The year 2017 might be the year mergers and acquisitions (M&A) activity finally returns to the beleaguered and overregulated debt buying industry. In 2014, both Encore Capital Group and Portfolio Recovery Associates (PRA Group) made multi-million dollar acquisitions. There was some M&A and recapitalization activity in both the United States and Europe in 2016. PRA Group acquired certain assets from Recovery Management Systems Corp., which complements its insolvency and bankruptcy businesses. In Europe, Lowell GFKL acquired Tesch Inkasso, which follows a previous acquisition of IS Inkasso, a large Austrian ARM firm. In addition, doBank announced it was acquiring Italfondiario SpA, both of which are leading ARM firms in Italy.
However, forecasts for additional growth remain limited. PRA Group CEO Steve Fredrickson noted, “Without a pickup in bankruptcy sales volume in the U.S. or an even larger increase in U.S. core and European portfolio sales, we’ll have to adjust downward our long-term internal growth rate goals.”
The onerous regulatory environment is largely to blame for this slowdown. Much of the current regulatory regime was borne out of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the formation of the CFPB. However, President Trump and the Republican-controlled Congress will most likely severely limit or dismantle these anti-competitive regulations. And once that happens, M&A activity and debt portfolio purchases will become more robust.
Donald Trump and the Republicans: Will We See the Oft-Promised Deregulation?
Trump’s famous campaign promise to “Make America Great Again” is partially rooted in a major overhaul of expansive federal regulations. One of the major targets is the Dodd-Frank Act, which was the aggressive legislative response to the Great Recession of 2008. This also produced the CFPB, which is the primary federal regulator and enforcement agency in the consumer finance sphere.
Executive authority over the CFPB was greatly expanded by the ruling in PHH v. CFPB, where the D.C. Circuit held the CFPB is not an independent agency and is therefore considered to be under the authority of the executive branch. This ruling essentially allows Trump to replace CFPB Director Richard Cordray. In fact, Senators Ben Sasse and Mike Lee recently sent Vice President Mike Pence a letter encouraging Trump to fire Cordray.
These regulations have had a direct financial impact on leading firms. In 2015, both Encore and PRA Group were fined $18 million by the CFPB, ordered to stop collecting on more than $125 million in debts, and refund approximately $61 million to consumers. While the charges were expansive, it is likely this aggressive enforcement regime will dissipate.
M&A Activity In 2017 and Beyond
It is expected to be a robust year for overall M&A activity in the United States. According to a recent Moody’s survey of executives, “75% of respondents expect deal activity to increase. And transactions may be bigger, with 64% of survey respondents expecting deal sizes to increase.”
The debt buying industry will likely experience an increase in volume as well. Deregulation is going to have the greatest impact on this increase. Regulations that extend liability to loan originators for the actions of third party debt collectors as well as a significant narrowing in permitted activities in debt collection have had a serious, chilling effect on deals.
2017 is going to be the year of change for all this. Trump is retaining fellow New Yorker, investor Carl Icahn, as a special economic advisor to identify and possibly eliminate federal regulations that impede business growth and economic development. And Dodd- Frank is in those cross hairs.
As many of the excessive regulations that overburden the ARM industry are brought to a more pro-competitive level, companies like credit card issuers will likely start selling greater volumes of debt. And since they account for approximately 70% of the debt buying market, improvement in this market will ripple through the entire industry. Another segment that will likely experience growth is FinTech and online lending. As millennials begin to take up more of the workforce and business owners, there will be a transition to mobile apps and alternative forms of lending. And this will create new areas of business for M&A activity.
These industry improvements may not be fully realized in 2017, and it might take more than a year to repeal the regulations developed over the years. However, as the Trump administration proceeds with its promised deregulation, it will become easier to operate and M&A activity will improve.
Michael Lamm, a co-Founder of CAS, oversees the firm’s M&A, consulting, valuation, compliance and regulatory practices.