Are back book buy-outs the future?

The debt industry has experienced a lot of change over the last few years, both as a result of more stringent attention from regulatory bodies such as the Office of Fair Trading (OFT) and also because of an increasing amount of self-scrutiny.

A significant number of companies were shut down after the OFT’s compliance review a year ago – 61 either had their Consumer Credit Licence revoked, an application for a licence refused or were asked to surrender their existing licence. Whilst this has had a considerable influence on the number of players within the industry, the trend of consolidation has also started to have an effect on the number of companies operating in what some might view as a fairly saturated market.

Big-name companies are continuing to buy the back books of smaller organisations, who are seeing their margins shrink as a result of capped fee structures and an increasing need for compliance.

One of the companies active in the acquisition arena is MoneyPlus Group (MPG). Backed by Palatine Private Equity, MPG has completed four acquisitions in the four months since its management buyout and has added more than 5,000 IVA and debt management cases to its books.

The company has not only acquired three customer back books, including those of Manchester-based Byrom & Keeley and Debt Solver, but has also acquired Cardiff-based debt management firm EasierDebt. The company will continue to operate its debt management services, as part of MPG.

Palatine backed the management buy-out of MPG in June 2011, with support from PNC Business Credit, and has stated that it will continue to support the growth of MPG as it looks at further acquisitions.

Chris Davis, CEO of MPG, said: “The last four months have been a busy period for all at MPG. We are delighted to have completed the four acquisitions in just over four months and have already integrated all the consumers onto our platform.

“We are particularly pleased with the acquisition of EasierDebt, which, as founder members of DEMSA, is one of the most respected companies in our sector. This activity underlines the ability of MPG to identify, negotiate and complete successive successful acquisitions. As such, we are continuing to work with Palatine to achieve our growth strategy and ultimately become one of the largest companies in our sector.”

Ed Fazakerley, partner at Palatine Private Equity, also commented on the acquisitions, “When we backed the management buyout of MPG, the strategy was to grow the business both organically and via acquisitions. We are delighted that the team has been able to complete and integrate these deals so quickly and there are a number of further acquisition opportunities currently being considered.”

Another company active in acquiring back books is FairPoint Group, which includes Debt Free Direct. Steve Walker, Managing Director of Promise Solutions, told us a bit about his experience of consolidation in the market. “We were approached speculatively by approximately eight potential purchasers about selling part of our Debt Management back book,” he said.

“A partial sale was one of many strategies we were considering but had decided not to sell until our landlords announced they were demolishing our offices and served notice to quit. Lawrence Charlton, which is part of the Fairpoint Group, offered us significantly better commercial terms than others and the whole deal made good sense for us and our introducers, who also received a lump sum.

“Lawrence Charlton was also very flexible and extremely proactive with our teams working well together in handling the transition. This was important as we wanted to ensure that our infrastructure and retained clients were not affected as we have continued to offer Debt management and associated solutions.”

When asked if he thinks these acquisitions are set to be a continuing trend, Steve explained: “I do think consolidation will continue to increase in the future; since we agreed the deal (which is months ago now) we have continued to receive many calls from companies still enquiring about buying our back book. I think this is because it is now more difficult to generate new debt management business: firstly because the market has become over-crowded, and secondly, because the OFT has set out its stall very clearly in terms of how it expects debt management companies to behave. 

“Those companies which intend to generate and process debt management enquiries correctly and compliantly will find it more difficult to compete with those companies that choose to take a more cavalier attitude and avoid giving consumers the balanced view required under the  OFT guidance.”

Alasdair Warwood, Secretary General of the Association of Professional Debt Solutions Intermedaries (APDSI), commented: “Consolidation amongst the debt solution providers is inevitable and mirrors what we have seen in the debt collection and debt purchase sector over recent years.

“We have seen many of the debt solution businesses broaden their range of services to become all-round providers, including debt management, personal insolvency, financial services, income optimisation and, in some instances, PPI reclaim services. Some of this has been achieved by acquiring niche and specialist businesses outright. Some companies, backed by private equity firms or on the Alternative Investment Market (AIM), need to be seen to grow and diversify.  

“Acquiring new clients in a tough market is very expensive, so taking on ‘back books’ from other reputable providers can create major economies of scale in terms of payment distributions to creditors and managing tens of thousands of indebted clients requiring on-going reviews where changes in circumstances are commonplace.

“The leading exponents of this are members of DEMSA and DRF, so newly acquired clients will be subject to a strict Code of Conduct and the their best interests should be of paramount importance. This requires close collaboration with creditors to ensure that Debt Management Plans are transferred with minimal risk of consumer detriment.”

By Miranda Atty