post

Burford Capital, AIM’s largest company, underlines its support for AIM

The interim results statement from Burford Capital (LON: BUR), currently AIM’s largest company, provided an interesting commentary on its reasons for remaining on AIM, rather than consider a move to London’s Main Market. With a market capitalisation approaching £4 billion, Burford would be close to gaining entry to the FTSE100 Index should it be on the Main Market, which would see index tracker funds be obliged to acquire shares, thereby offering a boost to the share price.

So why doesn’t Burford Capital move to the Main Market?

Burford Capital’s interim results statement comments that it hardly ever encounters potential investors who baulk at buying larger AIM stocks like Burford and companies with market capitalisation above £500 million make up around half of AIM’s total value.
Burford has broadened its shareholder registry over time to include some of the world’s largest and most sophisticated investors who are unperturbed by their choice of market.

Burford sees no evidence that it would see increases in liquidity or other trading benefits from a move to the Main Market and they already have liquidity comparable to or better than Main Market companies with similar market capitalisations to theirs.

As they concluded, the reality is that both AIM and the Main Market see corporate and governance failures at companies of all sizes – for every Patisserie Holdings on AIM there is a Carillion on the Main Market, although in the case of the latter at least investors were forewarned! Listing rules and governance codes are not the primary defences against such failures; rather, sound management, an experienced, attentive and involved Board and high-quality external advisers (and especially auditors – Grant Thornton take note) are key.

Therefore, despite its size and evident appeal to large institutional investors, Burford is unlikely to pursue a Main Market listing in the near term as they do not see the benefits exceeding the costs and disadvantages.

Fundamental does not hold shares in Burford Capital. In addition to concerns surrounding its qualification for Inheritance Tax planning purposes (Investor’s Champion AIMsearch gives a detailed explanation of this) , we remain wary of its business model where reported profits are far removed from the operating cash flow. We are also uncomfortable with the opaque nature of its accounting, where the details of litigation investments remain hidden.

For the 6 months ending 30 June 2019 pre-tax profit of $226m resulted in an operating cash inflow of only £6.7m. Add loan interest of $19m and that derisory inflow turned into an operating cash outflow of $12m. It has always been this way at Burford, which brings in substantial unrealised gains as income, something it regularly addresses in its results statement.

Other than snippets of information relating to very substantial cases such as the giant Petersen claim, in respect of which Burford has banked huge sums, we are left in the dark on the identity of its ongoing investments.

We are not alone in being concerned that, by including unrealised gains in income, there is a risk that Burford is recognising income associated with ongoing investments that may one day become losses. Furthermore, the immediate re-investment of cash generated into new claims means very little internally generated cash is ever reinvested into anything shareholders have a clue about.

We acknowledge that both IFRS and US GAAP require a wide swathe of businesses to fair value Level 3 assets (the most illiquid and hardest to value) and flow unrealised gains through their income statements, including not just Burford but firms like Blackstone and KKR.

We also appreciate that Burford is not unique in holding a significant number of Level 3 assets, however, it’s the contentious nature of these so-called ‘assets’ which are very different to the equity holdings of private equity groups. Furthermore, Burford’s contentious assets are now supported by a growing debt pile, a highly unusual scenario.

Nevertheless, up to now Burford has been a roaring success on AIM, where it seems set to remain for the foreseeable future.


post

Office of Tax Simplification Inheritance Tax Review – second report: what does it really mean for AIM?

The Office of Tax Simplification (‘OTS’) published its long-awaited review on reforming Inheritance Tax. A first report released in November 2018 dealt with the administration of estates while the latest report focuses on how Inheritance Tax could be made “easier to understand and more intuitive and simpler to operate”.

The stand-out headlines in the latest report were recommendations to reduce the seven year rule for gifting assets to five years and to increase the lifetime gift allowance from the current £3,000 to something more meaningful.

The press has also been keen to jump on a mention in the report of Business Property Relief (‘BPR’) and whether the treatment of AIM shares is within the policy intent of BPR.

Paragraph 5.19 of the report states:
…in relation to third party investors in AIM traded shares, BPR is not necessary to prevent the business from being broken up or sold in order to fund the payment of Inheritance Tax. This raises a question about whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.

Firstly, it should be emphasised that this was only an ‘observation’ and no further reference was made to AIM in the report in the conclusions or recommendations. However, in our opinion the report makes a reasonable observation regarding AIM.

BPR has never been wholly relevant to AIM in terms of preventing a business from being broken up or sold in order to fund the payment of Inheritance Tax. The relief in respect of smaller listed growth companies, is surely in place to attract third party investment and there are indications that the Treasury has always considered it thus. This is backed up by paragraph 5.18 of the report which states:

The OTS notes that the government’s response to the Patient Capital Review consultation published in November 2017 stated the government’s commitment to protecting the important role that BPR plays in supporting family owned businesses and growth investment in AIM and other growth markets. In correspondence and meetings, the OTS has heard evidence of its importance in meeting that objective.

To reiterate, contrary to what has been suggested by some of the more sensationalist headlines in the mainstream press, the OTS report has not recommended the removal of BPR on AIM. 

However, the OTS report has recommended that estates should not benefit from Capital Gains Tax dying with the deceased if the same assets in the estate are also benefitting from an IHT relief or exemption. In this regard Recommendation 5 on page 44 states:

Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.

The Treasury has said it will respond to the report in due course and consider its recommendations.

Last year’s Patient Capital Review highlighted a huge gap in funding in the UK for smaller growth companies and the removal of BPR on AIM will only exacerbate this, therefore we remain cautiously optimistic that radical changes are unlikely.

I think it’s worth reflecting that AIM as a viable Inheritance Tax planning option would not exist at all if the investment credentials didn’t stack-up in the first place.

Our AIM for Inheritance Tax portfolios have materially outperformed leading stock market indices for many years due to the compelling growth characteristics of the companies in which we invest, which just so happen to be accompanied by an attractive tax benefit for UK shareholders.

Successful AIM companies like RWS Holdings, AB Dynamics and many others have not seen their share prices rise due to the weight of demand from those investing for IHT planning purposes, they have risen based on the performance of the underlying businesses.

The great benefit of AIM is that it is market where share registers are dominated by family, founders and senior management.

Studies from Credit Suisse, Boston Consulting Group and Bain & Company have highlighted how superior growth and returns have been a feature of family and insider-controlled companies.

The great risk with a tax change of the type feared is if it pushes executive founders to sell early and exit the business, thereby depriving it of a valuable asset. For example, both RWS Holdings and AB Dynamics have benefited from the ongoing involvement of founder shareholders; Andrew Brode, Exec Chairman of RWS, has not sold a share since the business listed on AIM in 2003.

You can find out more about our high performing AIM portfolio service from the link here