Four reasons why one Receivable Auction Investor quit

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Auction markets for invoices intrigue me.  On the one hand, I wish I could invest my Money Market fund proceeds into short term trade receivables to get a much higher return than the 20 basis points banks or fund provide on short term liquid investments.  On the other hand, I recall trying to buy on eBay auctions only to find in the last 30 seconds someone outbid me for a desired item.

So I checked in with an investor to get their perspective.  Their interest in theReceivablesExchange (TRE) had been in its potential to support an asset management business whose revenues would be generated from investing in TRE auctions on behalf of those who would pay a fee for the service.

They did this since TRE’s inception in 2008.  What they found after  four years of trying is they could not create a feasible business proposition.

There were four main reasons my contact decided to quit buying receivables on the TRE site:

  1. The first had to do with a much slower than expected volume ramp up.  TRE’s small business volumes at the start were disappointing and took some time to get to a lever to support investor scale.
  2. The returns from TRE auctions were roughly half the level from when they first started.  In essence, besides not having enough deals, there was too much money chasing too few deals and down bidding the price.
  3. It was difficult to authenticate seller invoices, and even though TRE had recourse rights to the seller, there were instances of invoice value inflation.
  4. Finally, this investor felt the management change that happened circa 2012 (when the original founder Justin Brownhill left and GE Capital guys came in to run the entity) introduced organizational and management risk.   What transpired is TRE decided to deemphasize the small business focus and instead focus on their Corporate Receivables Program to potential sellers, including New York Stock Exchange listed companies as part of their joint strategic initiative with the New York Stock Exchange.

 

This is not to say that auction markets will not be successful.  I have written about Platform Black.  But creating a market is very difficult.  You have to satisfy both the Buy-side and Sell-side while ensuring the service provider can make a profit.  It can be done, but no one said it would be easy.

 

Voices (4)

  1. Pat Snippley:

    Not really a comment so much as a technical correction regarding—”In essence…there was too much money chasing too few deals and down bidding the price.”

    When discussing this scenario for such an asset, competing buyers aren’t bidding DOWN a price…they are bidding UP the price. It’s the (required) YIELD on the asset that gets bid down in this scenario…

  2. David Gustin:

    Hi Fabien

    Thanks for your thoughts. I think while TRE did a positive proof of concept for receivable auctions, no one felt comfortable to underwrite Seller Risk – you had no time. For Seller to qualify, you need data. I think they were on to something with Ariba but they could not make it work.

    There are many ways to skin a cat, and many ways to host auctions. The NY stock exchange is one example of a completely open market, but you can have various private network models (single lister, single investor, etc.).

    So far we are in the early days, lets hope this method proves a viable alternative lending option for small business.

    Cheers, David

  3. Fabien Jacquot - Corporate LinX:

    David, there is another way of organising successful receivables auctions. I will take the 4 points you have used to highlight TRE’s flaws:
    1- Receivables auctions can be challenging to a large group of small businesses. Therefore, in order to et traction and volume, best to convince initially big suppliers to join the scheme
    2- “Too much money chaing too few deals”. Initially, investors could bid for partial of full value of the auctions but could decide to opt out, should they not want to fund on a particular day. The system needs to demonstrate that the more investors are biding, the volume grows everytime.
    3-Non recourse funding is more manageable as it also creates receivavles auctions as an “off balance sheet” financial facility
    4-Cannot comment on this point but will conclude in saying that receivables auctions can work if the benefits are easy to grasp for all types of suppliers, legal document easily comprenhensible and a system allowing easy sale of receivables as well as irrevocable for a greater impact on vendors’s books.!

  4. Fabien Jacquot - Corporate LinX:

    David, there is another way of organising successful receivables auctions. I will take the 4 points you have used to highlight TRE’s flaws:
    1- Receivables auctions can be challenging to a large group of small businesses. Therefore, in order to et traction and volume, best to convince initially big suppliers to join the scheme
    2- “Too much money chaing too few deals”. Initially, investors could bid for partial of full value of the auctions but could decide to opt out, should they not want to fund on a particular day. The system needs to demonstrate that the more investors are biding, the volume grows everytime.
    3-Non recourse funding is more manageable as it also creates receivavles auctions as an “off balance sheet” financial facility
    4-Cannot comment on this point but will conclude in saying that receivables auctions can work if the benefits are easy to grasp for all types of suppliers, contractual document can be comprehended without an army of lawyers and if the sale of receivables can be easy to trigger but also irrevocable on suppliers’ books.

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