Tuesday, February 23, 2010

Whiskey on a Troop Train

An early mentor of mine, when unimpressed with someone’s ability or job performance, used to quip: “He couldn’t sell whiskey on a troop train!”

There are (at least) two things in the current economy that are widely assumed to be as easy as selling whiskey on a troop train:

1) buying distressed real estate in markets like Las Vegas when you’ve got the cash to close immediately, and

2) putting money to work in the SMB (small-to-medium sized business) market.

In the first case there has been such carnage and the outlook remains so glum that the idea that you’d have a hard time BUYING rather than selling just doesn’t seem credible.

In the second, the news has been so full of stories about the lack of financing for small businesses that it is assumed that anyone willing to provide financing to that market should have no trouble.

I thought of my old friend this morning when I read the article in the Wall Street Journal (p A3) headlined “National Housing Bargains Drying Up”. The article chronicles the difficulties that prospective buyers of foreclosed houses are facing today.

If you’re willing to look for bargains in inner-city Detroit, they can be found (depending on your definition of “bargain”). But in places where you might really want to live, the supply is “dwindling” and “bidding wars are the norm on foreclosed homes”.

In the SMB space, the bankers who have been pilloried for dramatic reductions in business loans have argued that:

1) part of the reduction in lending reflects reduced demand. Business is slow and so business spending is down and loan demand is down, and

2) the portion of reduced lending that reflects tightened standards is justified by the increased risk that weaker loan applicants pose.

I confess that a year ago, when the banks were pulling back as quickly as they could, I thought that ramping up volume in the receivables finance business was a pretty sure bet. But I have to admit that the bankers’ arguments are more valid than not.

I’d state it this way: while lending has become more restrictive and the SMB market is suffering from a lack of liquidity, risk-adjusted financing demand IS actually down.

That doesn’t mean that total demand is down. I don’t know that to be the case. But I think it IS true that the overall quality level of the business that is available is lower than it was, say, two years ago.

When I talk to people about TRE the common reaction reminds me of my old friend. In effect, they say: how hard can it be to put money to work when there’s no one else out there willing to provide capital?

Well, I wouldn’t have thought it would be hard to buy a foreclosed house in Las Vegas, either.

Anybody can put money out. The trick is getting it back!

The growth of TRE, I suspect, has NOT been helped by the financial crisis, as counter-intuitive as that might seem. Because the TRE Buyers DO want their money back and WILL (generally) exercise a reasonable degree of prudence in determining what to bid on and how to price their bids.

I think the crisis has actually acted as a pretty strong headwind for TRE in its first 15 months of operation.

Finding QUALIFIED sellers is a tough job in this market. It is NOT like selling whiskey on a troop train.

It’s probably as hard, in fact, as it would be to keep whiskey OFF a troop train!

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