The Price of Perception

I’ve written in prior posts about Buyer-pricing that has seemed to me to ignore the risks that are inherent in the activity of invoice purchasing.

It is one thing to comment on the absolute level of return implied by a particular transaction. It is another to look at the range of returns implied by pricing within an array of transactions.

In the past few days of trading we’ve seen a very wide spread between the best terms offered to Sellers and the worst terms. Some of that spread is explained by the relative experience of the Sellers on the Exchange. Some of it is explained by the relative strength of both Sellers and Account Debtors. Some is explained by the pattern of transaction volume presented to Buyers recently.

But, whatever the explanation, I thought it would be interesting to just consider the size of the spread in pricing between the lowest implied cost of (return on) funds and the highest.

I’m not going to use absolute numbers at the risk of running afoul the Exchange’s rules on disclosure.

And the numbers that I’ll use are those I estimate to be the likely, annualized net return to a Buyer after all costs charged to the Buyer by TRE. The model I use to calculate expected net annualized return is sensitive to: transaction size, duration, advance percentage and monthly discount rate; and it incorporates all TRE-charged fees and costs including such incidental items as wire transfer fees.

I will not disclose the actual fee schedule charged to Buyers by TRE but, as I’ve written before, it acts to penalize returns when transactions are closed-out quickly. So a combination of small size, high advance, low discount rate and fast close-out produces the lowest net annualized return.

In order to avoid disclosing actual numbers, I am going to establish the lowest implied pricing of the last few days as the benchmark with an “index” value of 1.

That says nothing about the absolute return—it just means that it represents the lowest annualized return produced by putting the terms of the transaction into my little model.

If inputting the terms of another transaction into the model produced a value of 2, that would mean the expected net annualized return on that transaction is double that of the index transaction.

So, what was the range of implied return expectations on the deals done over the period examined?

Take a guess.

The answer is 5.6.

That is, the deal that generated the highest implied return expectation to the Buyer had an expectation 5.6 times that of the deal with the lowest implied return.

That’s quite a spread!

But, in my view, that is very good news. It means that the Buyers are recognizing and demanding compensation for differential quality and risk perception.

There are many days on which this kind of analysis would produce a much narrower differential. And, again, I’ve said nothing about the absolute level of return expectation.

But this particular period provided the data to make the point pretty dramatically.

TRE Buyers ARE currently discriminating on the basis of perceived quality differential and TRE Sellers, whether happy about it or not, ARE closing deals that recognize the difference in Buyers’ quality perceptions.

Those are both healthy signs!