Getting the Word Out on Portfolio Purchases

We’ve seen a lot of debt purchasers trumpeting their portfolio purchases in the news lately. Why?

We’ve known for quite a while that Wall Street likes easy-to-follow business models. And we know that the debt purchasing business model is one that falls into that category.

This is not to say that it’s easy to run a successful debt purchasing/collection operation. Quite the contrary, it takes a lot of hard work and business acumen to run a successful debt buying shop. But if you are pitching a business model to a potential investor, the debt purchasing model – where debt buyers generally anticipate a 1.5 – 2.5x return on their investment over a 3-5 year period – is pretty straightforward and attractive.

Of course, what makes the model so attractive is that margin. It’s very important for debt purchasers to buy wisely — more so than in perhaps any other industry. So when big-time debt purchasers are finding success buying portfolios at nice prices, especially in an inflated-price environment like the current one, you can bet they want people to know about it.

Publicly-traded debt purchasers are compelled to release the details of their purchases in earnings statements. So companies like Asta Funding, Asset Acceptance, Encore Capital, and Portfolio Recovery Associates usually provide an update at least once a quarter on purchasing activities. An over-the-counter traded debt purchaser, Velocity Asset Management, also recently provided a portfolio acquisition update separate from their earnings release.

But it’s not just public debt purchasers who are making noise about purchases. Since December, debt purchasers like Debt Resolve, TNB Card Services, Sagres, ACF Medical Services, First Financial Asset Management, Corstone Capital, and IEI Financial have release details of portfolio purchases. And, of course, there was the recent news of WAM, NCO unit MEDCLR, and CarVal partnering up to purchase a large medical portfolio from Tenet. So what is compelling purchasers to air their business when there is really no need to?

In an increasingly competitive purchasing environment, buyers are finding that staying in front of the rest of the industry is good for business. And, as the waters become increasingly muddied with new players, the lesser-known purchasers can make a real splash by trumpeting their success.  So why did WAM and NCO (through MEDCLR) go public with their portfolio purchase?  They do not fit the model of lesser-known purchasers and neither company is public anymore.   In their specific case, the deal was actually highly note-worthy.  It was an extremely large medical portfolio that was not typical in the current debt purchasing market.  There was also tons of scuttlebutt and innuendo concerning the deal, and perhaps the companies took the opportunity to set some things straight.

But it’s not a universal phenomenon. Note that major purchasers like Unifund, Sherman, and Cavalry are not mentioned above.   Unifund and Sherman are notorious for remaining tight-lipped on the intimate details of their business.   They keep a lid on their movements because they can; these are some of the largest purchasers out there that have long-established relationships with not only creditors, but the reseller and broker market as well.

Companies have varying reasons for taking business details public. But it is worth noting that the practice of calling attention to portfolio purchases is growing.