{ "docId": "019dd923-622c-750b-8b96-e102d92b73f2", "docSlug": "e03b9adf861d", "documentTitle": "Burford Capital Ltd. (BUR LN)", "authorId": "51_Muddy_Waters", "authorName": "Carson C. Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2019-08-07 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 3, "pageCount": 25, "prevPage": 2, "nextPage": 4, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 15, "notes": "The slide functions as a short-seller research note, specifically targeting governance and accounting transparency.", "elementsJson": [ "paragraph", "data_table", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-e102d92b73f2/3", "deckHref": "/decks/019dd923-622c-750b-8b96-e102d92b73f2", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-e102d92b73f2.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-e102d92b73f2#slide-3", "components": [ { "bbox": null, "kind": "callout", "text": "These facts beg the question “Is Elizabeth O’Connell the only CFO who can be relied upon to approve the accounts?”", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-5370-75b3-9c68-3749cc720d9f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.14, "w": 0.78, "x": 0.11, "y": 0.51 }, "kind": "paragraph", "text": "BUR’s governance strictures are laughter-inducing. The CFO is the wife of the founder / CEO. Under the best of circumstances, this should alarm investors; however, with a company that consistently books non-cash accounting profits, it is unforgivable. In a situation so ripe for abuse, the very least the company could do is to have an independent CFO. (The CEO has sold a total of £59.4 million of stock.) BUR has cycled through four prior CFOs or senior finance managers (none of whom stayed for long). The table below shows the turnover at CFO and senior finance functions. These facts beg the question “Is Elizabeth O’Connell the only CFO who can be relied upon to approve the accounts?”", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "14ce55b5-1684-45e9-96a4-4372b1bd1921", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.78, "x": 0.11, "y": 0.35 }, "kind": "paragraph", "text": "BUR is a perfect storm for an accounting fiasco. It is a fund that invests in an illiquid and esoteric asset class, which few investors can understand well. By remaining listed on AIM despite being a midcap company, the company’s disclosure requirements are lighter than they would be for the main board - and far lighter than they should be. By choosing to account for its litigation investments as financial assets, BUR utilizes fair value accounting for a balance sheet largely comprised of Level 3 fair value assets (i.e., “mark to model” accounting of Enron fame). BUR disingenuously blames IFRS for needing to take (outsized) fair value gains when in fact, it was BUR’s choice to adopt this accounting.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "2b3551e4-a21e-4da3-a7c8-8e14bc98e1b1", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.11, "w": 0.78, "x": 0.11, "y": 0.22 }, "kind": "paragraph", "text": "BUR’s liquidity is risky, and it is arguably insolvent. We believe that BUR’s “real” invested capital is $880.3 million. BUR’s massive operating expenses tax that at approximately 9%, based on LTM expenses. BUR’s financing costs (including dividends) add another 8.3%. Therefore, in our opinion, the first approximately 16.5% of returns BUR’s adjusted investment capital generates goes to keeping the lights on. BUR is arguably insolvent, as its debt and funding commitments greatly exceed the $880.3 million adjusted invested capital.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "556d3ac0-e08d-427e-ad4b-c7d1b22e28aa", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.07, "w": 0.78, "x": 0.11, "y": 0.78 }, "kind": "paragraph", "text": "The directors have each served on the board approximately 10 years, and per the UK Corporate Governance code, are no longer considered independent. (In a bizarre defense of worst practices, BUR recently pointed out that it is not subject to the governance code, and thus sees no need to change the board.2) After spending $160 million to buy a litigation fund management", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "c3a4c04b-5164-409d-bd70-0ad96cb5b723", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.78, "x": 0.11, "y": 0.09 }, "kind": "paragraph", "text": "of only approximately 19%. (One of the four outsized contributors was actually a loss a trial, and was bailed out by BUR’s largest shareholder, Invesco, at the direction of Neil Woodford protégé Mark Barnett. Absent the bailout, the case almost certainly would have been a total loss.) The reality of BUR’s dependence on a small number of cases for the bulk of its returns is in stark contrast to the impression many investors seem to have that the portfolio produces meaningful returns across its breadth.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d85f6c81-5dc3-4ad3-bda7-f59bb73d4e69", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.25, "x": 0.11, "y": 0.87 }, "kind": "source-note", "text": "2 BUR H1 2019 Interim Report, p. 14.", "attrs": { "numbered": true }, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "eb7dafd0-66bc-4b42-a4da-d47cd5b109d4", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.6, "x": 0.2, "y": 0.65 }, "kind": "table", "text": "Table showing turnover of CFO and senior finance staff at Burford Capital.", "attrs": null, "subkind": "data", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "77dbd35e-1542-4281-98e1-4339d94e9a54", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 5, "from": 2, "beatId": "abf2cbdc-9a74-4ad1-a57f-750e79be7b78", "arcName": "Problem-Agitate-Solution", "arcSlug": "problem-agitate-solution", "beatName": "Problem", "beatSlug": "problem-agitate-solution-problem-identify-pain", "evidence": "The report exposes contradictions in Burford Capital's accounting practices and financial performance", "position": 0, "confidence": 0.7, "parentBeatName": "Complication", "parentBeatSlug": "complication" } ], "loops": [ { "to": 25, "from": 2, "name": "Cost Of Inaction", "slug": "27-cost-of-inaction", "bestFor": "Urgent budget requests, compliance, risk mitigation", "matchId": "fdbdba0d-04cf-4421-aa3c-a85fc4c5ab81", "evidence": "The report emphasizes the potential consequences of Burford Capital's financial stress and liquidity crunch", "position": 0, "objective": "Highlight the risks of not taking action", "structure": "The Status Quo -> The Hidden Costs Accumulating -> The Future State of Inaction -> The Tipping Point", "confidence": 0.6, "description": "Quantify what happens if the audience does nothing" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }