January 2014 – Issue 1

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Wall Street Drawn to Merchant Cash Advance Industry

Dry powder

One sign pointing to more potential deals within the MCA arena is the huge inflow of institutional money into hedge funds from sources like pension funds, endowments and insurance companies. All those big players are looking for investments that promise steep returns that can outpace typical equities market returns.

“And that money has to be deployed somewhere,” McGovern said.

The financial services sector has long been a darling of these institutional investors, but today’s environment isn’t presenting many investment opportunities into the traditional investment target — banks.

“With banks right now the M&A environment has not been catalyzed as much as it was expected to,” McGovern said. “We thought the banks would start rolling up three years ago, and they haven’t, and so there has not been as many opportunities to invest in banks as they were in ‘08-‘09 when they needed the capital.”

And since banks aren’t available as particularly attractive investment vehicles, other opportunities may begin presenting themselves. That has sent many investors looking to specialty finance outfits as a target, but many of those have attracted unwanted attention from state and federal regulators.

“MCA is the best of both worlds – it has a specialty finance aspect to it, but they have been largely able to avoid the scrutiny of the regulators because it has been an advance and not a loan,” McGovern said. “It makes it a very attractive target for private equity that has quite a bit of dry powder out there to invest.”

Add to that the fact that the industry is still fragmented and made up of many small players, and some of the more savvy investors are licking their lips, especially because the returns earned by MCA are attractive, and for the most part, the businesses are usually very scalable.

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