In Their Words: Major Industry Players Discuss Portfolio Sizes and Expected Returns

With the rapid maturation of the debt purchasing sector, many issues have evolved for market participants. The Global Debt Buying Report, a new research report published by Kaulkin Ginsberg Company, addresses some of the issues facing debt buyers today.

This research publication is filled with quotes from industry leaders analyzing the state of the debt buying market worldwide. Below is a selection of quotes on two issues that directly affect debt buyers everyday: portfolio sizes and expected returns.

On current portfolio sizes

Walt Collins of Collins Financial Services: “Over the last couple of years, and even this year, the size of portfolio sales has certainly grown. This has forced us all to go out and seek more capital… Capital One is selling $5.7 billion dollars, and I believe their preference is to sell it to just one bidder. It has been chopped into three or four pieces and sliced into age… still, this is forcing firms like mine to find bigger capital sources, and it’s forcing smaller players to team up together to buy deals. A smaller player is not going to be part of this transaction.”

Chic Natkins of Oliphant Financial: “What we are seeing are some of the larger creditors selling a $500 million portfolio segmented into subgroups ? now it’s not just one portfolio of a specific type of receivable being sold, but various categories (secured, credit cards, secured loan deficiencies, private label) of debt bundled together for one sale and usually divided into smaller portfolios.”

Irving Levin of Genesis Financial Solutions: “I have noticed something this quarter that is different from last year… there was a lot of little stuff last year. This year, there have been fewer sales but they?ve gotten much bigger. Even the pieces of jumbo portfolios are bigger.”

Bruce Passen of Hilco Receivables: “I think we’ve seen increasing portfolio sizes across many sectors, but it’s been more predominant in the credit card sector.”

Craig Grube of Portfolio Recovery Associates: “I’d say the portfolios are definitely getting bigger. This is a trend that has evolved over time, but is but is becoming more pronounced because of consolidation at the issuer level. Where there used to be 20 major sellers of credit card paper, there are about 7 major sellers now, and this leads to larger portfolios being put up for sale.”

On expected returns on purchased portfolios

Mike Meringolo of NCO Group: “I think a realistic multiple is more in the 2-2.5 range today, rather than the 2.5-3 range. Increased prices have compelled buyers seeking to remain competitive to leverage every available means to extract value from portfolios and to do so on a cost-effective basis.”

Tye Hanna of West Asset Management: “West targets 2.2 ? 2.5 times purchase price over 60 month period, working into an unleveled IRR is in the higher 30′s. If you include financing charges of course this is lower.”

Craig Grube of Portfolio Recovery Associates: “Over the last couple of years the historic multiple has compressed. If you were doing a 4X multiple four years ago, I don?t know how you?re doing 4X now. Some folks who have invested in technologies and run a good shop have brought their cost down to the point where they can still have solid returns in an environment were the multiple has compressed.”

Scott Matte of RJM Acquisitions: “We used to do 3 to 1 in three years. If you asked this question three years ago, I would have answered that way. I think people are looking more at a 2 to 2.5 return in five years. This lower expected return has been caused purely by increases in pricing.”

David Kaplan of Resurgence Financial: “2.5X and 3X are unrealistic rates of return. The pricing has been going up across the board, and the quality of product we?ve been seeing has been going down. Overall liquidation is staying flat or going down slightly. This means your returns are going to be lower than they were a few years ago.”

This article was excerpted from Kaulkin Ginsberg Company’s newest research report, “Global Debt Buying Report: Experts Analyze the Worldwide Debt Buying Market.” To download a free executive summary of the 128-page report, please visit www.kaulkin.com/research/publications/dp/executive_summary.cfm.