Burford: Fair Value Methodology

Litigation claims being a new form of asset has caused some trouble for fair value estimations. Burford’s methodology for reporting capital provision assets’ fair value has evolved and adapted to suggestions from the SEC. In this article I’ll go over:

• How Burford values their assets

• GAAP rules for fair value estimation and levels of securities

• What is the risk premium component in the discount rate and how case milestones impact it

• A letter filed to the SEC in which management answers doubts regarding their valuation procedure

Fair Value Accounting

When Burford invests in a litigation claim, the asset’s fair value is initially equal to the deployed cost. For the underlying asset is expected to generate cash flow in the future, the alteration in the reported fair value depends on management’s estimate of this future cash flow. The likelihood of its occurrence and the extent to which it could evolve into different scenarios are considerations embedded in the calculation.

This is an inherently subjective task. Certain clauses, however, might help increase the certainty of the valuation. Arrangements between Burford and the corporation or law firm highly determine it. For instance, imposing a minimum of capital returned to Burford under any scenario in which the backed party receives proceeds can help foresee how the minimum retribution for Burford could look like.