Companies hunkering down as they continue to weather the storm of record low charge-offs, weak consumer balance sheets, inflation, gas prices with promises of “better” days ahead.
By CAS August, 2022
Driven predominantly by international transactions, as well as interesting technology entrants and capital raises, both deal volume ($575M in Q2 2022) and deal count (13 deals in total) in the accounts receivable management (ARM) vertical are up from Q2 2021 ($286M, 10 deals) and are up in volume significantly from Q1 2022 ($80M in deal volume). This increase is driven predominantly by larger international transactions, although we at CAS expect domestic deal volume and count to accelerate through the end of the year, as ARM companies are at an inflection point with the collection performance softness through the first half of this year. Changes are likely to occur in most asset classes but trying to time and predict the future proves to be an incredibly difficult task for anyone tracking the market.
In the accounts receivable management vertical, most companies are experiencing challenging starts to 2022, thanks to a variety of factors impacting consumers. As a whole, the cost of living for Americans has gone up dramatically. One could point to inflation, gas prices, outstanding credit, and a cooling housing market and draw a logical conclusion. Moreover, consumers have less money on their personal balance sheets today to pay down debt.
One interesting trend to note is the rapid rise in auto repossessions noted by Barrons, as consumers are experiencing sky rocketing loan-to-value ratios and loans that were underwritten, taking into account increased income levels from government stimulus. Some people are viewing this a proverbial “canary in the coal mine” for the economy. We at CAS are watching this trend closely, as is the CFPB, as they issued a compliance bulletin prior to this rapid rise.
CNN provided a fairly robust market sizing and interesting data points to note on the buy now, pay later (BNPL) vertical. The current reality is that these point-of-sale installment loans are not yet being accurately accounted for by the Fed, credit bureaus, lenders, or any other data aggregator. The best estimates provided assume somewhere in the $100B annual spend via this lending channel. For comparison, the auto loan market is sized somewhere in the $1.46 trillion range, per LendingTree. The differences in underwriting a car loan versus the current spend in BNPL is considerable. More and more consumers are using BNPL for everyday items, per the CNN report. From our vantage point at CAS, we anticipate the BNPL vertical to also begin to show cracks as one of the potential leading indicators in negative economic performance/pressure.
Predicting any timeline around when the charge-off volumes will grow is a fool’s errand, but we feel the situation is inevitable. Increased charge-offs will lead to increased opportunities in the vertical for the survivors, those who are able to weather the storm of the shift to lower cost operating models (i.e., digital collection strategies, increased revenue per employee, scale, etc.). Other companies should consider their options and an appetite for continuing a bumpy ride with the various rulings/signaling from the CFPB.
Ophelos, in the UK, raised capital to challenge what it considers to be poor practices in the debt collection industry. We anticipate investor interest to remain strong in the industry, as it is viewed as counter-cyclical or stable during a period of economic downturn, given increased charge-off volume. Another noteworthy company who is upstream from a debt collection company like Ophelos is Tesorio, who raised money to help businesses automate the accounts receivable process. Tesorio relies on AI capabilities versus the “tribal knowledge within the accounting team.” This accurately sums up the pain points in dealing with certain companies and asset classes; thus, solving this problem via a software solution versus a traditional service model will be interesting to monitor.
Noteworthy transactions
The Bureaus, Inc. acquired Logicoll
IK Partners sells Recocash to Qualium Investissement (French deal)
Thomas Crown, Inc. acquires Rainer Collection Services
