Debt Buyers’ Growing Interest in Alternative Asset Classes
Alternative asset classes have long been an interest of a niche group of debt buyers. But now that niche is being widely expanded.
As the market for the purchase of credit card debt has grown more crowded, debt buyers have turned to alternative asset classes in hopes of sourcing less expensive and potentially more profitable consumer debt portfolios. In particular, bankruptcy receivables, telecommunications receivables, automobile deficiencies, and healthcare debts have attracted the attention of debt buyers with increasing frequency.
While the credit card sector continues to generate the most activity for debt buyers in the U.S., larger and specialized debt buyers in the U.S. have begun to search for alternative debts that allow them to diversify their portfolios and purchase debt in less competitive environments.
Debt buyers bought an estimated $3 billion in bankruptcy receivables in 2005, given the steady cash flows afforded by bankruptcy paper and revisions to the U.S. bankruptcy laws.
An estimated $5 billion in telecommunications receivables was sold in 2005, although the higher volume and lower account balances associated with this paper have challenged new entrants, including some of the largest debt buying companies.
Auto deficiency paper saw an estimated $2 billion traded in 2005. These debts vary in important respects from other consumer receivables because they are legally associated with a hard asset: e.g., the car or truck for which the delinquent loan was created. This has important effects on the collection process, as well as the purchase and sale of debt portfolios.
Healthcare debt is considered by many to be the ‘big prize’ of the debt buying market, given its enormous and largely untapped market. The purchase and sale of healthcare debt is also highly unique, requiring special resources on the part of debt buyers entering this space.
The success of companies within these sectors and the recent growth of the sectors themselves reflect the overall benefit of specialization within the debt buying market around the world. Companies develop competitive advantages in this field by sourcing portfolios from a certain type of creditor and collecting on a certain type of debt. This is particularly true when debt buying activities involve alternative asset classes.
This article was excerpted from Kaulkin Ginsberg Company's research report, "Global Debt Buying Report: Experts Analyze the Worldwide Debt Buying Market." For more information on the report, please visit http://www.kaulkin.com/research/publications/dp/. This publication is also available to Strategic Members of insideARM.
As Director of Research Services for Kaulkin Ginsberg Company, Paul Legrady oversees custom research projects and publications focusing on the accounts receivable management industry. Previously, Paul served as Research Manager of Thomson Financial, a leading provider of market information to the worldwide financial services industry, and as Research Manager of Term Sheet Intelligence, a provider of market research about venture capital transactions.
Paul has also served on the investment team of the venture capital firm New Vantage Group, where he reviewed business plans, interviewed business managers and performed due diligence on companies raising capital. He received his MBA from Georgetown University and an undergraduate degree from The College of William & Mary.
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