Monday, 2 June 2014

Where next for debt buyers?

Over the last year, the debt purchase market in the UK has been dominated by the arrival of the large US debt buyers looking for new opportunities away from their increasingly regulated domestic market. The interesting point here is that regulation is also being stepped up in the UK, and the influx of lower cost funding into the UK market has only served to push up pricing which has further depressed IRRs for key debt buyers.

So, with the UK market, like the US, becoming increasingly competitive and more heavily regulated, debt buyers must now look to other markets to purchase assets at high IRRs. One theory behind the rapid expansion from the US to the UK is that buyers are, effectively, using the UK as a bridgehead into debt purchase in potentially more lucrative European markets.

Some of the larger UK debt buyers are already looking at the Spanish market and have started acquiring assets and, most importantly, building performance datasets. However, a more general expansion across Europe has yet to really begin. The key thing holding most debt buyers back is the lack of outcome data and liquidation curves in these new markets, which is a bit of a chicken and egg situation. It’s hard to invest without the data, but you can’t acquire data without investing and learning about the markets.

This leaves debt buyers with two choices for expansion into the European market:
  • Partner with or acquire local entities who have outcome data from previous purchasers or agency activity.
  • Seed a number of markets with low value (and preferably high account volume) purchases to develop datasets for a ramp up of purchasing in the future.
It will be interesting to see how the different purchasers approach the European expansion challenge over the next 12 months. I think the really interesting feature in all this is that whilst some European markets are attractive, it is the emerging markets on a more global scale that really offer the best long-term strategic opportunities. Debt sale as a tool is increasingly prevalent outside of the developed markets and without significant external competition, local purchasers are being created to meet demand.
The opportunity for significant global growth is there for debt buyers, but it will require much more than just a Eurocentric vision.

By Stuart Bungay, Managing Director - International Expansion, TDX Group.

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