Interview: Michael Taulbee, Partner and Managing Director of Houston Funding

In our most recent interview, we had a great exchange with Michael Taulbee, Partner and Managing Director of Acquisitions and Sales for Houston Funding II, Ltd, a rapidly expanding debt purchaser.

Q. How does someone with a history degree get into the account receivable management industry?

A. Like just about everyone else, I fell into it. I got my first job in the financial sector as a mutual fund investment advisor simply because I got tired of playing volleyball on the beach after college. I eventually got into hedge funds and raising venture capital. A couple of years later, I received a call from a debt buyer asking if I would be willing to come and raise some investor capital for them. While I had never heard of debt buying, the offer was enticing enough to make me listen. The more I listened, the more I was fascinated. That fascination with our industry has continued into my current role today.

Q. You were with Encore Capital Group before going to Houston Funding. What was the transition like for you from Encore to your present position?

A. There were, of course, some of the expected speed bumps; but overall, it was a smooth transition. Going from one of the largest debt buyers to a much smaller organization brought a unique set of challenges and an equal number of opportunities.

Q. What was the appeal of Houston Funding over Encore?

A. I don’t know if there was an appeal of one firm over the other. There were, and continue to be, some of the best and brightest people in the industry over at Encore, and it was difficult to leave. For me, I saw Houston Funding as a wonderful opportunity both personally and professionally. As an added bonus, I got to work with two of the nicest guys in the industry, Bob and Harry Cagle. It was a simple progression and growth of my career.

Q. Tell us about Houston Funding, and how it fits into the larger debt purchasing sector?

A. Houston Funding was founded in 1993 by Bob Cagle. The firm has been steadily buying portfolios directly from issuers and resellers almost continuously since the beginning. I joined the firm in the fall of 2005, being tasked with growing the business and expanding the reach of Houston Funding. Since that time, we have purchased more paper than in the previous five years combined, increased collections to record numbers, and continued steady profitability and growth. As a midsize debt buyer, we offer the flexibility to close deals quickly and easily, while being able to purchase large portfolios that many firms are unable to consider. As a company, we are aggressively working on our efficiency and ability to collect purchased portfolios “Smarter, not Harder.”

Q. Do you specialize in any particular asset classes?

A. Houston Funding purchases portfolios across many asset classes, including Credit Card, Consumer Loan, Auto Deficiency, Private Label, and even personally guaranteed Commercial Loans. As a general rule we live by the saying “there is no such thing as a bad portfolio, just bad pricing.”

Q. What is your liquidation model, and how do external third-party collection agencies fit into it?

A. We have a collection floor in Houston, Texas, that takes care of the majority of our collections. We have used, and continue to use, third-party collection firms when there is a need. We view third-party collections as a way to maximize penetration into a file. Our partners are firms that collect specific paper types or use special collection techniques that compliment how Houston Funding collects.

Q. Let’s get to the obligatory portfolio pricing questions: Where are prices now? Are they trending up or down?

A. That is the million dollar question that everyone seems to be trying to answer. In my dealings over the past few months, I have seen some asset classes that are feeling some downward pricing pressure, while others seem to be holding steady. As I have been saying for the past few years, the debt purchasing industry is still very young. Some of the pricing and efficiency changes are simply signs of maturation, not solely a response to an increase in demand or a decrease in supply. As our industry grows and continues to mature, I think you will find stabilization in both pricing and IRR. The days of only buying home-run packages are probably gone.

Q. As debt purchasing comes into its own, so to speak, as an industry sector, has supply from and access to creditors been positively effected?

A. One would logically think that, as there is a higher comfort level with debt sales as a liquidation channel, we would see an increasing trend line in the availability of paper directly from the issuer. However, this does not seem to be the case. For many banks, collections are up, charge-offs are down, and profitability is at record highs. While some issuers have fully embraced the idea of debt sales and have made it part of their regular back-end strategy, for many others there is little incentive to sell portfolios at this time. Of course, this has allowed continued growth in the resale market, so there are upsides.

Q. What impact, if at all, does Dennis Hammond’s departure from DBA International have on the industry?

A. It will be interesting to see what direction the DBA goes in their search for new leadership. There is no doubt that the DBA puts on the premiere networking event in the industry, but their educational and legislative pieces, in my opinion, have often seemed lacking. It would be wonderful to see the DBA leadership look to match their strength with the ACA’s Asset Buyer Division and create a true representative for those of us who make our living in this industry.

Q. What are two not-to-miss events in the debt purchasing sector?

A. I think the best networking event is the DBA in February. Issuers, debt buyers, and vendors are all represented and all of the right people are there every year. I would venture to guess that there are more deals created at that one event than most of the others combined. Other than that, there are so many other good events; I would be remiss to pick just one. Each niche seems to have a favorite and depending on your company’s structure and business model, there is an event that is tailored just for you.

Q. How important are brokers to the buying and selling process?

A. Brokers do have a place in the industry. I have been amazed at the number of them that have sprung up in the past two years. It used to be that there were three brokers to deal with, and that was it. If it were not one of the Big Three, then there was not much value-add. Now it seems that every person I meet has a deal of some sort they are trying to broker. As it has gotten more and more competitive, new ideas and approaches have sprung up. I am guessing that over the next 24 months we will see somewhat of a shake-out, and those brokers that offer a “value-add” to both the seller and purchaser will survive, and those that have trouble with deal flow or relationship management will cease to exist.