Friday, 4 October 2013

Enhancing the auction process – how portfolio analysis adds value in a debt sale

This is the second post in our series that offers 'a fresh view' on the debt industry. They are the thoughts and observations from colleagues who have recently joined TDX Group.

Liz Crosland-Taylor joined TDX Group in March 2013 and works in our Advisory team. Here she shares her thoughts about how a debt sale has similarities to being at an auction. 

For the past few couple of months I have been working in our TDX Debt Sale team. I remember my initial reaction when I was briefed on the debt sale function – confusion, along the lines of… so, people actually pay money to obtain debts?

But quickly, this began to make sense. I see that the function of debt sale has similarities to being at an auction – in fact, purchasers do actually ‘bid’ for a portfolio, or segments of it. But, just like at an auction, how do bidders and sellers ensure they buy or sell the right lot for the right price? I suppose it all comes down to the varying perception of value, and how we can create and maximise it.

One thing that intrigues me at auctions is the mixed lots – a mystery box of china or glassware. These don’t usually have estimates, rarely have reserves, and it’s up to the buyer to establish what the value is worth to them.

However, some buyers might not have the time or inclination to visit and research into the contents of the lot. They may rely on the auction house to have noted one named piece of interest in the lot description, and take a chance with the rest… And they may rely on that named piece being authentic, or request the auction house buy back. Usually, the risk in this situation would result in the purchaser placing a low value on the lot.
It’s these principles and experiences that I see reflected in the realm of debt sale.

I would rather pay a little more for the items that I know and want, and less for a mixed lot that includes items I am not interested in – and an awful lot less when I know very little about the items on sale! I would prefer to avoid overpaying for a lot and realising I have obtained a significant number of items that are undesirable to me. That would cost me – literally – in deciding where I put them and how I get rid of them, and cost me in the time it takes me to do so too. This ‘unknown mixed lot’ can essentially be considered largely unattractive and of low value.

It can be similar in debt sale. Everyone has the prospect of realising greater value when given the opportunity to purchase accounts they are specifically interested in, and have greater knowledge of. When the time and effort is taken to carry out analytics, appropriately segment a portfolio and do sufficient research to produce a detailed marketing pack, it yields strong positive results for all parties.

So, returning to the auction process, perhaps sellers should take a leaf from our book? - become more profitable by segmenting their mixed lots, or spending a little more time researching and documenting the contents, helping to achieve higher prices? But then again, I realise not everyone would have an existing structure or the resource to make that into a viable commercial action. Working in TDX debt sale, I have seen how we provide a service that adds value for both the sellers and buyers of debt – it’s just a shame there isn’t an equivalent for me to take advantage of at the local auctions.

Liz Crosland-Taylor, Consultant, TDX Group

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