Burford Capital: Competitive Landscape

Burford’s sprint upmarket has created holes all over the industry for competitors to fill. Large corporations demand scale from legal finance companies. But this does not mean that all of the latter require scale to operate profitably. In fact, the bottom end of the market is getting increasingly fragmented.

How does the competitive landscape look like? Could these legal finance firms cause trouble to Burford as they scale? What are some examples of other public legal finance firms? Is there competition for Burford at the high end?

Bottom End of the Market and Different Approaches

Lawsuit-related expenses, mostly consistent of legal fees, range from the tens of thousands of dollars to the tens of millions. Burford’s strategy has revolved around rapidly attaining a spot at the high-end of the industry, servicing big corporations and law firms, both of whom offer Burford the possibility of investing in portfolios of legal claims. Additionally, corporate relationships give room for monetization of claims. These two elements have been vital in allowing Burford to deploy more and more capital.

However, this caused management to skip multiple tiers of the market, leaving unattended demand. There are still SMBs who need capital, though in lower quantities, to pursue legal claims. There are still individuals who are in a similar situation, but lack the funding. Demand such as this has created room for multiple legal finance players. Tribeca, for instance, provides funding up to a million dollars for individuals. To this point, it is crucial to understand that both consumer and commercial legal finance are almost entirely different enterprises.

“Commercial legal finance as practiced by Burford and consumer litigation funding are as distinct as investment banking is from payday lending. The former comprises multimillion-dollar nonrecourse investments with law firms and corporations represented by world-class counsel, and the latter comprises cash provisions to individuals in economic distress who may not be experienced in or savvy about negotiating legal transactions”

Although there are similarities and some common patterns might arise between cases, they are idiosyncratic. The region wherein they originate matters. Legal systems vary. Burford notes in their annual reports that other firms might follow a completely customized approach to doing deals, which results in clients benefiting from more competitive terms. Local dominance can occur within regions, as legal finance firms gain brand recognition and some scale within it.

Similarly, the nature of lawsuits differs among different industries. Different knowledge is required. Hence, legal finance firms can leverage their experience and take an approach that is claim or industry-specific.

Legal finance companies have different sources of capital. On the one hand, firms can allocate capital from its balance sheet, as Burford historically did. But they can also be asset managers. Raise capital via private funds, deploy it, and charge management/performance fees, such as Omni Bridgeway. A mix of both is the approach Burford now takes.

As a reference, some of the players I found are: (i) Nera Capital operates in England and has invested over £125m since inception; (ii) Therium, funded in 2009, has raised 1.1bn to date through 18 private funds; (iii) LexShares was founded in 2014 and has deployed over $100M at an average deal size of around 1-3M; (iv) Longford Capital, which has AUM that exceed $1.2bn and has recently raised a $682M fund.

Finally, there is a public company that caught my eye. Briefly expanding on their operations will give a sense of how smaller players are positioned and provide some color on Burford’s business.