Investing in Credit Card Debt Settlements

Ken Smythe: 

Thanks for having me, Elana. So excited to be here with you. 

Elana Margulies-Snyderman: 

Absolutely, Ken. So, before we dive into CurvePoint's investment strategy, love to hear about your background, how you got to where you are today, including your work with Next Round Capital and your experience with partnering in these strategies as a GP. 

Ken Smythe: 

Thanks, Elana. Yeah, it's exciting. Next Round Capital focuses on investing in VC-backed private companies, both on direct offerings and secondary share offerings. But many times, given my background originally in the hedge fund space, I'm always looking for niche and interesting opportunities. And one of those opportunities that came across my desk in early 2024 was an introduction to a gentleman named Shawn MacLean, who was one of the debt settlement pioneers and had started a very successful debt settlements company, which he had sold to private equity many years ago. I started learning a little bit more about the strategy, understanding what it is, and understanding the return profile and the risk profile. And I immediately became very intrigued and started doing a deep dive and started making calls to my network. And particularly I had noticed that very large successful private equity firms like Stone Point and Comvest were really running the largest debt settlement firms in the country. So, it told me that there was some validation there with institutional capital behind it, which was very exciting to me. 

Elana Margulies-Snyderman: 

And Ken, as a follow-up, how did you get the idea to launch CurvePoint? Was it about the strategy or was it something else that drew your interest? 

Ken Smythe: 

For me, it was twofold. One, it's the people behind it and Shawn is really a consummate pro in the space. I mean, you can't get into a niche sort of opaque strategy like this unless you have somebody that really understands the strategy well and where the pitfalls are. So that was Number 1. Number 2, and obviously we want a very favorable macro background for a strategy like this, right? To lock up capital for five years and have a strategy that really has macro factors against it really doesn't make any sense. So those two factors were lining up great. It was funny because we originally got introduced by the co-founder of an AI company, which we were looking to invest in their Series A, so this was totally different. He says, "You have to meet this guy. He is doing some really interesting stuff with his own money and really wants to go out and scale." And so, I told Shawn, after doing a couple of months of work on it, "Let's partner together. Let's build a firm around this. Let's raise a fund," which we successfully closed in June of 2024, and in fact, we just closed Fund II this January, January 1st. So, we were really looking excited at the opportunity and started, and we're seeded by a prominent New York City based family office. So, the opportunity set is very exciting to us. 

Elana Margulies-Snyderman: 

Ken, as a follow-up, what exactly is a debt settlement? 

Ken Smythe: 

Yeah, it's interesting. I asked the same question initially and I really wasn't sure. I originally thought like most people do that it's kind of you're in the collection space. And in the collection space, a credit card company, finally, when they realize somebody's going bankrupt or that they're not going to pay their bills ever again, they sell them off to a credit hedge fund for 5 cents on the dollar. The credit hedge fund then goes out and hires an army of tow trucks and people to go around and collect vehicles and other belongings to then try to make the settlement around 30 cents on the dollar once they collect some assets, which the credit card companies were not able to do. This is very different. We're actually buying the fee receivable portion of the debt. We're not buying the debt itself, which is a very important distinction. What we're in essence doing is factoring the servicer's business, right? The servicers that actually service the debt, speak to the consumers, onboard them, settle legal compliance, etc. They want money upfront. So, we buy that portfolio from them for an upfront fee, and then we get the back-end fee payments from that over a 48-month period. So, in essence, they want the capital, they're capital constrained, we're their capital provider, and then we receive the fee income as it comes in, which actually comes in daily as credit cards are settled on each portfolio. 

Elana Margulies-Snyderman: 

Ken sounds like a win-win situation. So, what's the catch? 

Ken Smythe: 

The catch is there's a couple. People are not disciplined. I mean, Americans have spent $1.3 trillion in credit card debt to date. That number was $700 billion in 2021. So, the massive rise was due to the fact, well, Number 1, people were cooped up in our house during COVID, so they weren't spending much. But once 2021 came around, not only were people spending a lot, but then that's when the Fed started hiking rates. And so that was a one two punch, which made credit card outstanding in the US $700 billion to $1.3 trillion today. So, it's a staggering number that people are really struggling with, and many find themselves in a position where they either think they have to go bankrupt or they walk away, which is never a good option. So that settlement is that option right before somebody goes bankrupt. 

Elana Margulies-Snyderman: 

That makes sense, Ken. So as a follow-up, what are some of the greatest opportunities you see in your space and why? 

Ken Smythe: 

Sure. I mean, look, right now we're just seeing a tremendous amount of deal flow. There's a lot that we pass on, but there's a lot of high-quality deal flow that's coming through. And by high quality deal flow, we want people that are actually going to be good for the program. And what we're saying good is that they will stay in the program over a 36, 48-month period. Debt settlement is much like being in AA, right? Some people that commit to it and they really do well. Others by month two, they're like, "This isn't for me. I want to start drinking again." And so, they kind of drop out of the program. So, on average, we see an attrition, let's just say if it's 500 debtors in a portfolio. We'll see about 30% of them drop out in month 12, but even so, we're still generating double-digit returns and the portfolios over a 48-month period. 

Elana Margulies-Snyderman: 

Ken, on the other hand, what are some of the greatest challenges you face in your space and why? 

Ken Smythe: 

Challenges are regulation. I mean, that's our biggest challenge. I mean, the industry got a really bad name associated with it. Seven, eight years ago, there was a lot of charlatans in the space calling around and saying, "Well, if you enter our debt settlement program, you'll be debt free in two months." But in essence, what they were doing is switching out the debt for another loan that was also at a very high interest rate. So, they would pay off the credit card debt, but then the consumer was stuck with a 35% a year personal loan or 40%. So, it was a lot of bait and switch. So, what happened was is that the debt settlement business, along with a Consumer Financial Protections Board, they decided that this was going to be regulated at the state level, and that's made things a lot smoother now. So, every attorney general is actually in charge of every debt settlement company operating. So, they're very wary of debt settlement companies calling up and offering products which are too good to be true. So, this is truly what we like to call a tough love program. It's not easy. It's not for everybody, but if you want to become debt-free and you want to do it in a way where you don't need to go bankrupt, this is pretty much the only option left. 

Elana Margulies-Snyderman: 

Ken, your strategy seems quite timely now between the rising interest rates and high credit card debt levels. How do you see this playing out over the next few years? 

Ken Smythe: 

I mean, based on what we're seeing now, and if rates stay, unless credit card companies start lowering rates to single digits, which we don't see happening anytime soon, or Americans stop using their credit cards, we only see this as an ever-growing unfortunate burden for the U.S. consumer that we're helping solve. So, we think that the environment is very ripe for continued strong deal flow throughout the next number of years specifically. And also, technology is starting to play a big spot in this space because AI is allowing us to identify creditors that have the really perfect profile for this, that have high credit usage, that we can get better data of people. That's consumer behavior around how long they're going to stay in the program, how long they've been at their job. A lot of these factors really matter for somebody that is entering or deciding to enter this, which is a big decision in their life. And so, AI is only making that a lot easier for us to discern who's a good fit and who's not. 

Elana Margulies-Snyderman:

Ken, we've covered a lot of ground today and wanted to see if you'd be able to discuss future plans. 

Ken Smythe: 

Sure. I mean, we are going to continue raising capital as we see the opportunity present itself. So, we're excited about launching future closed-end vehicles for the strategy. We're also excited about potential vertically integrated opportunities in this space. So, acquiring companies that have a servicer, affiliate marketing, everything sort of under one roof where we can build our own deal flow pipeline. So, we're very excited about expanding in this space. As, like I said, we see this being an ever-persistent problem for the long term. 

Elana Margulies-Snyderman:

Ken, I wanted to thank you so much for sharing your perspective with our listeners. 

Ken Smythe: 

Thank you so much for having me. It's been a pleasure to be here. 

Elana Margulies-Snyderman: 

And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business. 

 _{Transcribed by Rev.com}