The Old World – Europe – remains a polyglot. The collection industry is highly fragmented: Germany alone is home to some 700 agencies, and that country is considered a mature market. Uniformity is hard to find.
In spite of the creation of the European Union, which includes 27 member nations, there is no such thing as a "pan-Europe," sources tell CCR. Differing laws, languages, customs and attitudes continue to place obstacles in the way of consolidating the industry but consolidation is occurring and is expected to increase in the near term.
Kari Kyllonen, head of debt purchasing for Intrum Justitia, Stockholm, estimates "hundreds, if not thousands" of collection agencies and debt buyers compete in Europe. "Real pan-European players are few – 20 or 30 at most have operations in more than 10 countries," he says.
"Some big multinational groups have entered the Spanish market," Juan Jose Garcia, CEO for Adarve Corporacion Juridica in Madrid, tells CCR. Home-grown agencies "working in the premier league" number around 30, he says.
Regarding foreign investment, during the past three years or so, GFKL Financial Services AG – a German agency in which Goldman Sachs is a major shareholder – snapped up debt recovery firm Multigestión Iberia, Madrid; Lehman Brothers has a joint venture with Gesif in Palma; UK-based Cabot Financial Group bought a 20% stake in Gescobro S.L. in Barcelona; and Norwegian agency Aktiv Kapital purchased Treym International Collections S.L., Madrid.
None of these acquired Spanish firms are more than 20 years old, indicating that the accounts receivable management market there is less developed than throughout most of northern Europe.
Not One Market, But Many
Kyllonen agrees that probably 10 worldwide investment banks have had a hand in the European market. He adds Morgan Stanley, Deutsche Bank, Nomura Securities and National Bank of Canada to Garcia's list, plus private firms like Dallas-based Lone Star Funds ($13 billion in assets) and Minneapolis-based CarVal Investors ($16 billion).
There is growing interaction across borders, he says. "Lindorff [Group, in Oslo] has acquired collection agencies in Germany. Aktiv Kapital has bought local service providers in many countries. Cabot and Link [Financial, in London] have been both acquisition objects and acquirers," Kyllonen says, adding that there has also been "a lot of movement at the regional level."
Plenty of interest remains among international firms wishing to enter Europe and "funding is still adequately available," he says.
However, Kyllonen notes that Americans find it "difficult to understand that the European market is very fragmented and, for instance, the cost of capital is a country-specific issue. There is no general market price but country- and portfolio-specific prices."
Aside from such stipulations, opportunities for restructuring remain, he says.
Michael Weinreich, managing director for EOS Group in Hamburg, stresses: "There is no such thing as a pan-European market. Each country is subject to different legal restrictions and cultural peculiarities. Germany's collections market is a very saturated and mature market."
EOS has had substantial growth in Germany, "but only because we were able to convince clients [away] from competitors," Weinreich says.
In Germany's debt purchasing market, he says five to 10 "real bidders" consistently make deals. "The same names pop up repeatedly; many of them are international players." Throughout Europe, he says, between 20 and 40 buyers make up the top level of competition.
On the agency side, he estimates there are 10 major competitive companies. "It might go up to 20 if you consider medium-sized companies as well."
In terms of M&A activity, "I think we are in a consolidation period," Weinreich says.
Of Germany's estimated 700 agencies, "50 are ripe for sale based on their size." He cites Lindorff's acquisitions of Dausend Group in Cologne last December and of Aktiv-Inkasso Pleil AG in Heppenheim in March 2008.
"As the legal situation in Germany is very specific, it is not very attractive for outside countries to come in. It makes it difficult for foreign investors," Weinreich says.
He recalls that some American companies entered the German market and tried to apply their own rules.
"As a consequence, they suffered from a lot of negative press – and spoiled further opportunities with potential clients over here. I can only repeat: It is delicate and not so easy."
Weinreich recommends foreign investors partner with an established firm in the country "rather than taking it over. You would have to invest a lot of time and energy" to learn enough to operate in Germany competitively without such an alliance.
Nonetheless, "I expect that the German consolidation will happen," and EOS is "looking for opportunities to integrate other companies."
Lindorff Group is one of the consolidators. According to Tim Freeman, head of corporate development and M&A, the company operates in 10 countries from Russia to Holland and is seeking a larger footprint.
"Our current customers would like to see us present in more countries," he says. "They want to use the same service provider from country to country. There is a fairly developed and mature collection environment in the Nordic countries. We bring our processes to mature or immature economies."
A wave of consolidation marked the early 2000s, he says, the period during which two companies joined to form Lindorff. Private equity became interested in the industry because companies were reaching a scale where they had enough revenues and earnings to attract outside investment.
"The next wave of consolidation is beginning now. Middle-size and large agencies are starting to join forces," Freeman says.
For receivables purchasing, "probably only four or five companies compete for business across more than 10 countries," he estimates, "but within each country there are more. "During the UK boom in 2006, as many as 40 buyers were competing for portfolios," he says. "In another country, one might see only 10 to 15 companies bidding for portfolios."
Local Knowledge Helps
For collections, he points out that in many markets, "local presence is a key factor, particularly with small-business debts," a factor that may prevent nationalizing accounts receivables management.
However, private equity firms are scouting these markets for smaller players because the "bigger businesses are beyond the reach of private investors. Many of the sellers are family businesses needing capital to move on to the next stage," says Freeman.
Private equity "still sees the potential in acquiring companies," he says, because "the returns they can achieve are better than most financial services businesses."
Freeman echoes many of his peers when he says, "What stops some from going further is the fact that the EU is not just one market. It's still hard to collect across borders because of language and culture."
Another obstacle is that in many countries, legal collections is the primary method of recovery and lawyers need to appear in court. "One would have to have lawyers in each region. In Switzerland and Finland, collection is heavily legally oriented," Freeman says.
He agrees with Weinreich that foreign companies might be wise to partner up locally.
"You must use local people to be effective, especially local management," particularly since top talent is scarce. "It's a constant battle to fill all the positions we have." Poaching between rivals is nearly as common in Europe as it is in the United States, he adds.
TCM Group International Ltd., based in Leuven, Belgium, has a business model that is all about local partnerships. The company was created as a network of independent agencies. That network includes 36 agencies employing 3,000 people across five continents. It operates most heavily in Europe.
"For our clients, this structure offers several advantages," TCM Chairman Etienne van der Vaeren tells CCR. All claims are handled in the debtor's country by the local TCM Group office. "This provides local expertise and solves language and cultural problems," he explains.
The volumes exchanged across this network enable TCM Group "to analyze the quality of international work. We conduct an annual internal quality survey," the results of which prompt certain actions. For example, "poor performers get a chance to improve or are replaced," says van der Vaeren.
Lastly, "a strict code of operations ensures that TCM member agencies apply standards on a worldwide basis in terms of ethics and operational aspects." Standardization and central reporting are both important to clients whose debtors are spread across many countries, he says.
One-country creditors with few accounts that cross borders find they have to "rely on local lawyers who happen to have colleagues in the other country," who may be contracted to pursue the account. "It is not until we contact them [creditors] that they realize there is an efficient, economical and easy solution."
Van der Vaeren notes that "despite the EU, laws and usages vary a lot between countries, as well as collection practices – how they go about it and how they price their services." Some agencies "advertise they can collect anywhere; very few have an actual structure in place."
Europe, and even the EU, should not be considered as one homogenous market, he says. "Proceed on a country by country basis," Van der Vaeren advises. "Start with bigger countries, analyze its specifics, find the reasons why it is not as you expected, see what value you can add and then go for it. "The future will tell if buyers of companies can manage these country differences," he says.
Van der Vaeren offers a fundamental warning about the consolidation of debt collection and purchasing firms in Europe: "The profitability of these developments is not yet established."