Awash in Capital, Litigation Finance Firm to Charge 2-and-20

New York-based Burford Capital has secured $1.6 billion in funding to make new investments in litigation, according to a Wednesday announcement. 

The capital comes from three sources: a sovereign wealth fund, a new private investment fund, and Burford’s own balance sheet, the firm said. 

Litigation finance, once known as a niche product area, has grown in popularity in the past year. Both Burford and competitor Parabellum Capital have raised sizable funds and made several new hires over the past year.  

“We simply would not have been able to provide for that level of growth solely on the Burford balance sheet, let alone to have the implied leverage provided by this structure where we provide 42 percent of the capital but earn 60 percent of the returns,” said Burford’s chief financial officer, Elizabeth O’Connell, in a statement.  

Chief executive officer Christopher Bogart added that “Burford’s unique ability to attract a large-scale commitment from a sovereign wealth fund and to close a new investment fund with capital from institutional investors underscores its distinction as industry leader in terms of performance and governance, critical factors in making our capital the most attractive in the market.”

The sovereign fund has entered into a strategic partnership with Burford, but insisted on anonymity as part of the $1 billion arrangement, according to a firm spokesperson. 

According to deal terms, the institution will deploy two-thirds of the $1 billion capital pool, or $667 million, while Burford committed to $333 million. The investment firm has agreed to allocate half of each new investment it makes to this partnership fund for the next four years or until committing all $1 billion — whichever happens first, the announcement said.  

Burford stands to reap 60 percent of investment profits after returning the initial capital.

Distributions will be paid to the sovereign wealth fund and Burford on a per-investment basis with a traditional clawback, the announcement said. The sovereign wealth fund is further entitled to a 30 percent stake in any new Burford fund.  

[II Deep Dive: Is Litigation Finance Hot? Hiring Points to Yes.]

In addition, Burford announced that it has raised a separate strategic capital fund, called the Burford Opportunities Fund. The firm has capped the fund at $300 million, none of which it will contribute. But 40 of its own employees have invested in the fund, Burford said, amounting to $5.7 million. This demonstrates “the team’s belief in the attractiveness of the investment opportunities ahead,” the firm argued.  

Over the next three years or until tapping out the $300 million, Burford will allocate 25 percent of each new investment it makes to this new Opportunities Fund.

This all comes with a hefty price tag for fund investors, judging by the disclosed fee structure. Burford said it will charge a 2 percent management fee on both invested and committed capital over an indeterminate multi-year “investment period,” and 0.5 percent on deployed capital during the run-off period after that. After meeting an 8-percent return hurdle rate, fund investors are to pay 20 percent in carried interest, the announcement said. Finally, a ‘European waterfall’ feature means they will recover all invested capital before performance fees kick in.