On the face of it, the buoyant economics of the U.K.-based debt purchase market do not look sustainable. In the aftermath of the financial crisis, the market grew impressively fast as banks and other financial institutions sought to offload distressed consumer loans. But with demand starting to outstrip supply, the prices of loan portfolios have risen and debt purchasers’ profitability, as measured by the internal rate of return (IRR), has fallen.
The situation is reminiscent of the financial crisis in 2007, where demand also outstripped supply. The consequences were severe and the market collapsed. Given the headline similarities, could the market suffer the same kind of collapse again? Or are things different this time?
In their second Executive Insights on this topic, L.E.K.’s Peter Ward and Eilert Hinrichs explain why they believe the U.K. debt purchase market is sustainable this time around. Since the crash, debt purchasers have changed in two fundamental ways. Firstly, their capital structures are very different to those employed in 2007, and secondly, collection strategies have become much more sophisticated. These two factors are huge advantages to the leading debt purchase companies, enabling them to profit from new opportunities in the market.
The outlook is positive, but debt purchasers can’t afford to be complacent. L.E.K.’s report highlights three principal aspects of their business they should focus on in order to succeed in the U.K. debt purchase market.