Branching Out: Debt Purchasing Firms Expand and Diversify

March 10th, 2006

By Patrick Lunsford
Senior Editor, insideARM.com

As the industry rapidly matures, major debt purchasing players have been diversifying their corporate interests, service offerings, and even portfolio purchases. Successful debt buyers have become tremendously efficient in their core competencies and are now looking to expand their universe in search of increased returns.

Most of the M&A activity among debt buyers in the past few years has focused on bolstering core services.  Portfolio Recovery Associates (PRA), for example, purchased a skip tracing firm, IGS Nevada, in October of 2004.  There have been a couple of deals in 2005, however, that were executed to expand into additional market segments.

In August of 2005, PRA acquired government collection and service provider Alatax.  PRA gained a strong foothold in the high-growth sector of government collections.  In the deal announcement, PRA’s CEO, Steve Frederickson, commented, “Alatax represents an important investment for Portfolio Recovery Associates, providing us with entry into the large market for government accounts receivables management and creating yet another growth engine for the company.”

A new regulatory landscape was the impetus for a much more recent deal.  In early February 2006, Asta Funding announced the purchase of VATIV, a firm that provides bankruptcy and deceased account servicing.   While the company stated that the acquisition would help them to expand and diversify their service offerings, they also directly mentioned the Bankruptcy Reform Act of 2005 in their announcement.

The diversification trend is not limited strictly to M&A activity.  West Asset Management (WAM) announced a major purchase of distressed healthcare receivables in late January 2006.  The portfolio purchase itself was hardly major news.  But included in the announcement was an official launch of a new “Cash Acceleration Program” aimed at healthcare providers.  Under the program, WAM is offering a comprehensive healthcare receivables sales solution to hospitals and doctors, including options like forward-flow agreements and increased information sharing.  Also in the news release, WAM revealed that it has a 550-seat collection center in Texas dedicated solely to healthcare accounts.

Even traditional portfolio purchases have signaled a focus on expansion lately, if not diversification.  Encore Capital bought a $2.9 billion credit card portfolio from a CompuCredit unit in June of 2005.  Along with the portfolio, Encore landed a 120-seat collection facility in Minnesota and an agreement to purchase an additional $3.25 billion in face value of fresh credit card charge-offs.  And this was all in one transaction.

In an exclusive interview with PRA CEO Steve Frederickson last week, he told CollectionIndustry.com (now insideARM.com) that his firm did have expansion and diversification on its mind.  His words perfectly sum up the position of many of the leaders in the debt purchasing community:  “We view ourselves as an accounts receivable management firm in the broadest sense.  So over time, we would like to be able to service many — if not all — of the segments of the industry, whether we develop that capability from scratch, acquire a foothold by hiring a management team, or acquire a platform outright.” PRA has been very smart about acquisitions in the past, and Frederickson reiterated that point in the interview.  But it is clear that the major players in the debt purchasing world, the ones that have already had a high level of success doing what they do best, are looking to expandand diversify their offerings to facilitate even more growth.

For more news and information, please visit our debt purchasing section on insideARM.com.

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