Burford Capital Ltd (BUR) 2018 Q4 法說會逐字稿

Hello, and welcome to the Burford Capital Full Year Results 2018. (Operator Instructions)

I would now like to hand it over to your host, Christopher Bogart, Chief Executive Officer, to begin. Christopher, please go ahead.

Thanks very much, Megan and hello, everyone. Thank you very much for taking some time today to talk to us about Burford.

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Chief Investment officer; and Elizabeth O'Connell, Burford's Chief Financial Officer. And we'll split up the presentation as we go. I'll talk for a little while and walk through some of the slides, then Jon will do the middle investment piece and Elizabeth will do some financial slides at the end.

We're not going to cover every single one of these slides, although we will tell you where we are as we go. But we're going to really be centering our presentation around 3 fundamental themes today: around performance, around the growth of the business, and significantly around the continuing evolution of the business, not only its growth and scale, but also the evolution of what it does within the legal industry.

We also are going to be highlighting for you some new disclosure that we are making that we hope will meet with your approval and will assist in your greater understanding of the business.

Starting on Slide 3, that slide really touches on the theme of performance. What you see and what we're happy to provide is some nice results for the year, steady increases in -- across the board, income, operating profit, profit after tax and a significant increase in our generation of cash, much of which we turn around and reinvest in new investments.

You'll see there a pretty significant jump in total assets. That jump is because we had a particularly strong year of deployments in 2 investments in the business. And that's very good news, because it's obviously those deployments that ultimately make us our money. There is a return on equity impact from having that kind of jump in total assets, which is also a big jump in net assets. So our ROE, which was 37% last year, would have been 34% but for the new equity issuance. But obviously, the impact of that increase in net assets, and which is always going to be the case if we have a significant uptick in deployments like that. So that's good news from our perspective.

In the middle of the bottom row, you will see our usual presentation of balance sheet portfolio returns in the core litigation finance portfolio. And I think the real message there is around consistency. Those returns have now been generated on more than $1 billion of investment recoveries. And across that large and multi-year track record, you've seen pretty consistent IRRs. The ROIC, the nominal returns bounce around a little bit. They've bounced up this year to a particularly high-level. But we don't, again, hold that as a trend. What we have, historically said is across that range are the kinds of returns that conventional litigation finance investments have historically produced.

And finally, you will see that even though the recoveries keep on coming, the portfolio duration remains nicely below 2 years.

Turning to Slide 4. This is really where we talk about growth. So the way that the business grows is obviously by making new investments and by deploying capital against those new investments, which some lengthy and unpredictable time later, hopefully turns into profitability. And what you see here is a real step change in the business.

In 2017, we saw a big explosion of growth. We wrote 3.5x more business in 2017 than we did in 2016. And included in that 2017 business, were 2 particularly large, unusually large for us, investment deals, totaling $350 million, a $200 million portfolio and $150 million portfolio. And just for contrast, while we always have done some large chunky deals, in 2018, the largest investment -- largest portfolio deal we did was [$87.5 million] So what we've signed in 2017 was a big step up in numbers, but in part fueled by those 2 large deals. And I think the big question both for us and for investors was, whether we were going to be able to repeat that level of activity in 2018. And the answer turned out to be, yes. And not only yes, but yes without those 2 large anchor investors. That's only part of the story, and the other part is deployment, as you can see on the chart on the right, deployments were up materially. And I particularly highlight the gray portion of this chart, which is the balance sheet deployments, those rose 51% year-over-year. So that's a significant pool of capital sitting out there in the market awaiting returns.

Slide 5 is the evolution. And this is nothing new on one level. We have talked about all of these things before. And we've talked about how the business is continuing down this path. But really we wanted to shine a particular spotlight on how much the business is evolving this year. These boxes show the various things that we do, but the circle chart is particularly interesting. Because this year across the business, including our investment funds, only 50% of the capital that we committed went to traditional litigation finance. That number would be 57% for the balance sheet. And the rest of what we're doing remains absolutely core to our legal background and legal discipline. We're not straining inside the legal industry. There is no style drift here. But what there is, is an increasing desire by clients to have capital available in all sorts of different ways. And Jon is going to talk later about our principal strategies or our complex strategies business. But this is clearly an area of growth for us as well, you'll see that the 30% of our investment commitments went to that category. And just to frame that for you in for a second, what did that actually mean, it simply means a different way of responding to capital demand in the market for litigation-related activities.

So you can imagine, many of you are fund managers, the traditional litigation finance business is for Burford. It's for you to have an investment. Let's say, something has gone wrong with your investment, and you have a litigation claim to be brought against it. You would, historically, have come to us for capital, because you neither have a good path to capital in your own structure, nor do you particularly want to be spending fund capital even if you could on paying expensive lawyers to go and litigate. So you come to us, you would continue to hold the stock, and we would finance your legal fees so that you could bring your claim. And if we were successful, we would share the proceeds, that's basic litigation finance. So what we increasingly hear from clients is that, that's while a good solution for some, not a terrific solution for others. Because you're still having to spend valuable time and resources and energy on something that is frankly, outside your core expertise and area of interest.

And so the alternative is for you to show up and say, "Gee, we've got this claim, and we don't want to be involved in the management of it. We'd rather you do that. So instead of just financing our legal fees, why don't you take the stock position from us and bring the litigation for us on the back of the stock."

And that's good for Burford in a number of ways. Because in the traditional financing context, if we had lost that case, then we would have lost all of our capital, which happens to us in some number of cases every year. Whereas, if we hold the underlying asset, then even if we lose the case, we won't lose all of our capital. We still have an asset there that has some value associated with it. And we also have a more efficient process that we have a greater level of controlling. And so all of these expansions, all of this evolution is just a number of different ways for us to take what we have built. This premier brand and premier collection of people in the legal industry. And put their talents to work, put that expertise to work in a number of different investment propositions.

Turning to Slide 6. This really just is a more granular illustration of that theme of evolution and diversity. The chart breaks down for you the different kinds of things that we do across their capital sources. But this chart also is about scale. And it makes a very important point that we are the clear industry leader here. Scale is important in this industry, and with $2.5 billion in current investments, we far outstrip any other player in the space. And that's very relevant when we're dealing with large corporate clients and global law firms. There is simply a level of expertise and service that we can provide.

Turning to Slide 7. Continue the theme of diversity, but this is diversity on the capital source side. We believe in having a number of capital sources, where we try to optimize a combination of risk, cost of capital and flexibility. So we, obviously, have a large balance sheet that we invest directly from. We also have been developing our private funds business with considerable success over the last several years, and that now stands at $2.5 billion of AUM, up from $1.7 billion last year. And we're delighted to have a new strategic capital relationship with a large sovereign wealth fund that puts us on a path just in that relationship alone for another $1 billion of capital investment on the terms that are described there. So what we have, we believe, is a nice collection of ways to finance our growth as opposed to being dependent on any one portion of the financing market.

I'm going to skip now a number of pages, which are familiar to you, and we're certainly happy to come back and take questions on them. But before I go to the next theme of our discussion, I also just wanted to reiterate a point that's made in the annual report. And we moved it up front this year just to emphasize its importance. Because frankly, the best time to talk about these things is when you're coming off of a strong set of results, and that's with respect to the risk of volatility in this business. A simple reality is that we can't predict the timing or the quantum of investment outcomes. We're subject to the processes and the timing of the -- the many varied [court] and arbitration processes in which we invest. And that's particularly important now when we've just had a very significant increase over the last 2 years in the volume of business that we've done. We've written more business in the last 2 years than we've written in our entire history before that. And very little of that business is mature yet. And so if anything the risk of volatility of earnings in the business is greater now than it ever has been, even though, we believe that, that significant increase in the business activity sets the business up very nicely for a long-term profitability. But we do encourage investors to read that section in the annual report.

I'm now going to start talking about the business in a more granular level. But on the way, I'm going to pause on Slide 15, just for a moment to show a clear data point around scale and the competitive context in the litigation finance industry. And just to make the point here that by any metric, Burford stands head and shoulders above its competitors. That's not just bragging, that's relevant to the kinds of business that we're able to attract and close. It simply the case that a number of the other players in this industry simply lack the scale and the financial resources to do what we're able to do.

And now, I'll turn to Slide 18. And we're going to start digging into 2018 activity. Slide 18 shows you the funnel of business that we've provided to you before. And there are 2 big takeaways from this slide. The overall message is that we have seen a significant improvement in the quality of matters coming in the door. And that has enabled us to close more investments from that inbound pool of inquiries than we've been able to before. We think there are 2 reasons for that: One is, that we think the market, in general, is becoming more knowledgeable. In other words, lawyers when they contact us, are having a better sense of what kind of investments are likely to work and what kind are not. And so the overall quality of even the inbound leads is improving. But the other reason is that we've devoted some real-time energy and resources into building a first-class origination function. And while we're always excited to get business from any source, what we find is that when we get business that comes through our origination channels, that business has a 3.5x greater likelihood of actually progressing into our investment pipeline process. And so that's what we believe accounts for this increase in closed to -- closed investments.

Slide 19 is the usual chart that we have provided to you. I'm not going to go through this in any great detail. I would highlight for you the point about single-case commitments. Single-case investments rose sharply for us, up 175%. And the reason that's exciting for us is because single cases tend to be entry-level products for new relationships. So what that means is that a number of lawyers or law firms that had not worked with us before have come indoor for single-case financing. And historically, we've had about a 75% conversion rate of those new client relationships into repeat business for us.

While I'm here, I'd also note a new disclosure point. We have put up on our website under the investor information tab in our investor -- in our Investor section, a very expanded disclosure about our investment portfolio. We've historically provided some information about concluded investments. But this year, we've gone far further. And we've provided granular information about every single investment that we have. The ones that have finished, the ones that are still ongoing and the ones that are partially realized. And we've provided not only the basic financial metrics around those investments, but we've provided information about their industry, their geography and some other information.

So we hope that investors will find that significant increase in disclosure an interesting way of looking at our portfolio. The data is dense and that's simply because we have an awful lot of investments. So it will take some time to work through, but -- and we would love your feedback on that incremental disclosure.

Slide 20 is a chart that we've shown you before, and I'm going to spend just one moment on it, because it can be slightly confusing. Obviously, as I said before, deployments are fundamentally how we make our money. And we're very enthusiastic about crossing the $1 billion deployment mark this year. On the balance sheet, actually, that was $637 million, up 51%. And what this chart -- what the message of this chart is, is not only that over time we've historically deployed 84% of the commitments that we've written, and that's important as a way of making sure that we're actually going to make money on the commitments that we write. But what this chart also shows you is that dynamic that I was describing earlier about 2017. If you look at the black line, the black line tells you in 2017, what percentage of each year's commitments were deployed. And so what you'll see is in 2017, because we wrote those large deals. We only actually deployed 27% of the commitments that we wrote that year. And what happened in 2018 is not only that are -- and that's the red line, not only did our 2018 deployments against 2018 commitments go up markedly, but we also deployed quite a lot of capital against our 2017 commitments. So in other words, we had a little gap, a little pause from those new 2017 commitments, and we made up for that in 2018, which is why we had such a significant commitment.

Finally, for me, Slide 21, just makes the theme about growth, again. And this is really global growth. What we've done for the first time, the chart on the left is new disclosure for us. And so we've provided a segment analysis, and you can see the underlying components in that new website chart. We've rolled up the various geographic elements to the business. It's important to read the note about this, about how we've done this, because this business is inherently difficult to characterize by geography. And let's take a case like Petersen, for example. Petersen is a case where we're financing a Spanish client against a South American defendant in a case that's currently pending in Federal Court in the United States. So it begs the question of is that an American case, is that an European case or is that a South American case? And so for cases like that, we categorize them by where they're pending as opposed to where the client is, or where the assets are. And some of them are simply too difficult to characterize and those have fallen into a bucket that we call global. But nonetheless, we hope that this new disclosure does answer the question that we're often asked about the geographic diversification of the portfolio. And the part that I would emphasize there about that is, just the fact that we are truly a global player. We have offices around the world. This year, we opened a new office, this year, in both Washington DC and in Sydney. And we have lawyers from all over the world as well. And we're excited to see what kind of global trends the business can illustrate for us in the next several years.

And with that, I will pass you over to Jon Molot, Burford's Chief Investment Officer.

Thank you, Chris, and thanks to all of you for spending the time with us today, and for those of you who've been investors, for placing your confidence in us.

And I want to say thanks, in particular, I know listening to this call is our team. And when Chris and I tout our 2018 results, we're really bragging about the team that has made these results possible. As Chris said, it's a global business. We've been hiring the brightest and the best. When I think back to nearly a decade ago, when Chris and I launched this business, it was a big leap of faith for someone to leave a top job at a law firm or an in-house position at a top company with stellar resumes and come to Burford, when the industry wasn't really known and Burford didn't have a brand. And the years of success, not just financial success, but also the reputation we have developed in the market, working with the top law firms, has made it so that litigation financing is not a new industry by any means, and in that industry, Burford is the elite player. And so success has begotten success, and so far as we've been able to attract the brightest and the best, who see Burford as the place to work, and it's a very exciting place to work.

And the amazing thing is these are people who come and one could think, well because of the prestige they're coming to an established institution, and that's a wonderful thing. But they're also ambitious for themselves, for the company and for the market and what we can achieve in transforming the market for legal services. And so Burford, despite its growth and global presence, has maintained a hunger and a commitment to innovate that, I think, we're just so lucky every day to have this team to work with.

So on Slide 22, this is the portfolio that this team has been able to put together. And it is such a strong portfolio. We've got over $1.9 billion investments across more than 100 investments across -- more than 1,000, actually, more than 1,100 cases. It's widely diversified by jurisdiction, by defendant, by subject matter, basically anything you could diversify by. The largest law firm relationships are really relationships with a lot of different law firm partners running lots of different disputes in a number of different jurisdictions and subject matters. So the diversification is vitally important. We have said from the beginning, this is not a business where you make your money by making a few small concentrated bets. The key to our success over time has been having a diverse portfolio. Our team completely understands that, and we've work very hard to build that diverse portfolio.

You can see in the graphics, the division among the various ways we deploy capital, whether portfolio, single cases, complex strategies and recourse financing, which I'll talk a little bit about, legal risk management and asset recovery, which I'll also talk about, you'll see how the balance sheet commitments has -- have increased over time to be quite significant numbers, and you'll see the portion of it that is already deployed and undrawn commitments.

If we turn to Slide 23, you will see, what can I expect of that portfolio that we have great confidence in. Chris and I have studiously avoided making predictions, as Chris says, predicting exact size of the outcome and, in particular, predicting the timing, right it is a lumpy business, as to when things resolve. But nonetheless, past results give us optimism. And so if you look at Slide 23, you'll see that we've now had $1 billion -- over $1 billion of recovery on investments. So this is a well-tested portfolio approach. You'll see that as if 2018 our return on invested capital across all those including net of loses is 85%, that's the return on invested capital, with 30% IRRs. The weighted average duration remains below 2 years, that has moved around a little bit, but I'll talk a little bit about that being a product at some cases go all the way, and some of them resolve earlier through settlement. And it's just been a very steady performance. Either if you can predict the timing of when any particular matter, or even a concentration of matters will resolve. Over time, we've seen that the portfolio has performed.

If you turn to Slide 24, this is a chart you're all familiar with, if you've been with us for a while. And as Chris mentioned, for the first time on our website, we've provided much, much more detail backing up this chart, not only on concluded matters, which we've done some of in the past, but also on ongoing investments. We've wanted to be as transparent as possible with our investors, mindful though that we do not want to disclose things that would breach our confidentiality obligations to our clients.

We've said in the past, you can't judge any particular year in sales, were you asleep that year, did it not go well, why is that year so stellar? These will bounce around as things that are still ongoing resolve for a number of years. 2010 was a -- looked like a weak portion of it, and we've had a revolutions that have changed the dynamic of that particular vintage. Again, the emphasis is not on how any single year performs, but rather on how the portfolio as a whole performs over time.

And we often get 2 questions about this chart with people looking at it: One would be, well, so these look good for the resolved investments. How do I have any confidence that the unresolved really all are going to pay? And what would it mean if they didn't pay? What would the results look like then? And I will say, first, if you turn to the next Slide 25, that will show you in a worst-case scenario, which we do not expect ever to happen. If we were to lose every outstanding matter, and scrolling back for a second, we're seeing everything through the 2015 vintage. So back to 24, if you took the entire left part of that chart and the top of the right, everything through 2015, and now look at Slide 25, and said all of them -- of all the remaining matters produced a 0, we would still have a 41% return on invested capital and a 15% IRR. We don't expect that to happen, but we want to point out that the past portfolio has performed regardless of what [face] you have in the remaining matters.

And if you turn to Slide 26, you'll see why despite not making predictions, there is no reason to believe that, simply because a matter is older, it is likely to underperform. In fact, Slide 26 points out something we've emphasized in the past, but we haven't quite shown graphically this way, which is, of course, in this business, since we are betting on disputes, there are 2 ways for disputes to resolve: One is through a complete adjudication, where an arbitration tribunal or a court, issues a judgment and that ends it. The other is through a settlement before it gets to the end.

And as you can see from the numbers, on the right, although our overall portfolio has produced an 85% return on invested capital and a 30% IRR, where there is an adjudication, we've had a higher return on invested capital and a lower IRR, so 161% return on invested capital with a 25% IRR. Where there is a settlement, those average out to a 52% return on invested capital, so lower than the average, but a higher IRR, 46%. Why is that? Well, it's because when matters settle, you are taking a discount off of your full entitlement in exchange for no longer absorbing the risk associated within adjudication, and for the time value of money, make sense then the IRRs would be higher, but you wouldn't be collecting as much in absolute dollars, so you'd have lower returns on invested capital, but you'd have the capital back to reinvest.

On the other hand, when things go the distance, if you win, and we win more often than not, the adjudications end up producing the home runs, the much bigger hits. The IRRs may not look as hard, because it's taken longer to get there, but the return on invested capital have been quite attractive. So there is -- with respect to the charts before and what do we think about the older ongoing matters, those are matters that are poised to have the binary outcome of potentially very large recoveries, and that's what we've seen in our past performance. Sometimes people ask, which

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So it sounds like Jon has mysteriously vanished into the ether. So while we wait for him to return, I will pick up.

So Jon was about to talk about Slide 27. And what Slide 27 shows you is a very important point that is, that dovetails with the earlier slide that I discussed with the evolution of the business. And in that slide, we showed you all the various things that we did. And there is no question that those things have different economic characteristics. They have different levels of risk. They have often different durations. And consistent with those different risk and duration levels, they come with different pricing and therefore, different returns for us.

And so we sometimes get the question, well given that you're in a growing market, why don't you simply do only the subset of things that are the highest potential return opportunities. And I think the answer to that is as shown by this chart here.

And operator, I just want to make sure -- I am still on this call. Operator?

I am back, I do not know what happened. My line disconnected.

Jon, I -- yes, I took you in the middle. I was in the middle of Slide 27. And I was introducing the concept that there were varying levels of risk and duration.

Sure. So I guess what I would say about that is, before I was saying that, in fact, we are to some extent indifferent whether things settle or go to trial, we don't control it. But there is one category, where we can have some influence over the composition in terms of duration. And that is with our principal, strategies, investments. We've chosen purposely investments where you can end up with quite attractive returns with shorter durations. And we, as Chris mentioned earlier, end up having the greater control over the timing of resolution because we're in control of the lawsuits.

And as you see, and I talked about this on the Investor Day, that you could take on the left side, 2 conventional lawsuits that might take 3 years to conclusion, you recycle the capital. You have an attractive 0.6 return on invested capital, and an attractive IRR in the mid-20s, or you could over the same period of time have 6 1-year investments, recycling the capital, lower return on invested capital for each investments 0.23 with positive [gear]. Similar IRRs on the whole, and over the longer duration, you can even end up if you recycle it adequately with a higher return on invested capital.

So while we're content to have a balance of shorter and longer-term resolutions in our core portfolio, we do think particularly for a public company, where we have said repeatedly for the big hits, you never know when they'll come. That having some investments that are likely to resolve in shorter durations to recycle the capital and attractive IRRs is something that should be part of the portfolio. And we've pursued that with some success. And in fact, if you turn to the next slide, Slide 28, you will see the success we've enjoyed for the first 5 matters in a particular bucket of complex strategies that have resolved. And Chris mentioned to you earlier, that there is a scenario where an investment fund might have a claim. Let's say, they owned shares in a company, they were minority holder, and the majority holder decided to sell the company and takes an extra money for a controlled premium for the majority holder. And shortchange the minority holders and not do what's in their interest, that shareholder could sue in his own right, but they may have business reasons not to do that. And we could finance that claim and that would be part of our core portfolio. But we found it's attractive for us to just buy the shares and file the suit ourselves, and that's what these 5 matters reflect. And you see that the IRRs have been 24%, when we add in this is -- this is a strategy, where we use both balance sheet capital and fund capital. And the return on invested capital, if you look at how the money is out, so if you look just at the point where the most money was out, was a 20% return on invested capital. And this is an area, amazingly, where you can achieve these returns with, as Chris mentioned, on much lower risk of loss. No risk of complete loss, because where we are just financing legal fees, if the case loses, we lose our entire investment. We're owning the shares, because we think they are undervalued and through the litigation we're going to increase their value, even if that litigation doesn't succeed, we still own the shares and are compensated for that lower value. So the risk-adjusted returns for a strategy like this are quite attractive, when you think about the lower risk of loss, it's still generating these kinds of IRRs plus, as I mentioned before, they have a duration advantage that to balance out of portfolio of investments will be a very little control over timing, these tend to have a shorter duration.

I would like to say a word about 2 other things before I pass it off to Elizabeth. If you look at Slide 29, we've talked about our asset recovery line of business. And it has been a very valuable add-on to our conventional business. And so far as when we are underwriting a new matter, it's important for us to look not just at whether it will win. How much money it will win. How long it will take to get there. What it will cost to get there. But also if you get to the end are their assets to recover, and if so, will it take time and cost money to do that. So it's been an important add on. But you see, in 2018, we've had a breakout year where asset recovery has contributed to the business' success overall, both in terms of how much money we've put out in commitments, but also in terms of some of those investments coming to produce profitability.

And so, we're optimistic about the future, that it will continue to be an important component of our overall business as well as providing a profit source, beyond that. Because there are lawyers out there who are great at winning judgments and awards, but they're not necessarily as good at figuring out whether you can enforce those, and we can be quite helpful to those clients.

Finally, the last thing I want to say on Slide 30, which is something Chris alluded to earlier is, I've talked a bit about the importance of diversification. So if you hear that from me every call, which is we've got diversification in the current portfolio in terms of subject matter, law firms, descendants, jurisdictions, you name it. I also talked about diversification of when we expect those investments to resolve over time. But there is a third kind of diversification that I think is important, which is in our sources of capital. Our assets under management is a fund business that have grown from 2.5 -- to $2.5 billion from $1.7 billion. Some of that is from this new $300 million litigation finance fund we raised in December. Some is from the $1 billion strategic relationship we have with a sovereign wealth fund, which is unique in the industry, has very attractive terms. And therefore, gives us a lower cost of capital than any of our competitors.

A nice thing about all this is, it produces fee income in addition to the deposits we earn from our balance sheet investments. But for my purposes the thing that's really important here is, as Chris and I keep saying, there are a lot of ways to take advantage of market opportunities in litigation risk. There are many different ways we can deploy capital, and those different investments, they have different risk rewards profiles. And having different pools of capital to draw on, the flexibility to draw on those different pools, enables us really to take advantage of those opportunities and to continue to grow and expand and tap new opportunities for investment. So I am very pleased with the sources of capital we have as well as the way we've deployed that capital.

And with that, I will pass it on to Elizabeth O'Connell, Burford's CFO.

Thanks, Jon.

Turning to Slide 31. This slide looks at the fair value of our investment portfolio. And as a reminder, we hold litigation investment at cost until there is an objective event in the underlying litigation that would cause a change in value either up or down. And we wrote in this year's annual report, that our valuations have historically undershot our actual recovery. And that historical track record is one reason we see modest increases over time in the proportion of unrealized gain on our balance sheet.

And you've seen both of these slides before, they are now just updated for our 2018 results, and they show our continuing conservatism.

Turning now to Slide 32. We used this slide at our Capital Markets Day. And it lays out 2 real Burford investments, a win and a loss. And it -- they show -- this slide shows how we recognize fair value changes to those investments during their life, both on our balance sheet and in our P&L. And I won't belabor the slide, as I went through it in some detail at our Capital Markets Day, but the important message from this slide is that investments are held at cost until there is some objective events in the litigation that results in us adjusting its fair value either up or down. And when we adjust the carrying value

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Chris, Jon, can you hear me? I hear music.

I can hear you, but...

I hear you, but someone has music playing in the background. If the operator, could please step in and stop that.

Thank you. Just concluding on this slide, again, the message on this slide is that investments are held at cost until there is some objective event in the litigation that results in us adjusting its fair value, either up or down. And when we adjust the carrying value on the balance sheet, that adjustment flows through our P&L as unrealized gains or losses.

Slide 33 is our cash waterfall chart, that we've been including for a couple of periods now. And this waterfall shows Burford-only cash moves, and excludes any third-party interest cash that appears on our cash flow statement and our consolidated results. And the inflows of cash are the black bars on the left of the chart, and the outflows of cash are the red bars on the right. And there are a few points to draw from this slide: One is that we had record deployments last year. We deployed $658 million to investments as compared to $424 million in 2017. This is the point that Chris was making about the shift change in deployments this year over last. The second point is we had robust cash generation with $513 million of cash generated from investment recovery and operations, up from $362 million last year. And the third point is we ended the year with $277 million of cash, this is following our $250 million equity raise in October, without which we would had to have tempered our investment activity. And otherwise, we would have been left with too little cash at year-end. And instead, we enter 2019 with cash on the balance sheet to fund investments.

I'll run through the next 3 slides fairly quickly. Slide 34 looks at our operating cost. Our operating cost in 2018 rose as we added more people to support the growing business to $66 million from $52 million last year. But those costs, which are mostly staff costs, remain consistent as a percentage of income, 16% versus 15% last year and significantly lower than in earlier years.

Over our history, we've continued to balance the desirability of investing in the growth of the business, while maintaining prudent levels of spending.

Turning to Slide 35. This slide here simply to show the strength of our balance sheet and the growth in the business over the last couple of years. Our investment portfolio has almost tripled over 3 years to $1.5 billion. And our total net assets have more than doubled to $1.4 billion. And we've done this, while keeping our debt levels modest. And that brings me to Slide 36. While we raised $180 million of debt earlier this year or earlier in 2018, we continued to maintain a modest net debt-to-equity ratio at the end of 2018 of 0.27x.

And importantly, we have long-dated debt as compared to our assets. The average duration of our debt is more than 6 years, while the average duration of our concluded portfolio is under 2 years. And our first bond does not come due for another 3 years.

As I said at our Capital Markets Day, our balance sheet can support more debt, and we may decide to tap the debt market in the future to continue to fuel our growth.

And with that, I'll turn it back to Chris, who will conclude our presentation, and then we'll open it up for questions.

Thanks, Elizabeth.

We try for everyone to make this a little more interesting for you a little musical interlude in the middle of the financials, a little silence in the middle of Jon's, but we're all back together. And I will conclude on Slide 37.

And I really have 2 things to say about this slide, as a jumping-off point: One is, you will find for the first time in our Annual Report, a lengthy discussion about Burford's approach to environmental, social and governance issues, that in there in a collected way, because investors ask us about it. But, I think, the overarching point that I'd make about ESG is that Burford does not engage in ESG-focused activities, because there are now organizations out there scoring us on ESG points. We always have engaged in a significant amount of ESG activity. We are after all lawyers, and lawyers do a whole variety of things around social consciousness and social justice, in addition to sort of their business activities. We engage in ESG factors for the sake of the business. And it just so happens, that they also are able to play a significant and important societal impact. A real example -- and so I'd commend that discussion to you. And a real example of that is The Equity Project. So The Equity Project is a $50 million initiative that Burford has undertaken to do 2 things: One is, to attempt to make a contribution to closing one of the significant gender gap in law. Law is an interesting industry because it started off, if you look at law schools and if you look at the entry of people into big law firms, you see real gender balance. And that gender balance falls away as time passes and as lawyers become more senior. And that's bad from our perspective for the legal industry, and it's also bad for Burford, because we believe that the best way of litigating cases and evaluating them is to have the broadest range of diversity around them as you possibly can, not only gender, but every kind of diversity, because the reality is that the fact finders and adjudicators come from a diverse range of backgrounds.

And so we've adopted The Equity Project to earmark capital that meets our investment criteria, specifically for women-led cases. And it's just a few months old and it's been thus far a resounding success, we've already had more than $30 million of pipeline inquiries coming in the door, specifically because of the presence of The Equity Project. So I'd really commend you to the pages in our Annual Report, which are also replicated on our website for a discussion of these and other issues.

And with that, Megan, we are ready for some questions.

(Operator Instructions) There's only a few questions on the line. Our first today comes from [Saheed Raman], a private investor.

I've been an investor with Burford Capital for a number of years. I just wanted to ask you 3 different questions.

The first question relates to the listing. I mean, at the moment you listed on the AIM Stock Exchange, you also listed in the U.K. So as an investor, my sort of concern is that the U.K. market has been suffering from the Brexit effect, where other global investors are shunning the U.K. market. So is there an argument for a, listing on another Stock Exchange? Or moving away from the AIM listing to one of the more main listing exchanges? So that's the first question.

Second question relates to, in terms of the equity issuance that was done last year. Would you, with hind sight, think, the equity was done at a cheap price. So I mean if you were to sort of raise equity, again, would you sort of consider doing it at a higher price? I mean given that a number of sort of long-term investors still view this business as very undervalued. Their sort of concern is the equity was given away at a fairly cheap valuation.

And then the third question relates to more of a technical question. Apologies if you already answered it, but on aggregate, what is your sort of loss ratio on each of the cases? On average, what proportion of cases would you expect to lose?

Sure. Thank you for your questions and for your long-time support of Burford. Let me take them in order.

We actually wrote in this year's Annual Report a little bit about listing end markets. The short answer is that while we appreciate the Brexit issues, at the end of the day, it's quite difficult for us to add another listing or to relist elsewhere. It's certainly something that we have considered and talked about with our advisers. But the simple reality is that, I think, right now, we have come to the conclusion and have been advised on this as well, that we're best served where we are. And while you didn't specifically asked the question about a migration from AIM to the main market, I'll answer it anyway because lots of other investors ask it regularly. And the answer is that we've come out pretty clearly and said that we're not contemplating that move. And I think that frankly, AIM sometimes gets an unnecessarily bad wrap. AIM is a growth market to be sure for smaller companies, but it also has a significant pool of large companies on it. 41% of AIM's market capitalization are companies with market caps of over GBP 500 million. And more than a quarter of the exchange have market caps over GBP 1 billion. It serves our needs for liquidity, and we think it's actually a good and cost-effective place for shareholders to be listed.

On the issues of new equity, I think, look, the reality is, Jon and I and lots of other people at Burford are completely aligned with you. We work in the business. We hold a fair bit of the equity, collectively, Burford insiders hold 9-or-so percent of the company. Not only that, but we invest a fair bit of cash in our investment funds as well. So we're pretty deeply and personally committed to the business. And I don't think any of us would come along and say, "Gosh, the business is overvalued." So we share your view. On the other hand, to continue to grow and expand, you need capital. And we think that relying purely on debt capital is too great a risk. And we think relying purely on private fund capital, gives away too much of the return. And so, we like balance in the capital structure, as we -- as Elizabeth and I both averted to earlier. And so raising some incremental equity, which was the first time we'd done that since 2010, felt to us like the right thing to do. And as Elizabeth said, if we hadn't done that, we would have had to curtail our year-end investing activity.

So I think, we -- the reality is -- to issue equity, you have to give people a discount, and that's the price of admission. But we're hoping to put that equity to good use. And finally, as to loss ratios, we published them last year, and they vary by type of investments. And what we've done this year by giving you line-by-line data, is you'll be able to compute whatever approach to losses you'd like, they do vary widely, portfolio losses are low single digits, whereas, litigation finance losses are in the double digits. But your compensated for that for risk and returns. So I'd encourage you to take a look at the new multi-page disclosure that we've put on the website. Thank you again. Megan?

Our next question today comes from Trevor Griffiths of Nplus1 Singer.

Thank you in particular for the helpful new disclosures you provided this year. It feels a little [childish] therefore, to ask you about a couple of things that you told us about last year which you haven't told us this year. But I just wanted to ask you about new commitments. And -- so last year, you told us that, there had been a very strong start going in that new business commitments entered into -- in the first 2.5 months of the year, against what in 2017, that being a rather quiet period. So obviously, you've told us about the underlying trends, but if you can give us any early look at how things have started for 2019, that would be helpful?

And the second thing is in relation to unrealized gains, which have remained at a steady but fairly high proportion of total revenues. Has there been any significant change in the write-down experience as previously disclosed? I think, you'd said before that write-downs in respect of any cases that had ever seen a writeup amounted to only something like 0.2% of the NAV. So I just wondered if -- as you appear to be recognizing slightly more in relation to writeups, whether there was any significant movement in that write-down experience?

Trevor, so on to -- and, Trevor and I have known each other for a very long time, and so I'll -- I don't feel badly about making a joke at his expense, but -- So, Trevor, now, you're going to ask a bunch of lawyers for disclosures that they didn't give in their written disclosure to give orally on a call, and I think that's -- I think, you know us well enough to know that, that's unlikely to happen. The reason last year we gave the sort of first look was because we had been out in the market with some debt issuance, and it was important, I think, for people to have a more current view of what was going on. But I think the disclosure that we've given is all that we're capable of giving unless we actually go and supplement it for everybody in the world.

I will comment though on the fair value point. Elizabeth made the point, and I think it's a very important one. People can carry on all they like about fair value, and we may or may not agree with the way that IFRS approaches accounting. In fact, I've made it clear over the years that I don't agree with IFRS. But the simple fact of the matter is that we're subject to the accounting rules. And as when we've got $1 billion track record of generating 85% returns, it's relatively difficult to simply maintain the level of fair value at a level that is dramatically below that, which is why we've said over years that we faced pressure to continue to try and equalize those numbers. We're nowhere close to doing that, and we resist it. But the simple reality is that, that's the way that accounting in the market works. And I don't really think that it's fair to say that the number has ticked up. We were at 55% of earnings this year and 53% and 54% last year. So we're a little bit higher but by 1%. And in terms of whether things are being written up or down more, I think, that we certainly would've commented if there had been a sea change in the way that those valuations have been occurring.

Megan, I think, we probably have time for one more, at least.

Our next question today comes from Neil Welch of Macquarie.

Chris, I noticed that -- firstly, on Slide 23. You've highlighted the duration as moved out from 1.5 to 1.8. I also note the increase in the return on invested capital from, I think, 76% to 85%. Is there anything in the year that basically means there was a relatively -- the number of cases that were all slightly older, which had higher returns in them that then impacted that? And indeed, do you expect the duration to continue to stabilize in around 2 years or move out at all?

The second question I want to pick up on was, is there anything else that's developed out in terms of the Hong Kong and Singapore business? I'd be interested in that. And finally, I noticed that you had a number of significant hires that you announced just before these results actually. And in particularly in the origination team, I wonder whether you wish to comment on those on the call.

Chris, do you want me to take the first and then you take the second and third?

Sure. Sure.

So thanks for the question. I think we said last year when we saw the duration tick down from 1.6 to 1.5. We encouraged people not to read anything into that. As we said, we can't predict what the balance will be between cases that resolve early through settlements or will go the duration, and when they do go the duration, there could be some changes from one case to the other as to how long they'll go. So I expect that the duration is going to bounce around. I wouldn't make predictions that there is going to be an upward or downward trend. We now have sufficient number of years of experience to see the band in which we'd expect returns -- we would expect duration to be. I kind of think the same thing on return on invested capital, we've said that for things that take a little longer, we end up with a higher return on invested capital. If they are shorter, it would be a lower return on invested capital. And we're content to have that band move around as long as we're maintaining attractive risk-adjusted returns, which we think we are. So I guess, the answer is, I wouldn't read anything into a bounce from 1 year to the other, I would look at the longer-term trend, instead.

And Neil, on your other questions. Hong Kong and Singapore is fascinating. So Singapore, we have an office there, and Singapore has been open for business for a little while now. We did the very first financed arbitration that was ever done there, as far as we know. And we've continued to do business in Asia, as you can see from the geographic distribution chart. It's going to be as we've always said, a slow road. And the reason for that is that we've got a region that has a demand for capital, but has never ever used it. It's not just that they haven't had exposure to litigation finance. It's that there has been no legal way to pay lawyers other than by the hour, even things like CFAs and DBAs that exist in the U.K., don't exist there. And so, I think, it's a long-term play as opposed to a short-term play. The thing that has been quite interesting is that we've probably done more business now in Asia for Asian clients in other markets than we have in Asian finance litigation. So in other words, we'll have a client from an Asian country that will take financing from us to pursue a piece of litigation in the United States. And we're putting more money to work there than we are in regional litigation that's going on in Asia. So we'll see where that goes over time. And we've doubled down to some extent on our presence in that region with the opening of an office in Sydney as well this year.

And as to new hires, absolutely, new hires fundamentally split into 3 categories: The first is just people that we need to continue to maintain a growing business, incremental finance staff and legal staff and so on. But the other 2 categories, one -- as we've noted, we've made a real investment in origination and business development staffing, so that we are not just relying on our marketing and our relationships, we actually have a significant team of people out into the market performing what I have analogized in the annual report to a sort of a coverage investment banker style function. And the third component is simply continuing to expand what we call our underwriting team, the people who review investments as they come in the door and also manage them after they're made. And that's simply a function of the fact that the business has continued to grow significantly. I note that we're already at the 3 minutes past the hour.

And so we certainly don't want to keep you over time, but I realized that we also ran on for a fairly long time. So if there are other questions in the queue, I'm happy to take another one, if there is, or we may have already lost people.

Our last question today comes from Daniel Lasry of Engadine Partners.

Three questions from me, I'll make it quick.

Chris, you mentioned before, you've kept quite an extensive database on a lot of the items you've passed on, all the opportunities. Can you just give us an idea of what the data tells you with the benefit of hindsight?

Second question is, in the annual report, discussing the addressable market, you write and I quote, "Each area dwarfs the supply of capital available." One of your unlisted peers have said, one of their biggest concerns for the industry is that demand for litigation finance is greatly outstripping supply currently. How much do you keep that in the back of your head, when you're trying to grow the business, grow the industry and you consider pricing?

And final question is on the new initiatives. It's been growing quite fast, maybe under the radar? How -- can you help us understand, how hard you've been pushing this? Is it mostly incoming because we're just trying to understand the potential for this over the long term?

Jon, would you like to take the middle question, the pricing question, and then I'll do the other 2?

Sure. So my feeling about pricing is, we don't consider this to be a commodity product. The people who come back to us, the law firms realize we add more value than simply our capital. We help them particularly for portfolio to figure out what the right building arrangements are that need their clients' needs and increase the profitability of the firm, or if it's a corporate client, we're doing a portfolio with -- what sort of an arrangements to negotiate with their lawyers in taking our capital.

And so we've not seen a change in pricing, and in fact, your questions suggests, others seem to agree that the demand for litigation finance capital outstrips the supply. So we think there is ample room in the market for all the capital that's there and then some as we continue to see the demand grow. So I'm glad you asked the question. I'm glad you asked it the way you did. I think it reflects the fact that this is a growing industry with lots of opportunities.

And on the other 2 questions, new initiatives. So new initiatives, fundamentally right now, our asset recovery business. And that's the business that we've talked about for the last few years. We've fundamentally been migrating that business. That business has a good market position, but it started life with us as predominantly a fee-for-service business, where we would provide professional services on a time or time-related basis to clients. And we concluded after watching the success of that business for a while that we thought we could make more money by taking risk in it. And so while we still provide the fee-for-service business. We certainly amped up the risk-taking part of the business as well, and we're pleased with the early results, not only in the kinds of returns that we've been able to get from the things that have done well, but also in the demand for capital. So, I think, we'll continue to watch that business and see how it is able to do. And we'll continue to provide capital and other resources to it.

And finally, we're big fans of data. We have what we think as the largest proprietary data set in the industry. As you say, it covers thousands of cases that we've looked at and not done anything with. And we make extensive use of that data in our own analysis alongside public data, and predictive analytics to come to views about litigation investments. And we actually have a team of people who are dedicated just to that function, nonlawyers who are an integral part of the investment process, and to engage in probabilistic modeling and other analysis of our investment portfolio, based on a combination of qualitative and quantitative factors, including that big data store. So we make active use of it, and as a technology continues, as AI continues to improve, we intend to make still more use of it.

And with that, since we've now overrun by 8 minutes, I'm going to thank everybody very much for their time. To the extent that we didn't get to your questions, I apologize. But we're certainly available off-line to interact with you, as we always are.

So once again, thank you for your time today. And thanks again for your interest in and support of Burford.

Thanks, everyone.

This concludes today's call. Thank you for joining. You may now disconnect your lines. Have a lovely day.