Adam Parks (00:08)
Hello everybody, Adam Parks here with another episode of Receivables Podcast. Today I'm here with a fairly frequent guest industry legend and one of the most knowledgeable people about mergers and acquisitions as it relates to the debt collection and financial services space, Mr. Michael Lamm with Corporate Advisory Solutions. How you doing today, Michael?
Michael Lamm (00:08)
You I'm doing great, Adam. How are you doing?
Adam Parks (00:30)
I'm doing really well. Just for context for the audience on this particular episode, I saw your Q2 newsletter. You guys had a lot of information about the marketplace, the trends that are happening, and immediately reached out to you and said, I think that's a podcast. I think we need to have this discussion. I want to learn more. So I really do appreciate all that you compile there. For anyone who has not seen that, I'm pretty sure you can get that from corporateadvisorysolutions.com and I'm sure that they're going to have it available. We'll also leave a link down below in our videos here so that you can go through and read the full report. know, Michael, for anyone who has not been as lucky as me to get to know you through the years, can you give us a quick intro and tell us how you got to the seat that you're in today?
Michael Lamm (01:12)
Sure, Adam, it's great to be here love being webinars, podcasts, the whole thing. It's always so much fun with you. Again, Michael Lamm, Corporate Advisory Solutions. Started the business with my partner Mark about 15 years ago. We're a boutique investment bank. We specialize in tech-enabled services, and we have three primary coverage areas, credit and collections healthcare revenue cycle management, and the call center and business process outsourcing sectors. That's where we live and breathe. M&A is our core. We also do valuations, exit prep, and strategic boardroom level consulting.
Adam Parks (01:41)
breathing, emanating. Well, in one of the conversations that you and I had earlier this year when we were talking about preparing to sell your organization and the three year ramp up window that it generally takes to maximize your value and do it the right way immediately had me looking at my own business. So I'm hoping to find some nuggets of insight today, like I found from our previous discussions, which I will also link below as you prepared and consolidated all of this information to put together your Q2 newsletter report. You know, what did you learn from the process of putting all of that information together?
Michael Lamm (02:22)
There's a lot of activity going on, Adam, and there's a variety of reasons for it. And so every quarter we produce this newsletter wrap up on what's going on in the market. And I will tell you, this quarter has specific significance in a variety of ways. Yes, there's a lot of deal activity. Yes, there's consolidation. Yes, there's compliance and industry dynamics that are affecting all those things.
But we saw a big company, Jefferson Capital, go public. And a lot of people haven't been talking about it. It's hit the news, it's hit the trade rags, but it's a significant one. We haven't seen a new publicly traded player in over 25 years in the industry. I mean, it's a massive movement to get a company of the size, stature of Jefferson Capital to a point where
Adam Parks (03:08)
I mean, it's a massive movement to get a company of the size, structure of Jefferson Capital to a point where
Michael Lamm (03:19)
it went IPO
Adam Parks (03:19)
it went on.
Michael Lamm (03:20)
and what that's done, Adam, is it's created a lot of interest in the marketplace. You've got investors, private equity firms, hedge funds, all looking at the industry. It's kind of been a sleepy industry with PRA and Encore being active. But when you get a third, it's another transaction comp for the marketplace. So we are beyond excited about that and excited about what that does for the overall view of the market. So
Adam Parks (03:29)
all looking at the industry, it's kind of the distinct industry and the theory for being active. But when you get a third. So we are beyond excited about what that does overall.
Michael Lamm (03:48)
It was an exciting quarter from that perspective.
Adam Parks (03:51)
So I want to dig into some of those specifics that you've brought up there. How do you think the industry is trending? Are we on an upswing in terms of mergers and acquisitions activity? And what do you think is driving the current trends?
Michael Lamm (04:05)
Yeah, I do think we're on an uptick and I'll tell you why. In the credit and collections world, you've got rising delinquencies, you've got a government that is finally calming down a bit from a regulatory perspective and supervisory view. So you've got a lot of positive headwinds that are creating investors, buyers saying, let me look at this industry in a little bit more of a deeper way.
And then you add to it the bigger picture of where digital engagement in technology is going in this industry. And you've got a recipe for a lot of M&A activity and a lot of interest in a particular end market like this.
Adam Parks (04:49)
So that driver of this new technology, whether it's organizations looking to invest in it, or are people, are they thinking about leveraging their own technology knowledge, or is this more about expanding margins through the application of technology?
Michael Lamm (05:04)
You've got groups that want to come at this and say, I want to take my AI model and apply it into collections. You've got that. That's one facet to it. But then you have operators that are in the space saying, I'm on legacy software. I'm using the old dialer from 1995 and I'm trying to figure out what I can do differently and how can I get rid of people with technology to grow my margins and expand my margins. And so those are the conversations that are happening in the industry, which 10 years ago, Adam, being you've been in this space a long time too, were not happening. People were like, weren't thinking in the same way that they're thinking today, which frankly is a breath of fresh air for folks like you and I, because we can finally have some more strategic discussions about where this industry is going to go versus it being the old
Michael Lamm (06:00)
the old school way of thinking, is butts in seats, keep dialing as much as you can, and hope for the
Adam Parks (06:00)
you
Michael Lamm (06:07)
best.
Adam Parks (06:08)
It feels like we've seen more movement amongst technology platforms than I've ever really seen before. Organization shopping new systems of record, which is a let's call it a 12 to 36 month process of actually migrating your system of record. But it feels like organizations are preparing for what comes next. And we can talk about artificial intelligence and those things. But our industry's vocabulary has changed in the last 18 months. Data was not a conversation that I was having in the hallways of conferences last year. This year, feel like I've been asked a lot between, well, do I use Snowflake? Do I use AWS? We're not only just starting to use it in our vocabulary, but we're starting to dig a little bit deeper, which is the infrastructure necessary should we ever start applying artificial intelligence in new ways.
Michael Lamm (07:03)
Yes. but those conversations, Adam, before when you would talk to a member of ACA or RMAI or whatever association it is, at the smaller end, they weren't thinking that way. They weren't thinking in, they weren't even wrapping their heads around it. Now they're beginning to, now we're seeing people that are hiring data scientists and tech oriented people that are going into these operations to automate them, which is pretty cool.
So I'm bullish about, and that's why our newsletter this quarter was so much more significant than others, because you've got so many things that are affecting the industry. mean, everybody talks about interest rates and interest rates drive M&A activity a lot, but interest rates are just one variable. Deals are still getting done with high interest rates because there's a strategic need for these deals that will occur. If there wasn't,
Adam Parks (07:40)
because you've got so many things that are affecting the industry. mean, everybody talks about interest rates. Interest rates are just one variable.
Michael Lamm (07:59)
there wouldn't be any activity. Everybody would just be sitting and being another, being a sleepy industry. But as a result of all these changes and opportunities that are coming up, it's opening it up to new groups that want to come in.
Adam Parks (08:12)
You felt that contraction for a period of time, I would call it five years or so where it really, it felt like the money kind of dried up a little bit. Specialty finance changed, the ability to finance purchased portfolios transformed over time and we've seen some pretty massive shifts at those specialty financing companies. From a debt buyer's perspective, how bullish are you on the current market?
Michael Lamm (08:38)
I'm very, I would say it this way, Adam, bullish is a tough word, but I see the volume increasing so significantly. I'm just waiting for that price point to shift because we're seeing a little decline here and there, but there isn't like, we're not in 2008 land where we saw 30, 40 % drop off in pricing. We're nowhere even near that. And a lot of that's a function of unemployment.
Adam Parks (08:41)
Okay. you
Michael Lamm (09:06)
have jobs, they're fighting every day to pay their bills, pay the electric bill, pay their phone bill. But we haven't seen it so that the delinquency volume hasn't tipped over yet. I think it's going to, Adam, and if I could guess when you and I would be sitting here, I'd be having a beer with you in Aruba somewhere or Brazil. in my mind, that's where I'm
Adam Parks (09:19)
Fair.
Michael Lamm (09:33)
I've been waiting for a while to see this market shift over because then there becomes a massive buying opportunity in the debt buying space. Then you layer in technology, changes with the compliance and everything else. This business becomes more profitable and it becomes more exciting to the investors.
Adam Parks (09:52)
I think that's pretty accurate. When we look at the debt buying marketplace and we think about how we're going to be able to apply the technology, how we're going to be able to do some of these different things and what kind of factor is that going to have those debt buyers and what the debt buyers do and what the creditors do is going to directly impact everything in third party collections. So I start looking for those new and interesting opportunities to whether it be leverage that technology or try to understand what value attributes we can derive from the current marketplace. it feels like there's a, the consumers are changing, but we've seen this, we have seen a little bit of an increase in charge-offs and then it started to dip, but arm loans, the adjustable rate mortgages are back to 2008 levels. Unsecured consumer,
Michael Lamm (10:40)
Yep. Yep.
Adam Parks (10:44)
accounts are at an all time origination balances are rising. It feels like that bubble is still inflating when it actually burst is hard to say, but we are in the early indications from what I've seen from the survey for trans union this year, it feels like everybody has that same kind of mentality right now there's going to be an increase in the accounts. The question is, when is the decrease in liquidation going to couple it?
But as long as lending outpaces delinquency, people are going to borrow more money to feed the beast. And I think we do find ourselves back with some similar challenges to 2008.
Michael Lamm (11:21)
Yeah, I do. agree with you, Adam. think the other, you're looking at where the market's going or where there's opportunities, obviously debt buying, I think there's going to be a big opportunity for those that are in or want to jump in. The other segment of the market that you play in and I do too, is with the law firms. There's a massive shift that's going on with the debt buyers pushing more volume into legal channels.
Adam Parks (11:24)
think we're going to want to get started on opportunities.
Michael Lamm (11:47)
And I think you're going to continue to see that. But now we've got a whole new crop of investors that are interested in investing into buying and partnering with law firms. And that's become a new growth opportunity for the industry because law firms have its challenges because of the fact that you have to be a lawyer to run them. But you have states that are changing their rules like Arizona, Utah, DC.
Adam Parks (12:10)
States that are changing their rules like Arizona, Utah, and the DC
Michael Lamm (12:15)
allowing non-attorneys to invest in own parts of the firms. So there may be a bigger opportunity there too that we're keeping an eye on, which we're pretty jazzed by too.
Adam Parks (12:28)
Well, as we see more attacks or we see things tighten at the state level, I think you're going to see more of that litigation growth over time. It's just an inevitability because if we can't collect it over the phone or the statute of limitations going to be reduced, then the legal channel becomes kind of the only option, especially if you're dealing with a two or three year statute of limitations because the underlying consumer does not have an opportunity for their life to change and be able to satisfy those debts.
Michael Lamm (13:00)
Right, so I would say as you look at where the market's going, expect to see changes on the law firm side. Firms getting bigger, acquiring, bringing on investors, looking at the market completely different than the way they did five, 10 years ago. And then you layer in all the technology discussion we just were talking about. That's going to hit that side of the market too, just like it's hitting the agencies as well.
Michael Lamm (13:28)
And I think you'll see some pretty cool platforms that are developed and have both debt buying, legal, first and third party servicing, onshore, offshore delivery, all with AI and all the other buzzwords that we talked
Adam Parks (13:40)
Well, speaking of the AI buzzword, do you think that the I feel like we're at the very beginning of the race. The AI race has just begun. We have no idea who's going to come out in front. But do you think that those that are able to properly deploy this technology are going to become targets for acquisition?
Michael Lamm (14:00)
There's no doubt. mean, the virtual agent side and where it's going and how good they're getting and Adam, you've done the demos. You've seen how good some of these virtual agents are becoming to, it's more about how they plug in because it's not just the agency, the debt buyer, the law firm saying, I'm going to go use a virtual agent tomorrow and do all this stuff with it. They got to go get the clients to be willing to even contemplate it too. And we're not even there yet. So I think it's got.
Adam Parks (14:12)
Not just the. I think it's
Michael Lamm (14:28)
Where early innings, as you said Adam, we've got a long way to go before this is utilized correctly in the operations. So we've been telling our clients and our network, keep learning and testing and figuring it out. Just don't put everything on red yet. Let's just see where it's gonna go and then figure out where you play in the sandbox because.
Adam Parks (14:49)
Where to go?
Michael Lamm (14:54)
I think there's a lot of options out there and nobody knows where it's going to go yet.
Adam Parks (14:59)
I think the secret sauce is going to be in the strategic deployment of the tool itself. What data are you powering the tool with? We're going to start finding, like anything else, it'll become commoditized over time. And as it gets commoditized, where are organizations going to be able to stand out, make themselves special, and get in front of the pack? Because if you've got five agencies all using the exact same tool, It's gonna be about how you use the tool, right? Like giving me a hammer and giving a carpenter a hammer are going to come out with two very different end results, right? The carpenter can build something with it. And I wonder if that becomes the focal point for organizations to create differentiation for themselves and potentially drive their value.
Michael Lamm (15:47)
Yeah, I think it's going to be a big part of it though, Adam. It's just the same thing. Remember when payment processing was like this huge thing and now it's just like, okay, great. It's become a commodity. It's just like, everybody can take a payment. It's going to be a charge and a cost and you got to figure it out, but you can pay. There's ways to pay. And I think I wonder if virtual agents and the whole AI world of how it's going to be used in our industry is going to end up in a similar way.
Adam Parks (15:55)
It's a commodity.
Michael Lamm (16:16)
If someone says, should I go build my own robot tomorrow? I'm going to say, really? Why would you? Why don't you piggyback off of what has already gotten started versus go out and spend your billions of dollars that way? I just don't know if that's the right way of thinking long-term. But I will say though, there's certain end markets like student loans as an example. They're so specialized or commercial high-balance stuff that you need to have the right
Adam Parks (16:39)
There is so specialized virtual high-level stuff that you need to have the right
Michael Lamm (16:45)
type of technology to support that workflow. And it's not just, you're not gonna use the same type of talk-off with a virtual agent that you do for a cell phone
Adam Parks (16:45)
type of technology to support it. And it's not just, you're not going to use the same type of talk-off with a virtual agent, I think for a cell phone.
Michael Lamm (16:56)
bill than you do for a $50,000 student loan. And I think people are trying to figure all of that out this AI phenomenon continues to happen.
Adam Parks (17:08)
Well, the content that's being sent through the channel will be the differentiator similar to how some groups have done really well with text messaging and emails. Part of that is the technology infrastructure and deliverability, but a bigger part of that is the content and the evolution of that content in finding those strategic ways to deploy the right content to the right people at the right times. Because just like text messaging was a big deal to separate an agency from others, three, four, five years ago, that's not the case anymore. Everybody can send an email. Most organizations can send a text. It's about how are you actually able to use the tool itself? And I think artificial intelligence, whether it be the virtual agent, whether we're looking at it from a workflow or a negotiation perspective, like I've identified six use cases specific to the debt collection industry, and regardless of what use case, I think it still comes down to how do you use the tool?
Michael Lamm (17:44)
Correct.
Adam Parks (18:03)
You can give me a hammer, but if I don't know what to do with it and I'm just banging it on a computer monitor, that's not going to accomplish the same thing. I expect that'll be where we find those differentiations. But as you mentioned, the hiring data scientists, I think is where that future is going to lie because the workflow seems to be that easiest piece. Have you seen any use cases of artificial intelligence that are more attractive to third party investors than others?
Michael Lamm (18:31)
When we're out there pitching a deal and we're showing them an agency that is invested in trying to apply AI internally or utilizing a virtual agent, what we're trying to show to an investor, Adam, the benefits and what it looks like to the margin profile. Because look, we're going to go into tax season in a few months, right? And you're going to be sending out your settlement letter.
Michael Lamm (18:59)
and everything else, right? Or emails or texts. And that's being driven, you're driving back inbound calls, texts and emails. And if you have a person or a robot that's going to help create more margin, contribution margin or gross margin too, it's going to lead to a larger EBITDA, which is going to get an investor more interested to see how that business is going to do, but also get more excited they don't need as many people to continue to operate the same that most expensive thing that we all have in our organizations, The volume of people there. Now, as we start thinking about beyond the technology and we start thinking about the environment in which we live here, how do you feel the current political environment is impacting healthcare, for example, now that medical credit reporting is no longer going to be barred?
So as we're starting to see some of those changes, what are you seeing in the first half of the year?
Michael Lamm (20:01)
First half of the year, investors are really interested. They weren't, Adam, last year and the year before that. They were very suspect. Would you want to put money to work in healthcare with all the noise that you were seeing? If you did, you were going to pay a really low multiple for it. Well, now the pendulum has gone the other way. So now healthcare collection companies, bad debt, first party, EBO, denials, all that stuff is in vogue.
Michael Lamm (20:31)
People want that because they know healthcare is like government. It is so slow to do anything. It's awful, right? And so if you're betting on an industry that's going to continue to be chaotic from a tech perspective, not have all their ducks in a row, I'm going to bet healthcare all day long. Because I think the next four years with Trump and even going beyond that, I still think you're going to see a lot of
Adam Parks (20:38)
It's true.
Michael Lamm (21:01)
opportunity there in healthcare. It may look a little different from how and what you're collecting on, still think it's going to be a growth area for the marketplace.
Adam Parks (21:09)
That seems pretty reasonable. Now, as we think about that political environment, I know call center and kind of global BPO services is something that falls within your wheelhouse. Have we seen any impact from all of the noise around tariffs?
Michael Lamm (21:23)
Yeah, well, not even just tariffs but also there was a bipartisan bill that started getting steam about bringing jobs back on shore. And so you got investors that are a little concerned if that gets steam in the government, the federal government. And I personally don't think it will. I think it's just noise. mean, think about how many jobs and how many Fortune 500 companies rely on a global delivery platform.
Michael Lamm (21:53)
and people in the Philippines, India, all over the world, and to say that, you're going to get penalized for having offshore, nearshore labor, I think that's going to go over pretty negatively. So that part of it, I don't, I have less concern over, but it's definitely being talked about by investors within the call center and BPO framework. But the tariff-wise, not so much. We're not seeing any groups saying, Nah, not interested because of what's happening with with tariff A, B and C in the countries. They're not necessarily like if we were, if we were dealing with manufacturing companies, 100%. I'm very happy we're not, but.
Adam Parks (22:32)
Moving physical goods across borders, yeah, understood.
Michael Lamm (22:36)
So less of an issue for these industries.
Adam Parks (22:39)
It feels like a lot of noise. I was just curious as to whether or not investors were even considering that aspect of it. But as you mentioned, we're not manufacturing a good or importing, so things change. And I don't think that the H-1B visa cost structure change will generally impact our industry beyond a handful of individuals, if that.
Michael Lamm (22:58)
We're not going to see, we're not going to, exactly. And yeah, I don't think it's going to have a negative effect on these end markets that we cover, Adam. I think it's going to affect other industries like the true pure play tech sector. Absolutely. But also think about it, Adam, if they're trying to hire an AI developer from India and they want to pick like a hundred, like it's a drop in a bucket.
Michael Lamm (23:26)
You know what I mean? Like they're already making millions of dollars. Does it even matter to them? I'm sure it does politically, but like from a dollar perspective, is it really gonna be the end all be all if they wanna get somebody over here? So.
Agreed. I don't think it's going to have really any impact for us as an industry. I think the one thing that we are going to continue to see on a global scale is the power of the US dollar. And I know, know, a couple of years ago, we were talking about the dollar weakening and the position that it was in, but it feels like that has really reversed course over the last six months or so, seeing a pretty strong dollar against just about every currency.
Michael Lamm (23:53)
No, no. Agreed. think you're going to continue to see it get strengthened globally. So I'm not worried there. I am worried about the student loan bubble. I'm worried about what that's going to look like. I've got the RFI that went out over the summer to a lot of the vendors. I think there's going to be a book. Right. I heard that too. And I feel like there'll be some interesting stuff that happens, but I think market wise, there's a big
Adam Parks (24:23)
There's a second one now too.
Michael Lamm (24:34)
explosion about to erupt there with student loans. mean, it's just the defaults are picking up. It's a real problem. And I think something will have to happen there. The government's going to need to do something.
Adam Parks (24:47)
So I presented on this with a former Department of Education person and somebody from Yrefy at the TransUnion conference recently. I think the biggest challenge that we're going to see as an industry, I think there's a lot of opportunity around the student loan sector, collecting student loans and all of that. And now there's some RFIs and it sounds like, or at least they're indicating that some of these things are gonna start moving forward. But the biggest impact I can envision for our space on the whole, is that once they start garnishing wages, that's 15 % of the income, the federal government doesn't have to go through the courts, that process can move quite quickly, and I think it changes the payment hierarchy from the consumer's perspective. And that's one of the bigger concerns I have because student loans have fallen off of the payment hierarchy altogether for the last four five years, which in turn did not just go into people's pockets, it went into overpriced vehicles, apparently, because looking at the loan to value ratio on used vehicles right now, on average being around 128 % of the vehicle's value tells you that people spent way too much on that new Ford Bronco, right, paying these these dealer fees and whatever and increases. And that's where I see the real risk coming from. But with all of these things in play now,
Michael Lamm (25:55)
They did.
Adam Parks (26:06)
What do you see over the next six months? How do you envision the next six months playing out?
Michael Lamm (26:11)
Well, if interest rates do continue to slowly come down, that's a win for M&A, right? Every point, quarter point, whatever it is, will only drive more deal activity and get sellers that are sitting there at them saying, do I go to market? Do I sell my company? They start thinking about it more because they're hoping that with those interest rates coming down slowly, the multiple that that company is worth is going to increase. So that's kind of that part.
Michael Lamm (26:41)
Politically, I wish I could tell you what the heck's going to happen with our crazy world of wars and political things going on everywhere. Who knows? But I think if we can get through from an economic perspective, if that continues and rates come down, that'll be a positive win-win for our market overall. And again, if delinquencies rise significantly, I still think that with unemployment being what it is,
Adam Parks (26:49)
But I think if you can get through. And again, if the link is raised significantly, I still think that unemployment being what it is,
Michael Lamm (27:10)
Maybe our economy will continue to hold out for the next six months and things will continue okay. I don't know, Adam. It just seems like we're in a balloon that's gonna eventually pop significantly. And I think our industry needs to be prepared for that. And I think that's a big concern I
Adam Parks (27:10)
maybe our economy will continue to hold out for the next six months and things will continue to okay. I don't know, it just seems like we're in a balloon that's going to pop significantly and I think our industry needs to be prepared for that. And I think that's a big concern.
Michael Lamm (27:30)
have whether we are, are we fully able to take advantage of a significant increase in volume with that will lead to accounts being less collectible and how are we going to hit?
Adam Parks (27:41)
Wow, definitely some food for thought. And I really do appreciate you coming on and sharing your insights today. Hopefully we can get together in another six months, see how these predictions have played out and continue to talk about mergers and acquisitions in the space because you've through our conversations, both on the podcast and in the hallways at conferences, you've definitely changed my perspective on how I view the industry on the whole as a business owner and in conversations with other business owners. So I thank you for that and really do appreciate your insights.
Michael Lamm (28:12)
Thanks Adam, it's always a pleasure. Anytime you want me back, I'm here.
Adam Parks (28:17)
Well, I definitely appreciate that. We'll get that one on the calendar. For those of you that are watching, if you have additional questions for Michael and myself, you can leave those in the comments and we'll be responding to those just as quickly as we can. Or if you have additional topics you'd like to see us discuss, like ESOPs and other things, you can leave those in the comments below as well. And hopefully I'll get Michael back here at least one more time to help me continue to create great content for a great industry. But until next time, Michael, looking forward to seeing you at the shows. And thank you again for joining us. I really appreciate you.
Michael Lamm (28:47)
Thanks, Adam.
Adam Parks (28:48)
Thank you everybody for watching. We'll see you again soon. Bye everyone.
