Part One - Pioneers and complexity

How a single tweet crashed a stock market wonder

In August 2019 a stock market wonder crashed following just a single tweet. The valuation of the company, Burford Capital, has never recovered to its previous levels following the attack by activist short selling hedge fund Muddy Waters.This is the first in a trilogy of articles produced by the Rebbelith team exploring that attack and why the reasons for its success are so important to all communications experts, reputation managers and brand strategists who operate or serve clients in the public domain.

Narrative vulnerabilities, investor messages and valued media

Burford’s story was really compelling, both for clients and for investors seeking sources of income uncorrelated to traditional markets. The company’s founding idea, potential market and legal experience provided them, their communications advisers and publicity agents with the immediately clear, enviable ‘early mover’ narrative that few businesses are lucky enough to enjoy. They were ‘pioneers’.But Burford invested in esoteric assets. These were difficult to value, the timing of future cash flows was hard to predict and the nature of litigation itself was complex. Compared to that ‘pioneering early mover’ narrative this aspect of the business was not immediately clear. Only a small number of people with specialised knowledge would likely understand the litigation process and its potential financial value. For a publicly listed company subject to standardised reporting and public scrutiny this made explaining Burford’s ability to deliver reliable value into the future a serious communications challenge.It was absolutely imperative that this challenge be met - as Muddy Waters would later reveal, that degree of complexity significantly raised the potential for confusion and for vulnerable narratives to grow around the company.

This article will explore the three crucial and avoidable reasons for why Burford failed this challenge:

Had Burford deployed modern, data-backed media and narrative analyses rather than old, legacy strategies, these failures would have been conspicuously avoidable.

Reason One: Burford failed to monitor its narrative vulnerabilities

Media described Burford’s growth and rising share price by repeatedly covering specific themes. But whilst these themes helped drive the Burford success or ‘growth’ narrative, they also embedded vulnerabilities within it, later to be levered or ‘activated’ by the Muddy Waters attack and its highly sophisticated communications campaign. The story of these narrative vulnerabilities, how they grew within media coverage, what caused them and the way in which they were ignored, is told below through three key examples.

A focus on single large investment cases

Media referenced single large investment cases in Burford’s portfolio again and again. Retail investor publications actually used these single cases to justify buy recommendations. Others leant on them to frame the exciting and increasing growth of the business.One case exemplifies this. In 2017 retail investment publication Investors Chronicle covered Burford’s “thumping” pre-tax profit for the 12 months ending December 2016. This was 28% above ‘consensus estimates’. Within that review the high price of Burford shares was specifically justified through the company’s interest in a single large investment case, the ‘Petersen’ claim. That interest, it claimed, was worth more than three times the company’s profits in 2016.Again in 2018, the Petersen claim was used to “put the scale of the (Burford’s) undervaluation into perspective” ⁱ by one reporter, who subsequently revealed analysts at broker Liberum believed the company’s stake in the claim could be worth as much as $1.12bn.The reasons for successive coverage like this were logical and simple - media intuitively picked up on the most noteworthy announcements from the company or the things they chose to highlight in content.But this also meant that readers were continually exposed to the significance and publicity media gave those single large investment cases. Over time this repetition meant those single cases became a key aspect of Burford's growth narrative and a key driver of its share price.

Returns Metrics

Investor-focussed media continually referenced the high Internal Rates of Return (IRRs) and Returns on Invested Capital (ROICs) reported by Burford over the years to describe its financial performance. Mention of these metrics came, firstly, alongside narratives of how the company had moved the litigation finance industry from ‘niche’ to ‘mainstream’ and, secondly, how that industry was “exploding”.Continued media references to these IRR and ROIC metrics served to support Burford's profitable ‘early mover’ role in those industry narratives. Their repeated presence in media coverage also helped to verify readers’ beliefs in Burford’s potential value, and offered a way of quantifying those beliefs simply.But their effectiveness in verifying those beliefs had a hidden and increasing narrative cost. Like the successive reference to single large investment cases to describe the company’s potential, continued media citation of unreliable IRR metrics meant they too became embedded in Burford's growth narrative.

Unrealised gains

Without a careful strategy to guide investors there was potential for the complexity of the company’s valuation methods to become confusing or misunderstood. Even worse, they might be criticised publicly.Because of the very specific nature of litigation, Burford attributed value to its ongoing investments in legal cases according to a process known as ‘fair value’ accounting. This meant they increased or decreased investment values based on objective events in the progress of the litigation, rather than recording profits after the conclusion of a legal case and the final receipt of cash. This process resulted in ‘unrealised gains’ being recorded in the company’s accounts.In their 2014 annual report Burford showed how the level of unrealised gains remained the same as the previous year, at 11% of assets. That report described their valuation methodology as ‘conservative’. Investor media duly lifted this figure and message of ‘conservatism’ straight from the report.Over the next few years, as Burford’s growth narrative developed alongside its share price, and as it ploughed more and more cash into new legal investments, reporters acknowledged the increasing level of unrealised gains. But they did so only as references, as ‘backstage asides’ nestled amongst endlessly positive analyst estimates, coverage of staggering profits, and high IRRs. By 2018 the share price was being termed “meteoric”, and the company described as “undervalued”. ⁱ ‘Unrealised gains’ themselves received little specific media attention.But this lack of explanation made Burford vulnerable.

Figure 1: Media described Burford’s growth and rising share price by repeatedly covering specific themes. But whilst these themes helped drive the Burford success narrative, they also embedded vulnerabilities within it.

Reason Two: Burford's content was inadequate and its messages were confusing

Single large cases dilute diversification message

Part of Burford’s investor message attempted to make clear that its investment portfolio was both large and diversified. Its investor materials, like annual reports, discuss this ⁱ .

"Part of the secret of litigation investing is having a large, diversified portfolio"

- Burford Annual Report 2017

"Burford’s financial performance is the product of many investments”

- Burford Annual Report 2017

The successful permeation of this message throughout its growth narrative would demonstrate an ability to generate income smoothly and predictably. This would help to retain existing investors, attract larger ones and thus reduce volatility in its share price.But ‘diversification’ did not adequately permeate media coverage. It did not form a meaningful part of the company’s growth narrative in key publications. Instead, reporters focused on the huge value of single large investment cases. This happened for two reasons - inadequate content and the choice of announcements.

Inadequate content

The company’s communications strategy failed to back this diversification message with newsflow or content that demonstrated it effectively and carried it to the most valuable media. Untargeted RNS announcements, articles in niche legal trade publications and infrequent annual reports were simply inadequate tools for embedding such an important message within that audience over time. There was also insufficient acknowledgement or repetition of this essential message in the required investor materials - the company’s 2014 annual report even delegates finding details of portfolio diversification to the reader:

"We also won’t repeat in any detail our devotion to the construction and management of a large and diversified portfolio of litigation investments, but we believe that is a critical way to go about investing in this asset class, as each investment comes with idiosyncratic risk that can only be properly managed through diversification." ⁱ

If it was critical, management should have been discussing portfolio diversification actively - their media team should have advised them to do so, identified suitable media opportunities and produced content around it for targeted distribution through the company’s social media assets.

Choice of announcements

Some content Burford announced to the market repeatedly highlighted the significance and huge potential future value of single large investment cases rather than the merits of a diversified portfolio. On two occasions announcements highlighting the possible values of such cases were made just before or in conjunction with major financial results.On the 14th March 2017 at 07:00, just one minute before the previous financial year’s full results were released, Burford announced the partial sale of interests in a single investment - ‘the Petersen Claim’. The sale implied “a market value for the investment of $400m.” ⁱIt is very possible such announcements altered the way aggregate financial results (required by market regulations) would have been interpreted by anyone reading them: it is plausible those announcements may have ‘primed’ readers to note particularly the importance of single large investment cases as they made or confirmed their own ideas of Burford’s value potential.The next year Burford repeated this announcement pattern. On 13th March 2018, on the day immediately before the 2017 full year results were released, the company announced it had sold its entire interest in a single arbitration case called ‘Teinver’. The announcement was titled `“BURFORD SELLS TEINVER INVESTMENT FOR $107 MILLION, A 736% RETURN”. ⁱThese messaging decisions increased positive analyst estimates, but at a real cost. They diluted the impact of any attempt to create a narrative around portfolio diversification, and they helped embed single large case successes within the Burford growth narrative.

Returns metrics

It was a challenge for Burford to identify the right metrics with which to describe its profitability. The timing of its cash flows was difficult to predict and its assets were hard to value with traditional, common methods. This meant standard metrics were unsuitable.Indeed as early as 2013 and 2014 the company’s annual reports clearly stated the company’s reluctance to use IRRs to measure its profitability or the performance of its investments reliably:

“We are often asked about IRRs. Particularly given the multiple lines of business in which Burford is now engaged and the widely varying nature of our investments, we regard IRRs as a less helpful measure than return on invested capital (on a per investment or portfolio basis) and return on equity (for the entire business). That is especially true when one considers that we have one matter with IRR in excess of 15,000%, another in excess of 1,000% and several more well into the hundreds – but that does not necessarily signify that those were fantastic investments (although we were perfectly happy with them) because we can’t reliably put out capital in our business repeatedly and have it returned as quickly as occurred in those matters. Indeed, as a general matter, we would have preferred our capital to be outstanding for longer in those ultra-high IRR matters, so that we generated greater cash profits but lower IRRs.”

- Burford Capital 2013 Financial Report ⁱ

“NAV and IRRs are not the appropriate valuation metrics for this business, as the research analyst community increasingly recognises.”

- Burford Capital 2014 Financial Report ⁱ

But these metrics continued to be provided by Burford over the years. Inevitably, they were included in media coverage of the company’s share price potential. And whether unintentional or not, this meant potentially unreliable metrics became steadily, cumulatively inseparable from the company’s success story, and Burford’s IRRs became embedded in its growth narrative.

Unrealised gains

Various investor-valued media mentioned the growing unrealised gains on the company’s balance sheet over the years. As discussed, they did so mostly in a benign manner and as casual references. But these references didn't echo an adequate set of defined, simple and crystal clear company messages, and this meant the company’s valuation methods weren’t explained to or familiarised with investors through key media.Those media could have provided a powerful third party validation for these messages and that explanation. They could have improved its familiarity with target audiences and thus reduced the potency and newsworthiness of potential future criticism. But these simple messages did not permeate media successfully for two key reasons:

The content used to carry them was inadequate or confusing

The company mainly discussed its complex valuation methods as part of announcements on the RNS and in annual reports. This required significant active searching by readers and limited message frequency to a few pieces of content.The messages in those announcements were also inherently confusing and inconsistent. They appeared to imply values for single large investment cases but then immediately introduced caveats, stating they did not “necessarily regard the implied valuation of these sales as the appropriate carrying value for the remainder of the investment on Burford's balance sheet.” ⁱ These lengthy explanations of complex valuation methods were just copied and pasted from page 23 of the 2016 Annual Report. ⁱ This same messaging confusion occurred in announcements made on 14 March 2017 ⁱ, 13 June 2017 ⁱ, 24 July 2017 ⁱ and 13 March 2018. ⁱ

The company failed to recognise a lack of explanation in key media

Burford’s lack of awareness (and certainly lack of action) with respect to how media covered unrealised gains meant they couldn't guide the existing discussion or recognise potential future vulnerabilities in coverage.As investor appetite for Burford continued, in January 2019 the publication ‘Investors Chronicle’ ran a story on the future of litigation finance. That article discussed a failed IPO by Burford peer ‘Vannin Capital’, and demonstrated how hard it could be to convert such esoteric investments into hard cash.Then, amongst media reviews in March 2019 of the previous year’s results, after years of continued share price growth, it was mentioned that ‘unrealised gains’ now accounted for more than half (55%) of Burford’s reported income. More importantly, reporters were starting to include this in bearish ideas, possibly signifying that a negative narrative of ‘opacity’ and ‘complexity’ was present. But Burford had left it too late to communicate its valuation methods clearly enough, and over enough time.In June 2019 hedge fund Gladstone opened a short position in Burford Capital equivalent to 0.5% of the outstanding shares. It was suggested that the company had inflated its past returns on ‘unrealised’ investments. “Burford’s business”, said one publication, _“requires a lot of trust in management.” _ⁱ

Figure 2: Inadequate content and poor messaging meant ideal investor messages (green) were not carried through to media. This meant narrative vulnerabilities (red) became embedded in the company’s growth narrative (grey) over time.

Reason Three: Burford failed to identify the media and journalists that were actually valued by its investors

Burford’s main shareholders included some of the asset management industry’s leading funds.

Source: fund factsheets

Figure 3: Key Burford shareholders (summer of 2019)

The company could have signalled its key investor messages to its main shareholders continuously if it had received adequate insight from its communications strategists and publicity agents. With such insight, the company could have determined:Firstly, which publications and individual journalists had the most reach with those key shareholders.

Figure 4: Mapping the publications and journalists most valued by specific investors

Secondly, the individual reach of those publications or journalists.

Figure 5: Revealing the reach of specific journalists or publications

Thirdly, the media most valued by each key shareholder.

Figure 6: Publications and journalists most valued by individual investors

Fourthly, the company could have built an investor relations campaign with accurate knowledge of its true, valued-media landscape, and accurately monitored those titles and journalists for the growth of narrative vulnerabilities.

Figure 7: Burford’s key investor media landscape

Burford instead pursued an antiquated, legacy media targeting strategy focussed on legal trade publications and reliant on the scattergun reach of the London Stock Exchange Regulatory News Service (RNS).Huge opportunities to ‘signal’ Burford’s value and embed its key investor messages, over time and in the optimum investor-valued media, were wasted.

Figure 8: Burford media team’s publication focus January 2017 - August 2019 (larger nodes denote publications with the greatest focus)

From October 2015 to the end of July 2019, Burford focussed attention on a few small, niche legal trade publications, likely identified by its communications advisers through generic searches for ‘law’ and ‘trade’ on aging media databases. Its forays into valued business media were sporadic and unsustained. Its use of Bloomberg’s powerful newswire remained mostly relegated to its law desk.Even in these unsuitable media, the thematic focus of outreach by Burford’s media team was misguided. The only themes that received concerted publicity effort were the growth of the litigation funding market, and accompanying comment. During a period of rapid share price growth between the summer and autumn of 2017, discussion of single large investment cases also saw focus by that media team.But, and even in these unsuited media, it's the absence of one theme and the timing of another which suggests the company’s communications strategists were ill informed. Firstly, essential discussion of portfolio diversification and valuation methods occurred sporadically and very infrequently. Secondly, as bearish ideas spread through investor media in the summer of 2019 and Gladstone opened its short position, the company was focusing media resources on gender equality rather than investor communication.

Figure 9: Thematic focus of outreach by Burford’s media team (May 2017 - August 2019)

This outreach pattern may have been thought adequate for a broad targeting of potential customers or clients. But, and so crucially, it neglected how critical the right media are to achieving successful investor communications, for signalling value sustainably, and for monitoring the development of narrative vulnerabilities.

Next time...

In the second article, the Rebbelith team will explore the structure and dynamics of the attack itself to reveal its two unique dimensions. It will show how these went beyond the simple activist short selling playbook and made Muddy Waters’ attack so effective.Through new narrative and network maps, readers will be taken through a visual journey of what happened, what a ‘narrative entanglement’ looks like and why an understanding of them and networks are so important to businesses and individuals in the modern public domain.

• Read Part Two: The Attack