The Receivables (Pivot, but Still Likely Won’t) Exchange

You might recall that I penned a post entitled The Receivables (Don’t) Exchange earlier this year.  You might also have noticed that shortly after I penned that post  The Receivables Exchange (TRE) raised a fresh $10 million in venture capital from existing investors (here’s the news release).  So you might ask; what gives?  Either I must have been totally off my rocker or these investors are off theirs.  Like most things in life, the answer is a bit more nuanced than it may appear on the surface.


Here’s what going on.


My earlier piece was directed towards the original business model of TRE – the intermediating of accounts receivable of small and medium sized businesses.  The thrust of my argument was that investors were getting “a really terrible deal” in this equation because (essentially) there were no workable fraud controls being employed to discipline the companies selling those receivables – no SEC or CFTC.  These selling companies weren’t public issuers and therefore weren’t governed by these regulating bodies.


To be fair, TRE was already well down the path towards developing a new business model – one focused on public and large private issuers of accounts receivable – a pivot in the parlance of venture capital.  Back then, TRE had quietly shuttered its small and medium business new origination activities.  Their small and medium business activities, however, still seem to exist – as evidenced by its continuing (though lower profile) presence on the TRE website.  I know that TRE dumped a lot of money into originating small and medium business issuers and my guess is that when doing so they developed a modest number of what they perceive as “reliable” issuers.  Not enough to build a business around, but perhaps enough to harvest for cash a while longer until the marginal contribution declines to the point where it dies under its own weight, at which point it will be shuttered entirely.  After all, they already spent the money, so why not milk it for whatever trickle of cash flow that might be left?  It may take a while longer for TRE to finally shutter its small and medium business activities, but it’s still coming – and probably fairly soon.


Out of the frying pan and into the fire – I think.


So what of the new focus on public and large private issuers?  I do think that working with these types of issuers will acceptably solve the fraud control issue.  Substantial companies may make some mistakes that could technically compromise their accounts receivable bona fides, but not enough to materially impact an asset based financing vehicle – and certainly not outright fraud.  If they did, they’d have the SEC or CFTC to answer to – and that would not be a pleasant experience.


Any good pivot can solve a pre-existing problem, but what of any new problems?  This is question TRE is trying to answer for themselves with their new focus on public and large private issuers and their new money.  Unfortunately for them, this new strategy involves a whole host of new problems – and in the end I don’t think that it will work any better than old one – but for different reasons.


There are a number of practical and technical challenges associated with TRE’s new strategy, but (ironically) it is TRE’s own website that probably best summarizes the core challenge.


Take a look at this page from TRE’s website.


This table compares TRE’s new offering to existing competitive offerings.  The key point I’d like to make is this — one need not even focus on the table particulars (and never mind that they are from TRE’s point of view), but only observe that the listed alternatives each represent multi-trillion dollar markets.  After making this, ask yourself these few questions:  Is there any big problem with how these markets operate today?  Are they inefficient?  Too expensive?  What exactly?


The answer to all those questions of course is “No!”  Or in the case of “What exactly?” – “Nothing, really”


Herein lies the essence of TRE’s new problem –while there is always demand for a better mouse trap (even in the largest markets), it is almost certain in my view that the disadvantages of TRE’s new offering are at least as great as the advantages.  In the end, it seems like just another mouse trap.