Wednesday, February 29, 2012

A Little Off Balance

It’s been another month of half-written, then discarded posts. That might reflect, in part, my own uncertainties about TRE but I think it’s actually more a matter of the transitional nature of the times. My sense is that things are just a little off balance.

What’s transitional in TRE-land? A number of things:

--The increased volume that we saw last December, which represented a significant break-out after a plateau of many months duration, has thankfully persisted. It appears we have a new baseline volume that is about 50% higher than the former baseline. (As I write this I think it’s already fair to say that February will have set a new monthly volume record.)

--Average auction size, which also spiked last December, has also maintained its new level. In fact, the increased volume is almost solely attributable to increased average auction size, not to an increase in the number of auctions sold.

--The increased average auction size reflects the activity of a number of new Sellers whose businesses are much larger and whose auction appetite is much larger than the previous average Seller. Volume is more highly concentrated as a result, however, which has its own issues.

--Increased average auction size has meaningful implications for a Buyer's ability to construct a diversified portfolio. The opportunities and constraints are different for those who can buy 100% of the average auction versus those who cannot.

--We are still digesting the impact of the risk mitigation measures that went live last November. And by "we" I mean both Buyers and Sellers.

--We are still digesting the impact of the fee changes that took effect on January 1. (Same "we".)

--We have just begun to see the first of the new Sellers that would not have previously met the TRE registration criteria but do meet the new “smaller Seller” criteria.

For those who have watched the daily auction activity for any significant length of time, I think some changes will have been noticed during the first two months of 2012. It appears that an intra-month cycle of sorts might be developing, partially as a result of the structure of the risk mitigation program, for instance.

Whether those changes will persist is open question.

Whether the experience of this past 60 days will lead Buyers to react somewhat differently over the next 60 days is also an open question.

But things have been changing and I have a sense that many of us are feeling our way through those changes at this point. Which is the real cause of my relative silence – I’ve just not been sure what I’ve wanted to actually put in writing!

But there are some just straightforward factual issues that can be noted:

1. Weighted average returns to Buyers have been falling even as the spike in volume has persisted.

2. Pricing parameters have been migrating toward a band that shows much less recognition of Seller-quality differential.

3. (Some) Sellers have apparently not yet fully grasped the impact of the risk mitigation program.

4. New SMB Sellers have been appearing at a consistently more rapid pace than was the case at this time a year ago.

5. Corporate auction activity has increased in a meaningful way.

6. Organizational and operational changes continue to be made that seem to me to reflect a commitment to long-run business-building. TRE appears to me to continue to invest in its future even at the apparent expense of the near-term cash burn-rate.

7. According to my records, in February, TRE marked its 10,000th auction sold. (My records are missing a small bit of early data but not enough to shift the date of that milestone into January.) That’s a piece of data that I haven’t yet seen in a press release.

The issue of Appropriate Compensation is still very much on my mind and the question of the true value of (versus the cost of) the risk mitigation program is also very much still open.

Unfortunately, answering those questions remains very difficult because the answers are necessarily dependent on volume and actual measured risk.

Solutions to some problems come only at certain not-yet-attained volume levels. Projecting when those levels will be reached is an uncertain enterprise.

Solutions to other problems will come only with certain not-yet-available risk measurements. In that case only time will really tell.

So, we wait and watch. And some of us continue to buy. [We recorded our 750th purchase a couple of days ago!]

It’s interesting to note that the concept of an auction market for receivables is one that continues to attract attention and investment both in the US and abroad.

--The Market Invoice platform in the UK is the only such effort that I'm aware of that has actually generated a meaningful operating history. It has been active for over a year. While volume is not large, it is growing and participants with whom I’ve spoken have been pleased with initial results.

--The Receivables Market platform here in the US has been in development for some time but does not yet appear to be operational. An attempted launch over a year ago seemed to be stillborn but RMC has recently begun to reach out for participants and a good deal of work has been done on their website. From what I can see, though, it cannot be called a “trading platform” at this point.

--The EuroTRX platform in the UK is targeting a late-2Q launch and appears to be the most TRE-like of the new market entrants. EuroTRX appears to have studied the TRE model closely and to have identified several significant differentiation elements that they will attempt to exploit. My sense is that EuroTRX will have the edge over other new entrants if they are able to translate their concepts of process and structure into reality.

I continue to believe that that the concept of TRE was, and is, an excellent one.

First movers have to solve all the problems of a new business. Those who come later get to leverage the experience of the first movers.

One of the most important qualities of the first mover who wants to survive is flexibility; principally the flexibility to recognize when an initial idea is not working and needs to be changed.

I think it can be said that TRE’s initial concept and vision is essentially unchanged and is being validated; perhaps more slowly than initially hoped but nonetheless…..

It’s also fair to say that there have been a number of areas of implementation that have tested the flexibility of TRE’s management.

In many cases the need to change has been recognized quickly and responded to promptly.

In other areas, both recognition and response have taken longer; sometimes too long.

In still others, recognition might not yet have occurred.