On Wednesday, Radius Global Solutions, LLC, the ARM firm started by the former NCO Group leadership team, announced that it merged with Northland Group Inc. based in Minneapolis, MN. Northland Group is a well-established ARM firm with a history of servicing large financial institutions.
This announcement came on the heels of the announced merger between European ARM companies Intrum Justitia (IJ) and Lindorff. The combination of IJ and Lindorff will create the largest debt buyer and servicer platform in Europe with a presence across 23 European markets. Subject to regulatory approval, this transaction is expected to close in Q2 2017. Kaulkin Ginsberg expects this transaction will receive approval to close given the significant level of competition among debt buyers and servicers in Europe.
These two major announcements throw the financial services sector of the ARM industry right back into the spotlight of mergers and acquisition, after years of being deemphasized by buyers and investors for companies in growth markets such as healthcare and government. We believe this shift was in direct correlation to the dramatic decrease in total loan charge-offs after peaking in 2010, as shown below.
Two factors directly contributed to the decrease loan charge offs; the increase in regulation by the CFPB and scrutiny of loan applications by financial institutions. As loan charge-offs dropped, the volume of accounts placed with collection agencies servicing this segment of the ARM industry plummeted, leading to dramatic reductions in the number of vendors assigned to service large banks and other financial institutions. As banks continued to significantly reduce their vendor networks, many well-established collection agencies lost substantial market share, while others were let go by the banks they serviced.
These factors severely impacted the financial performance of ARM companies focused on financial services, and led to a mass exodus of buyers and investors. Under the Trump administration, we expect this market segment to rebound in anticipation of softening regulatory conditions and the subsequent increases in loan originations and charge-offs that are likely to follow. That said, we did not expect buyers and investors to reenter this segment before the New Year.