Year by year, Arrow Global has swiftly grown to become one of the UK's largest debt buyers, with nearly £3bn of assets under management. Its chief executive and chief investment officer describe a rapid journey
"Every debt buyer has to go on a journey into his soul as to what he is." Zach Lewy, chief executive of debt buyer Arrow Global, is reflecting on the business model of a company that has rapidly become one of the largest players in the UK market. And it is in fact Arrow's anomalous model that has engineered 180 per cent growth during the best part of two years.
This year in particular, the company has secured a string of deals including an asset management deal with a statutory body, netting the firm a £3bn contract over five years. Arrow has also secured a £58.6m face value purchase with a major building society and a £100m face value transaction with a telecoms provider. The company now owns or manages £2.95bn in receivables.
As Lewy explains, along with chief investment officer Andrew Birkwood, these past two dynamic years for Arrow Global in the UK follow its parent company's own soul searching in the United States from around 2001 to 2002. During this time the composition of the UK company's DNA was forged.
For a bit of history, Arrow Financial Services in the US was set up in Illinois in 1961 by Jack Levin and his family as a collections agency. It began buying portfolios in the early 1990s and started pioneering the outsource model in 2001. For the next three years it placed accounts on a case-by-case basis with a large panel of specialist servicers, based on bespoke data analytics.
As Lewy explains, in 2001 Arrow in the US said to itself: "We have more assets than we can collect internally and we have about 1,100 collectors but that's nothing close to what we need. We also have a diverse range of assets."
Lewy adds: "I give Jack an enormous amount of credit for forcing the internal decision, which says we are not only a collection agency, we are also an asset manager."
Three divisions were set up in the States; a portfolio management group, a collection agency group and a servicing group. When the company landed on UK shores it had around £24bn of assets under management and 120 different servicers.
Lewy says: "When we looked at Europe, Arrow had already seen enough evidence from its internal collections that placing with specialists would put the best assets with the right servicing partners, bringing the best performance rather than just servicing everything internally.
"Europe became the perfect menagerie to run that properly."
On founding the company in London in 2005, Arrow saw around 430 collection agencies in the UK, and perceived it as futile to recreate the best of those existing systems.
Lewy says: "In the same way that Einstein says if you wanted to go the speed of light, you would have to be infinite mass, to be the perfect collection agency, you would need infinite mass. You would need the best tracing unit, the best field agents, the best call centre, the best probate unit and so on."
Birkwood adds: "Just in terms of collections, you would need a great team of credit card collectors, a great team of auto loan collectors, mail order collectors. It's no good to say you can have a team of collectors that can collect any kind of asset."
As a business model, Lewy adds, such a company would be hugely exposed as to whether a bank is going to sell portfolios at any given time, presenting a massive systemic risk.
By 2005, when Arrow started out, the market had been up and running. Birkwood says that a few years before, during the market's birth, there was a "garage sale" mentality.
"At that time most banks came to market for the first time with a 'garage' portfolio. That transaction consisted of the banks opening up their filing cabinets and disposing of whatever debt was inside. It was a lottery as to whether you did a good or bad transaction."
Later, in around 2003 and 2004, systematic sellers like MBNA and Barclays started to sell in significant volume. But Birkwood, who was working for Carval Investors at the time, believes prices had started to bid up to a place that did not make sense. The pricing of deals was dysfunctional.
"By 2005, we were thinking, this market doesn't make sense, it seemed completely untenable."
That same year Arrow Global in the UK started out operating in Lewy's words like "a scavenger." It was putting together client relationships, the knowledge of how to manage assets, and placing with servicers. Between 2005 and 2009 Arrow sought to purchase assets that fitted its panel of servicers best and ended up working with 24 different sellers.
Since 2005 Lewy says the major event for Arrow and the market was access to credit bureau information. This allowed better, wider and more effective data analysis on an account by account basis, enabling Arrow a greater understanding of how to place each account with the right servicer.
Lewy says: "If you are running a call centre business where the single determining factor of success had been how cheap can you make 1,000 calls to people whose data you don't have, I think of that as like a machine gun. You are just blindly shooting out. In that world the competitive advantage was if you could shoot 1,000 bullets in an hour cheaper than the other guy can shoot 900 bullets in two hours. It was lowest cost to serve efficiency."
A silver bullet
Lewy believes that when the credit bureaux opened, people realised how many accounts didn't have the right address or phone number, and this revealed how "falsely and faux efficient" the prior lettering and dialling approach was.
"There was a silver bullet, where if you spent the time on the data, you got the customer experience right."
Another major change in the industry since Arrow was founded has been the growth in resource invested behind compliance, but Birkwood believes this area still presents the greatest challenge to the industry.
He says: "I wouldn't be surprised to see regulation come into this industry, either through the Credit Services Association or the government. I do not think we are far away from that point.
"Banks have stockpiled a significant amount of debt in the past couple of years. Once those banks start selling again, there will be increased focus on how those companies approach compliance."
Lewy says: "I'm hopeful that we can evolve the regulatory framework which gets the balance right between being prescriptive and a series of transparent guidelines."
In this context, the industry's trade bodies are working on schemes that would help debt buyers and DCAs demonstrate to clients their transparency around compliance.
The Debt Buyers and Sellers Group (DBSG) has gone through 21 core process headlines for such an audit, working with auditing parties. This would enable the CSA and DBSG to check that members have robust processes for these 21 areas.
Should such an audit be mandatory for membership?
Lewy is adamant. "Arrow's view is yes, absolutely. The industry is not there, it's an optional thing. Interestingly, there's a US client that requires you to pass a SAS 70 audit of those same processes. If you want their work, you have to pay £70,000 just to pass that audit.
"There are other markets where the mandatory nature of getting this right is extremely high. If we step up to that voluntarily, it shows great industry leadership."
Birkwood adds: "The industry runs the risk of having such an audit imposed on them from above in future. That will be a harder pill to swallow."
Lewy also believes that the top buyers should publish their treating customers fairly scores by next summer. Such transparency would inevitably bolster debt buyers and DCAs' chances of working with the public sector but he adds: "I don't think the public sector should ever sell debt. The government has different stakeholders, different constituents and different data protection laws. HMRC, for example, doesn't need to go to court for seizure. It makes no sense for them to sell to the private sector."
The next chapter
Birkwood adds that partnerships will be the way forward and that data-led servicing could be an area where the public sector can benefit from debt buyers' expertise.
While the public sector may offer up various opportunities, the next chapter for Arrow is ensuring that core operational processes match to a map of treating customers fairly. Lewy says this is about completing a small number of processes exceptionally well, such as the transaction itself, the analysis on customers, offering customers the right treatment and offering flexible repayments.
If Arrow does that, he says: "We'll be in a better position than the high street banks, who by definition have to be bulk producers of activity and can't have the same flexibility."
As for the industry's future, Lewy adds that there are around six major debt buyers today, compared to about 17 in 2007. Birkwood believes that they are seeing the market's maturation, and that there has been more harmonious behaviour among debt buyers and sellers.
But Lewy interjects: "Sellers hate to sell anything that's below the real value. They hate thinking you have done them over. But if you switch this around, there are only eight to 10 major sellers in the UK, so if you are out there hurting them, you may have done a good deal, but there's no business there."
He believes that working together innovatively and more transparently is the only way to ensure all parties have sustainable businesses.
"There are fewer virgins out there, everyone now gets the upside of getting it right."
Zachary Lewy: the CV
1996: BA in economics with honours, Princeton University
1996-1997: Consultant, Mercer Management Consulting
1998-2002: Co-founder and executive director, 7C Group, a global call centre operator, led sale of 7C to Vertex, a division of United Utilities
2002-2005: President, Vertex North America
2005-present: Chief executive, Arrow Global
Andrew Birkwood: the CV
1999: BA (hons) economics and econometrics, Nottingham University
1993-1999: Product line accountant and market risk analyst, Cargill Financial Markets
1999-2009: Investment analyst, later director, non-performing loans, Carval Investors
2009: Managing director, Investcorp/ Etape Capital
2010-present: Chief investment officer, Arrow Global
Who do you most admire in public life?
ZL: Warren Buffett
AB: Lance Armstrong
If you could employ anyone in the world who would it be?
ZL: The team at Arrow. We work with great people.
AB: Dr Michael Burry (readers of The Big Short will understand).
What was the last great book you read?
ZL: Too Big To Fail by Andrew Ross Sorkin
AB: The Big Short by Michael Lewis
What was the last great film you saw?
ZL: Inside Man. Denzel Washington and Clive Owen were fabulous.
What is playing on your iPod?
ZL: Fool in the Rain by Led Zeppelin
AB: Coldplay, The Killers