Profiting from consumer debt

21 April 2008

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Knowing which businesses to back in a stuttering economy and a more illiquid environment requires greater caution, skill, foresight and luck than in buoyant economic times. With sterling hitting a record low against the euro, the property market suffering its biggest drop since 1992 and consumers tightening their belts in anticipation of more problems to come, finding the right businesses is more crucial than ever. With the ability to generate returns through leverage restricted, and EBITDA growth through operational restructuring largely dependant on external factors (and often the preserve of the few) seeking out multiple arbitrage situations becomes the priority

Enter Exponent Private Equity. A couple of weeks ago the mid-market firm acquired debt purchasing company Lowell Group, the obvious rationale being that as economic conditions deteriorate further, non-performing debt will rise and present a bounty for such companies. On the surface it is a no-brainer. Total personal debt in the UK exceeds £1.3bn and British residents owe twice as much in non-mortgage debt than other western European countries. Mortgage debt is estimated at more than £1.1trn. However, it may not be that simple. Delinquent debt is sold off because it is just that and, as the credit crunch hits the real economy and disposable income drops, consumers may decide that paying off debt becomes less of a priority. Barclays Private Equity (BPE) may have shown better timing by acquiring debt puchasing business Cabot Financial in January 2004 and selling in April 2006, generating a 3x return. At around the same time as the BPE acquisition Bridgepoint acquired 1st Credit for £72m. Bridgepoint has opted to hold on two years longer than BPE and is rumoured to now be looking for a buyer. Whether it finds a buyer - and whether returns figures are disclosed if so - will help determine who is calling the market most effectively. A definitive answer will not be known for some time.

Guy Hands has always talked the talk. Now he has shown he can walk the walk. Terra Firma's first annual report in line with Sir David Walker's transparency and disclosure guidelines, a 129-page tome, reveals a firm at ease with itself, its investment practices and private equity's role in the economy. With detailed information on investments, revenues, fees and remuneration the report goes beyond Walker's guidelines and calls out those firms which to date have paid only lip-service to disclosure issues.

Yours sincerely,

Nathan Williams

Editor, unquote"

Tel: +44 20 7004 7449

nathan.williams@incisivemedia.com.