Business As Usual

I started buying TRE auctions on June 1 of last year. The Exchange was still in its fairly early days of operation and each new auction posted seemed to represent something of an event.

There were two days in the first half of last June, in fact, on which no auctions closed. It certainly seemed at that time that there were more dollars seeking auctions than there were auctions to bid on. So “losing” an auction was, at least for me, kind of a big thing.

There have been many changes in TRE operations and dynamics since that time. By my count, over the same period in June of this year there have been five times as many auctions sold as last year and the average daily dollar volume has increased by a similar factor.

The number of Sellers has continued to increase and, while there are quite a few that don’t make it through our screen, there are quite a few that do. There is now a significant number of Sellers, in fact, that I’m quite pleased to buy from.

One of the happy consequences of the continued maturation of the Exchange is that it no longer feels like such a big deal when an auction is “lost”.

A year ago, the process of analyzing a Seller; analyzing it’s Debtor(s); reviewing the invoices posted; considering the past auction history; deciding to bid; and then actually placing a bid; represented not only a significant investment of time and energy but had an emotional component as well.

It represented a serious commitment. To fail to win an auction after all that actually felt something like a failure.

Well, times have changed. I “lost” two auctions yesterday that I bid on actively. I liked the Sellers. I liked the Debtors. I’d had good experience with each and I offered competitive pricing—actually a series of increasingly competitive bids.

And then those auctions, that I really assumed I was going to win, were just gone; snapped up at prices that I suspect pleased the Sellers quite a bit but left me empty-handed.

But here’s the point……

I didn’t get THOSE two auctions--but later in the day I got two others.

And I know that the Sellers of the auctions I lost are likely to be back very soon and I’ll have another opportunity to buy some of their invoices.

It’s no longer an “occasion” when a good auction is posted for sale. It’s business-as-usual. If I miss one today I’ll have another chance tomorrow.

On the other side of the coin, if a Seller has to pay a little more today because of the dynamics of this particular day’s activity, he can probably count on evening the score on a day when the Buyers are feeling the pressure to put money to work.

In short, what was a novelty a year ago is not a novelty today.

When I log onto the TRE platform tomorrow morning I will have every expectation that I’m going to have the chance to do some business.

Some days will be better than others. You win some and you lose some.

But that’s what a market is about, right.

And that’s what the Exchange has now really become.

Rational Irrationality?

Ori and Rom Brafman, in their fascinating book: “Sway: The Irresistible Pull of Irrational Behavior” write about an experiment used by a business school professor on the first day of each new semester.

He auctions off a $20 bill to the students in his class.

Sound simple? At the time the book was written the highest price paid in those auctions had been $204!

Now there’s nothing special about the bills themselves; there’s no rarity value involved. So why would anyone be willing to pay any more than $20 for a $20 bill?

The answer lies in the motivation of the bidders, which reflects the rules of the auction.

In these auctions the winner gets the $20 bill BUT BOTH the winner and the runner-up have to pay what they’ve bid.

The bidder who comes in second has to make good on his bid, but he gets nothing in return; while the bidder who “wins” has to pay up, but at least he gets the $20.

So the motivation is not actually winning the auction, it’s avoiding the greater cost of losing the auction!

When I find myself unable to explain in any rational terms the actions of an auction participant I have to step back and remind myself that what appears to be irrational might be irrational only from my own frame of reference. The “winning” bidder might be operating under rules or influences, unknown to me, that explain his actions quite clearly.

At this stage in the life of The Receivables Exchange there are too few auctions involving too few Buyers to allow us to confidently equate value and price. And it is certainly too early to assert that price and risk are in any way firmly associated.

As we wrote in our post of August 19: “One Buyer with a perceived ‘need’ to put money to work in any significant quantity could easily … create a pricing environment that is not informed by any real risk assessment.”

The actions of such a Buyer might be primarily motivated by the desire to avoid the perceived “loss” incurred by not deploying allocated funds. In that case the loss avoidance behavior is captured in winning a certain quantity of auctions essentially regardless of price or quality. The perceived “loss” of failing to win is greater than the potential loss created by paying essentially whatever is asked or failing to assess the risk assumed.

In that type of environment, the price at which auctions are won is not a valid measure of value. Bidder behavior is driven by something other than the value of the item being auctioned.

The professor in the Brafmans’ book found that in almost every $20 bill auction, most participants realized when the bidding got to the $12 to $16 range that the correct decision, even at a level still below $20, was to withdraw from the auction.

While either unknown motivations or non-economic motivations control market action, the rational response is just to “hide and watch”.

"You've Got Bank!"

Have you heard the ads that some banks are running on the radio these days? How your banker really, really understands you and is on your side, working nights and week-ends to make sure you get great service?

Please……….

If you have a small business, or even a pretty good-size business, going to your bank for financing is as pleasant as a root canal…and the odds of success these days are much lower.

The Receivables Exchange provides a truly unique alternative to traditional financing. It is not a borrowing. It is a sale of an asset. You are converting one asset…money due to you from a customer…to another asset…cash.

A Seller on TRE can choose which of its receivables it wants to sell, when it wants to sell them and how much it wants to pay for the ability to convert the bulk of that receivable into cash.

Of course, the Seller has to meet certain qualifications. The companies that actually owe the money have to agree to re-direct payment to the TRE lock-box. And there has to be a Buyer willing to bid on the receivable you want to sell.

But the qualification process appears to be reasonable and timely. I’ve already written about the benefits of the lock-box arrangement. And I understand that over 99% of the listed auctions are ultimately funded. That doesn’t mean the Seller got the terms requested; but the terms were apparently acceptable…because an agreement was ultimately reached.

The truly dazzling feature of the process is the speed. I have seen TRE transactions disappear from the auction list in, literally, a matter of seconds!

Imagine… as the owner or the CFO of a TRE Seller you determine you need some cash. You select a receivable due from a pre-qualified customer. You post the receivable for sale on TRE, specifying the pricing you’d like to obtain. Your desire gets communicated to all TRE Buyers, who are then able to bid on your receivable. When a Buyer makes a bid, you see it immediately and, at your option, you can accept it or wait for a better offer. When you do accept an offer the auction is closed and both parties are notified of the agreed-upon terms.

Now, I’m a Buyer, not a Seller, so I don’t actually know what message the Seller gets when an auction closes. But in effect the message is….

“You’ve got Bank!”

You’ve requested financing and gotten a commitment for essentially immediate funding, on terms that will not be changed by someone higher up the chain. And you’ve done it without ever having to talk to a banker.

How cool is that?