Burford Capital, founded in 2009, provides specialized finance to the legal market. It operates as a finance and professional services company worldwide with principal offices in New York, London and Chicago. The company offers financing to lawyers and clients engaged in litigation and arbitration, asset recovery and other legal finance and advisory activities. Burford Capital has initially started on the AIM market with a valuation of 80million, only to see that figure sore to the heights of around £3billion prior to the company’s recent share price collapse. If we take a close look at Burford’s shares over the 1-year period, we can see they have already lost a tremendous amount of value from over £20/share to lows of around £3.80 share. The case for investment is a complex one, but we believe Burford capital offers at the current levels an interesting mix of risk/reward. Short attack from Muddy Waters LLP At the beginning of August, US hedge fund Muddy Waters issued a report alleging malpractice at Burford Capital. The terms used to describe the company as “arguably insolvent” and accused Burford of “aggressively marking” their litigation cases then misleading investors relating to the financial metrics within its reports. The report had a spectacular effect of collapsing the company’s share price to nearly 70% in a day. The share price reaction was met with a strong statement by Burford highlighting no wrong-doing on their part, and as a gesture of belief in the company very large share purchases in market were made by directors. The exact wording from the RNS was that the directors “intend to purchase a significant number of Burford shares in the market. Two of Burford's non-executive directors have also sought clearance to make market purchases, as have numerous other Burford employees. In addition, the Board is also considering the Company buying back its own shares, given the potential investment return the shares represent at their current price. Appropriate disclosure will be issued upon the completion of any purchases.” Interestingly Muddy Waters short exposure was not particularly large, what had been reported on the short tracker was just above 1%. So, the question remains— why then the big move in the share price? A move of that magnitude can be caused by a variety of thing, such as a large seller in the market, but even still that would normally mean they are dumping a large number of shares without consideration of price, therefore more sells than buys push the share price lower. Another possible reason is market manipulation which Burford alleges to have happened in this instance. Burford’s statement, “during five one-minute periods on 6 August (14:17, 14:30, 14:35, 14:43, 14:45), Burford's shares fell 6%, or over £170 million in value, some of its sharpest declines of the day. During these periods, executed sell orders totalled a mere £186,000. That mismatch between price movement and executed orders is consistent with market manipulation”. If somebody floods the order book with sales, this can give the impression the company is selling off, even if the sales do not go through, they are cancelled, automated algorithms can be fooled into selling positions in the share. Burford believes it has found evidence of manipulation, but this may take some time to prove, once proven we could see a large movement upwards in the current share price. Negative aspects to consider Burford has recently come under fire from rating agencies and brokers marking them down, and also from the recent news that Hargreaves Lansdown are selling their position within the company from their select funds. The sales coincide with the sales from Woodford funds who are a distressed seller at present and need to unwind their position. The company has been seen to be reacting to the negative pressure but not giving enough fine detail or transparency in general regarding to explanations against the allegations. Long term potential The company has fallen back significantly and we do think Burford could pick up where they to evidence no wrong doing and market manipulation in the stock, the share price seems to work favourably for directors who are picking them up in quantity on the cheap, there could be a buyback issued with available capital, the company has come out denying they will be a serial diluter in the share price by undertaking share issues. But this is always a risk. The company believes they could by q1 2020 be listed in the US which is a good move, litigation is big market in America and will increase transparency and liquidity for Burford. The company can expect to raise significant funds if listing in the US. We think it is not unreasonable to think as further criticism comes out over Burford the share price may pull back temporarily, and entry of £5/share could be quite optimistic but, in a few months, Burford could be trading a lot higher than current levels.
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