 31, 2018, to $2 million for the year ended December 31, 2019. Although much of the growth in our asset recovery business has been through a contingent risk approach, in which our returns come from the capital provision assets generated from our asset recovery activity rather than through fees for the services we provide, the overall growth in the business nonetheless contributed to growth in fee-for-service income for the year ended December 31, 2019, compared to the year ended December 31, 2018.

Cash management income and bank interest

Cash management income and bank interest increased by 272% from $2 million for the year ended December 31, 2018, to $7 million for the year ended December 31, 2019. The increase was primarily due to a 24% increase in interest earnings on bank deposits from $4 million in the year ended December 31, 2018, to $5 million in the year ended December 31, 2019, because of generally higher market rates, along with a decline in unfavorable fair value movements on cash management assets from $(5) million in the year ended December 31, 2018, to $(0) million in the year ended December 31, 2019.

Foreign exchange gains/(losses)

Foreign exchange gains/(losses) increased from a loss of $1.5 million for the year ended December 31, 2018, to a gain of $2 million for the year ended December 31, 2019. This increase was due to the impact of foreign exchange movements on the values of our non-US-dollar-denominated assets.

Third-party share of gains relating to interests in consolidated entities

The third-party share of gains relating to interests in consolidated entities increased by 358% from $3 million for the year ended December 31, 2018, to $15 million for the year ended December 31, 2019. The increase was due to continuing activity in the consolidated Strategic Value fund (for which the third-party share of gains increased from $3 million in the year ended December 31, 2018, to $3.5 million for the year ended December 31, 2019) and the addition of the consolidated BOF-C fund with associated third-party interests at the end of 2018 (for which the third-party-share of gains was $6 million for the year ended December 31, 2019, compared to $0 for the year ended December 31, 2018). As well, other consolidated entities accounted for $6 million of the third-party share of gains in the year ended December 31, 2019, compared to a de minimis amount for the year ended December 31, 2018.

Operating expenses

General operating expenses increased by 19% from $66 million for the year ended December 31, 2018, to $78 million for the year ended December 31, 2019. The increase was principally due to increasing headcount and related office space costs, together with costs associated with the marketing, due diligence and ongoing maintenance of the larger capital provision asset portfolio. Equity and listing related operating expenses increased from $0 in the year ended December 31, 2018, to $2 million in the year ended December 31, 2019, as preparations began for SEC registration. Case-related operating expenses ineligible for capitalization increased 97% from $6 million in the year ended December 31, 2018, to $11 million in the year ended December 31, 2019, as portfolio growth has resulted in an increase in situations where Burford acted as principal rather than funding a client in which situation legal fees cannot be capitalized into a capital provision asset.

Finance costs

Finance costs increased by 3% from $39 million for the year ended December 31, 2018, to $40 million for the year ended December 31, 2019. The small increase was largely driven by the inclusion of $1 million of lease liabilities

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interest arising from the implementation of the new lease accounting standard during 2019 that requires the recognition of a liability and associated interest expense for the present value of future lease obligations.

Taxation

Taxation expense increased from a tax credit of $13 million for the year ended December 31, 2018, to taxation expense of $13 million for the year ended December 31, 2019. The increase in taxation expense was mainly driven by the Group’s non-recognition of a deferred tax asset of $11 million relating to an interest expense deduction limitation as a result of the US Tax Code under the TCJA.

Segments

We have three operating business segments (i) Capital provision: provision of capital to the legal industry or in connection with legal matters, both directly and through investment in the Group’s managed funds; (ii) asset management activities; and (iii) provision of services to the legal industry, including litigation insurance and asset recovery (judgment enforcement and other corporate activities). All of our segment income is aligned with the corresponding line items of the income statement and therefore our segment results are also discussed under “Consolidated Operating Results” above.

The following table provides a breakdown of our income by operating segment for the years ended December 31, 2020, 2019 and 2018.

The following table sets forth our income in the capital provision operating segment net of the third-party interest amounts for the years ended December 31, 2020, 2019 and 2018.

The following tables provide a breakdown of our profit/(loss) before taxation by operating segment for the years ended December 31, 2020, 2019 and 2018.

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Profit before taxation in the capital provision segment decreased 2% from $279 million in the year ended December 31, 2019, to $273 million in the year ended December 31, 2020, because of a 3% decrease in capital provision income combined with a 7% decrease in segment operating expenses. Profit before taxation in the capital provision segment declined 22% from $357 million in the year ended December 31, 2018, to $279 million in the year ended December 31, 2019, because of a 16% decline in capital provision income combined with a 32% increase in segment operating expenses.

Profit before taxation in the asset management segment declined from $(5) million in the year ended December 31, 2019, to $(9) million in the year ended December 31, 2020, because of a 24% increase in segment operating expenses. Profit before taxation in the asset management segment declined from $(1) million in the year ended December 31, 2018, to $(5) million in the year ended December 31, 2019, because a 30% increase in asset management income was more than offset by a 63% increase in segment operating expenses. Growth in assets under management over the past several years has driven the current period increases in operating expenses in this segment, while much of the income (in particular, performance fees) would be expected to occur in future periods.

Profit before taxation in the services and other corporate segment declined by 13% from $(48) million in the year ended December 31, 2019, to $(55) million in the year ended December 31, 2020, as income increased by 5%, segment operating expenses increased by 52% and finance costs increased by 2%. Profit before taxation in the Services and other corporate segment improved by 6% from $(51) million in the year ended December 31, 2018, to $(48) million in the year ended December 31, 2019, as income increased by 16% while segment operating expenses declined by 12%, partially offset by a 3% increase in finance costs.

Cash flows

The following table sets forth the principal components of our cash flows for the years ended December 31, 2020, 2019 and 2018.

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Net cash inflow/(outflow) from operating activities

Net cash flow from operating activities increased from a cash outflow of $8 million for the year ended December 31, 2019, to a cash inflow of $181 million for the year ended December 31, 2020. The increase in inflow was primarily due to increased proceeds from and decreased funding of capital provision assets in 2020.

Net cash outflow from operating activities decreased from a cash outflow of $233 million for the year ended December 31, 2018, to a cash outflow of $8 million for the year ended December 31, 2019. The decrease was largely driven by lower new funding of capital provision assets. Our operating cash flow for 2018 and 2019 was negative due to the cash outflow from our new funding of capital provision assets being greater than the cash inflow from realizations on our existing capital provision assets.

The following table sets forth the principal components of our net cash outflow from operating activities for the years ended December 31, 2020, 2019 and 2018.

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Net cash (outflow) from investing activities

Net cash outflow from investing activities decreased from an outflow of $3 million for the year ended December 31, 2019, to an outflow of $0 million for the year ended December 31, 2020. The decrease was largely driven by a decrease in purchases of fixed assets.

Net cash outflow from investing activities increased from an outflow of $0 million for the year ended December 31, 2018, to an outflow of $3 million for the year ended December 31, 2019. The increase was largely due to the capitalization of leasehold improvements in connection with new office spaces.

We anticipate that our primary sources of funds will be available cash and cash from operations, which includes proceeds from our capital provision assets. We may also issue additional debt from time to time. We believe that these sources of funds will be sufficient to fund our operations, including our working capital requirements.

Net cash (outflow)/inflow from financing activities

Net cash outflow from financing activities increased from an outflow of $67 million for the year ended December 31, 2019, to an outflow of $45 million for the year ended December 31, 2020. The decrease was largely driven by decreased dividends paid in 2020.

Net cash outflow from financing activities decreased from an inflow of $365 million for the year ended December 31, 2018, to an outflow of $67 million for the year ended December 31, 2019. The outflow of $67 million was comprised primarily of $28 million of dividend payments and $38 million of loan capital interest and the issuance of $180 million principal amount of bonds during the year ended December 31, 2018, while there were no share capital or bond issuances during the year ended December 31, 2019.

Financial instruments

We have issued four series of debt securities that are listed on the London Stock Exchange’s Order Book for Retail Bonds through finance subsidiaries. Burford Capital PLC has currently outstanding (i) £86 million aggregate principal amount of 6.500% notes due 2022, (ii) £100 million aggregate principal amount of 6.125% notes due 2024 and (iii) £175 million aggregate principal amount of 5.000% notes due 2026. Burford Capital Finance LLC has currently outstanding $180 million aggregate principal amount of 6.125% notes due 2025.

The trust deeds governing our debt securities contain certain covenants, including a leverage ratio requirement that we maintain a level of consolidated net debt that is less than 50% of the level of our tangible assets. See “Key information—Material contracts”. As of December 31, 2020, we were in compliance with all of the covenants under the trust deeds.

Capital expenditures

We do not have material capital expenditures. As of December 31, 2020, we had $3 million carrying value relating to fixtures, fittings and equipment. We do not anticipate incurring material capital expenditures in the year ending December 31, 2021.

Research and development, patents and licenses, etc.

We do not spend material amounts on research and development, nor do we own any patents.

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Burford balance sheet only results

The remainder of the “Financial and operational review” focuses primarily on Burford balance sheet only results, removing from our results the impact of consolidated entities. In the “Data reconciliation” section beginning on page 72, we provide a full reconciliation of the Burford balance sheet only results to the IFRS consolidated statement of comprehensive income for 2018, 2019 and 2020 and consolidated statement of financial position for 2019 and 2020 so that investors are able to relate our performance discussion in the remainder of this “Financial and operational review” with our published accounts. The tables below provide a full reconciliation for 2020 of the consolidated statement of comprehensive income and consolidated statement of financial position for 2020 and, for comparison, the Burford only results for 2019. A similar reconciliation for 2019 can be found in the Data reconciliations section on page 73 of the “Financial and operational review”.

2020 Financials and comparison to 2019

Statement of comprehensive income

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Statement of financial position

Overview of full year 2020 results

Burford delivered strong results during 2020 despite the difficult environment and operating challenges posed by the Covid-19 pandemic. While Burford only capital provision income was down 1% in 2020 compared to 2019, a greater proportion of income was from realized gains during 2020: Realized gains during the period were up 41% while unrealized gains (net of transfers to realizations) were down 26% due principally to the absence of any fair value changes in our YPF-related assets. With Burford only income from other segments 2% lower in 2020 than in the prior year, Burford only total income was down 1% from 2019 to 2020.

Total operating expenses were up 14% in 2020 from 2019, driven in part by $8 million of expenses related to our US listing and related equity activities; without those expenses, total operating expenses would have increased 9%. However, net profit was affected by book taxation expense being higher in 2020 by $24 million because of the jurisdictions in which gains occurred in 2020, although cash taxes were only $11 million. As a result, Burford only profit after tax in 2020 was $172 million, down 19% from $212 million in 2019.

Realizations from capital provision-direct portfolio

During 2020, we saw significant progress in a number of cases in our capital provision-direct portfolio. These successes, distributed among several of our recent vintages, underpinned $337 million of capital provision-direct asset realizations for the balance sheet during the period, which in turn gave rise to $180 million of realized gains from the capital provision-direct portfolio, the highest level ever for Burford.

Although a significant portion of the realizations that occurred in the first half of 2020 gave rise to receivables (rather than cash) at June 30, almost all of those receivables had been collected by year end. As a result, realizations from our capital provision-direct portfolio produced cash proceeds for the balance sheet of $325 million during 2020, and we closed the year with only $31 million of due from settlement receivables.

Realized gains from capital provision-direct portfolio

The capital provision-direct portfolio realized gains of $180 million (57% of Burford only capital provision income in the period) along with $141 million in capital provision-direct unrealized gains drove $314 million in total capital provision income during 2020, down 1% from 2019. Burford only capital provision-direct realized gains increased as a share of profit before tax to 86% in 2020 from 53% in 2019.

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This significant level of capital provision income in 2020 came without any contribution from our YPF-related assets. In 2019, $188 million or 60% of our capital provision income came from YPF-related assets; during 2020, we had $2 million of unrealized loss (as an offset to additional costs incurred) from YPF-related assets. These 2020 results indicate that the strategy we outlined in our 2019 Annual Report of the YPF-related assets serving as a bridge to substantial performance from the rest of the portfolio has started to materialize.

A key driver of our capital provision-direct realizations and income during 2020 was a set of ten related assets consisting of 18 cases in which Burford’s balance sheet had invested $94 million ($144 million Group-wide). From these ten related assets, we had $267 million of balance sheet realizations ($425 million Group-wide), for realized gains on the balance sheet of $172 million ($281 million Group-wide), an ROIC of 183% for the balance sheet (195% Group-wide) and an IRR of 50% for the balance sheet (57% Group-wide).

Unrealized gains from capital provision-direct portfolio

During 2020, our capital provision-direct portfolio experienced modest but steady unrealized gains, as positive case progress in a number of matters required us under our Fair Value Policy and in accordance with IFRS to adjust upward the fair value of a number of assets. Net of unrealized losses and amounts transferred to realizations, in 2020, we recorded $143 million of net unrealized gains on the capital provision-direct assets on Burford’s balance sheet, compared to $92 million in 2019, excluding YPF-related fair value adjustments in both periods. The net unrealized gains for 2020 of $143 million were recorded across 41 different assets in the capital provision direct portfolio on Burford’s balance sheet.

Because unrealized gains in our capital provision-direct portfolio are driven by case milestones (such as favorable rulings, trial wins and successful appeals), growth in the aggregate unrealized gain on our portfolio can be viewed as an “indicator” of positive overall progress towards successful outcomes and realizations. At December 31, 2020, the aggregate unrealized gain (net of unrealized losses) on our capital provision-direct portfolio, excluding the YPF-related assets, stood at $183 million, or 17% of ex-YPF carrying value, compared to $38 million at December 31, 2019, or 4% of ex-YPF carrying value, showing the continuing maturation of the portfolio.

Group-wide income from capital provision-direct portfolio

It is worth noting that Group-wide income from realized and unrealized gains on the capital provision-direct portfolio increased significantly in 2020 to a total of $508 million ($361 million in realized gains and $147 million in unrealized gains), up 28% from $397 million in 2019 ($178 million in realized gains and $219 million in unrealized gains). Burford began deploying significant off-balance-sheet private funds capital in 2017; these 2020 Group-wide results provide an indication of the overall growth in earnings generation across all of Burford’s funding sources. Burford itself should benefit in the future from the portion of these Group-wide gains in its managed funds through earning performance fees on those funds.

Cash returns

The group of ten related assets and our overall 2020 performance continued our history of attractive cumulative returns. Since Burford began operations in 2009 through December 31, 2020, on $1.6 billion of capital provision-direct realizations on our balance sheet, we have generated an ROIC of 92% (up from 88% at December 31, 2019) and an IRR of 30% (down slightly from 31% at December 31, 2019).

Realizations from capital provision-indirect portfolio

Despite the Covid-19 pandemic and resulting challenging market conditions, we were able to realize significant cash proceeds from our capital provision-indirect portfolio, where we shifted to favoring settlements even at discounted returns given adverse market conditions. During 2020, we resolved five assets in this portfolio, resulting in cash proceeds to Burford’s balance sheet of $173 million. Though cash returns on these resolved assets were dampened by the market environment, we believe it is nonetheless an indicator of the effectiveness of the strategy that we were able to realize significant cash proceeds at positive returns during this period. Our ability to harvest cash from our capital provision-indirect portfolio during 2020 also reinforces our view of this portfolio’s capability of serving as a medium-term source of liquidity for Burford’s balance sheet.

Liquidity

We finished 2020 with $336 million in cash and cash management assets, an increase of $130 million over December 31, 2019, and putting us in a position of having significant liquidity to re-deploy into the financing of attractive new legal finance assets.

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Commitments

Although we had good success in realizations during 2020 despite the Covid-19 pandemic, our capital provision-direct new business efforts were more significantly impacted, especially during 1H 2020. As the pandemic hit in the first half of 2020, many clients paused from pursuing legal finance to transition to working remotely and to determine the impact on legal processes. At the same time, given the uncertain environment, we took a cautious stance on potential cases and counterparties. As a result, Burford’s new capital provision-direct commitments during 1H 2020 declined significantly. As legal processes and the overall environment stabilized during 2H 2020, our pipeline began to re-build and commitment volumes increased, returning to levels comparable to the second half of 2019, prior to the pandemic.

During 2020, we made capital provision-direct new commitments on our balance sheet of $335 million, of which $278 million or 83% were made in 2H 2020. By comparison, we made $530 million of new commitments on our balance sheet in 2019, of which $285 million or 54% were made during 2H 2019. In other words, after a weak 1H 2020, our new commitment activity returned in 2H 2020 to the same level as in 2H 2019.

Deployments

Deployments also rebounded during 2H 2020. Our level of deployments on capital provision-direct assets on our balance sheet during 2020 was $225 million, down 16% from $272 million in deployments during 2019. As with commitments, our level of capital provision-direct deployments on our balance sheet during 2H 2020 bounced back significantly from 1H 2020 to approach pre-pandemic levels, with $158 million deployed in 2H 2020 compared to $67 million in 1H 2020 and $188 million during 2H 2019. Ultimately, we expect the pandemic and resulting environment to produce a significant amount of litigation and arbitration, which could produce a substantial volume of attractive future financing opportunities.

During 2020, we have refrained from making new commitments in our capital provision-indirect portfolio, so deployments from our balance sheet to that portfolio were down significantly during 2020 to $26 million from $196 million in 2019. The strategy that underlies this portfolio depends upon certain types of merger and acquisition market activity, which has been negatively impacted by the pandemic. Further, given the medium-term potential we see to originate attractive capital provision-direct assets, we would rather deploy incremental funds into those higher-returning assets rather than make new commitments to capital provision-indirect assets.

Asset management income

Asset management income during 2020 was $24 million for Burford only, down 6% from 2019. This decline was largely attributable to lower management fees, since, unlike in 2019, we are no longer receiving base management fees on Partners II, Partners III and COLP, while the Strategic Value fund has declined significantly in size.

During 2020, we did recognize $6 million of performance fees from our Partners I Fund, as that fund concluded its life, allowing crystallization of our performance fees under the “European-style” fee structure. Over its life, Partners I generated, net of fees and expenses, an IRR of 32% and an ROIC of 171% for its limited partners.

We did not recognize any performance fees from any of the other “European-style” litigation finance funds (Partners II and Partners III and BOF) during the period, although as we continue to realize assets in those funds, we do get closer to the point in time when those performance fees will also crystallize. Based on current fund performance, we expect the other two litigation finance funds (Partners II and III) that are now past their investment periods to generate together in excess of $50 million of performance fees as they conclude.

In both 2019 and 2020, fees from BOF-C were similar, albeit modest given that BOF-C is still early in its life with relatively few realizations to date.

Operating expenses

Burford only general operating expenses during 2020 were $86 million, up 11% from 2019. Because of the uncertainty caused by the pandemic and market environment, we managed expenses carefully during the period, including by limiting growth in headcount and compensation expense, while expenses for travel and marketing declined because of the work-from-home environment. Nonetheless, we did continue to invest in people and infrastructure to support our growth, including for our SEC registration and NYSE listing. We also incurred $8 million in added direct expenses, such as legal and accounting fees, because of our preparation for a US listing and certain other equity-related activities. In 2020, we incurred $2 million in case-related expenses that cannot be included in those cases’ deployed costs, in many instances because we are acting as principal rather than financing a client.

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Taxes

We saw a significant increase in the tax expense recorded on our statement of comprehensive income this period. It is important to understand that there is a significant difference between our “book” taxes (i.e., the tax expense shown on the income statement) and our “cash” taxes (i.e., the amount of tax we actually pay). That discrepancy can be particularly pronounced in the United States and is illustrated in note 4 to the financial statements but, as the accounting approach to tax is complex, we discuss the topic here.

We have commented in the past that our book tax expense was lower than our cash taxes, and in some instances was even positive (i.e., we had a tax credit); in 2020, our book tax expense of $37 million was substantially higher than our cash taxes paid of $11 million. That difference arose largely because we had sufficiently high realized gains to make use of the bulk of the net operating loss carry forward shown in our deferred tax assets at year-end 2019. As we have always expected to be able to offset these losses against future taxable gains, we had recognized the benefit of this asset in our financial statement tax computations in prior years. The impact of using these net operating losses during the current period primarily reduces the amount of cash taxes payable for the relevant jurisdiction and not the tax expense recognized in the income statement.

We continue to expect our tax rate to settle in the low teens over time, as we have noted previously.

2H 2020 Financials and comparison to 2H 2019

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Overview of 2H 2020 results

Capital provision income in 2H 2020 was $63 million, up 29% from 2H 2019. Asset management income was $17 million in 2H 2020, up 14% from $15 million in 2H 2019, with a $6 million performance fee from the Partners I fund more than offsetting lower management fees from funds now past their investment period. Higher capital provision and asset management income helped to drive total income in 2H 2020 to $100 million, up 44% from 70 million in 2H 2019.

Like 2H 2019, 2H 2020 was a relatively slow period for realizations from our capital provision-direct portfolio; we had realizations of $29 million for the balance sheet during 2H 2020 compared to $46 million during 2H 2019. Though court delays due to the COVID-19 pandemic may have contributed to the slower pace of 2H 2020 realizations, we would repeat our prior observation that six-month periods in which we have little activity are not unusual in our business.

Our realized gains on capital provision-direct assets were also affected by the final conclusion of a matter from the 2011 vintage at a loss. We had long expected this result and had written the mater to zero in 2016, but its conclusion in 2H 2020 means that the unrealized loss is reversed and a realized loss (of $14 million) is recorded, leading to net realized gains of $(3) million in 2H 2020 (2H 2019: $4 million).

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We continued to see steady progress in the capital provision-direct portfolio in 2H 2020, with positive case progress in several matters triggering additional unrealized gains (none of which were from the YPF-related assets) which, net of transfers to realized, totaled $73 million in 2H 2020, compared to $68 million in 1H 2020 and $48 million in 2H 2019. Included in the 2H 2020 unrealized gains was $14 million of unrealized loss from the concluded 2011 vintage asset that was transferred to realized in the period; this transfer of unrealized loss offset the realized loss on that asset during the period, so the conclusion of the matter had no net impact on capital provision income during 2H 2020.

Although operating expenses, including listing and equity-related expenses, were higher in 2H 2020 compared to 2H 2019, operating profit still increased 121% to $41 million in 2H 2020 from $19 million in 2H 2019. Profit after tax was $20 million in 2H 2020, compared to $(8) million in 2H 2019.

During 2H 2020, we did see significant collections on our due from settlement receivables. Those Burford only due from settlement receivables stood at $281 million at June 30, 2020; by the end of the year, much of that had been collected as cash, so that due from settlement receivables at December 31, 2020, were $31 million. Notably, $266 million of the receivables at June 30, 2020, were related to the group of ten related assets; all but $23 million of those had been collected by year end.

As referenced above, although 2H 2020 was a slow period for realizations and realized gains, it was a busier period for new business. In our capital provision-direct portfolio, we made $278 million of commitments on our balance sheet during 2H 2020 (2H 2019: $285 million) and $158 million of deployments on our balance sheet (2H 2019: $188 million).

Cash generation

Burford generated a robust level of cash during 2020, with $997 million of cash receipts Group-wide and $519 million to the balance sheet. Cash receipts for both the balance sheet and the funds were driven by significant realizations in our capital provision-direct assets, while realizations in the Strategic Value fund drove substantial proceeds in our capital provision-indirect portfolio and realizations in BAIF produced $168 million of cash proceeds in that fund.

Burford’s balance sheet 2020 cash receipts were consistent with 2019, though the mix of cash proceeds behind these results was different, with cash proceeds from capital provision-direct contributing a larger share of 2020 cash receipts. In 2019, proceeds from the capital provision-direct portfolio (including $100 million from the sale of some of our YPF-related assets) contributed 41% of cash receipts, while the capital provision indirect portfolio, where capital tends to be recycled more quickly because of the short tenor of the assets, accounted for 52%. In 2020, significant realizations from capital provision-direct assets generated 63% of cash receipts, while the capital provision-indirect portfolio contributed a more modest 33% as that portfolio continued to be realized and not reinvested. Going forward, to the degree that the capital provision indirect portfolio remains modest in size, we would expect Burford’s aggregate cash receipts to be lower without the contribution of capital recycling from that portfolio. However, with a smaller capital provision indirect portfolio, we would also be deploying a similar lesser amount into these assets, so the net impact on available cash for the rest of the business should be minimal.

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Cash receipts on Burford’s balance sheet only**

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This level of cash receipts gives Burford the flexibility to meet ongoing deployments as well as operating and financing cash needs. As we have previously indicated, we do not have control over the timing of our cash proceeds from asset realizations. We do, however, benefit from the relatively short weighted average life (WAL) of our assets, which gives us some comfort that cash proceeds will come in with some regularity.

From these cash receipts, Burford funds its operating expenses and finance costs. During 2020, Burford’s balance sheet generated more than three times as much cash as needed to cover those cash outflows, leaving significant cash available for deployments into new legal finance assets. Burford did not raise external capital for the balance sheet in 2020.

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Burford has a consistent history of generating significant cash receipts and, therefore, substantial cash available for deployment.

Internally-generated cash available for redeployment – Burford balance sheet only

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For further information on how data in this Cash Receipts section is related to data in the financial statements notes, see Cash receipts data reconciliation on page 76 of the “Data reconciliation” section.

Current portfolio

We count each of our contractual relationships as an “asset”, although many such relationships are composed of multiple underlying litigation matters that are often cross-collateralized rather than reliant on the performance of a single matter. As of December 31, 2020, our Burford only balance sheet portfolio consisted of 159 assets held directly and four other assets held indirectly through our investment in the Strategic Value fund.

At December 31, 2020, our consolidated¹ portfolio was $3.4 billion, including deployed cost, unrealized gain and undrawn commitments, while the Group-wide portfolio was $4.5 billion of which $2.9 billion was attributable to the Burford only balance sheet. For a reconciliation of our current portfolio on an IFRS consolidated basis to the calculation on a Group-wide basis, see Portfolio data reconciliation on page 77 of the “Data reconciliation” section. The following table reconciles the calculation of our current portfolio on a Burford only balance sheet basis to the calculation on a Group-wide basis.

¹ Consolidated figures are provided from time to time in this section of the report as a means to demonstrate how the Burford only and Group-wide financial data tie into the consolidated financial reports.

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The Group-wide portfolio has grown at a compound annual growth rate of 52% over the five years ending December 31, 2020. The Group-wide portfolio at December 31, 2020, was 7% larger than at December 31, 2019, despite lower deployments across the capital provision portfolio during 1H 2020 due to the Covid-19 pandemic and significant realizations in both the capital provision-direct and indirect portfolios. The Group-wide portfolio had declined 6% in size from December 31, 2019, to $4.0 billion at June 30, 2020. Then, as origination activity resumed at a more normal pace during 2H 2020 and certain existing cases experienced fair value adjustments because of positive case milestones, the Group-wide portfolio grew 13% in size from June 30, 2020 to December 31, 2020.

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Unfunded commitments

Our portfolio includes both commitments that have been funded and, therefore, have become deployments, as well as commitments that have not been funded and, therefore, are expected to become deployments at some future date. Although our realizations are neither controllable nor predictable, we do have significantly more visibility of and control over our deployments. Although some portion of these deployments are on prior definitive commitments which we are obligated to fund, a significant portion of deployments on prior commitments is discretionary, so that we have control over whether to fund.

As of December 31, 2020, our consolidated unfunded commitments were $1.3 billion. As of the same date, our Burford only balance sheet unfunded commitments were $1.0 billion and our Group-wide total unfunded commitments were $1.6 billion. Deployments on new potential commitments are entirely within our control since we can decline to make the commitment in the first instance if we do not want to deploy capital at that time.

The table below sets forth our Group-wide unfunded commitments outstanding at December 31, 2020, and December 31, 2019, on a consolidated basis, a Burford balance sheet only basis and a Group-wide basis and provides a reconciliation.