Arrow points up

After buying up bad debt from mainstream lenders, Arrow Global tracks down customers using its in-house data systems to improve repayments. Management says the group is able to match the records of around half of a typical UK financial services portfolio. Results have been impressive, with Arrow growing its core collections by almost a third during the first quarter of this year, to £67m. This drove revenue up by a quarter to £44.5m and adjusted cash profit up by more than half to just shy of £52m.

Management has been increasing its rate of investment in debt portfolios, which provide the raw material for future growth. During the first three months of the year Arrow grew its total purchased loan portfolios to £620m, from £586m at the end of last year. This followed a record year of investment in 2015, where management purchased £180m in debt portfolios. This was well in excess of its £78m replacement rate - the level of purchases needed to maintain the current level of estimated remaining collections (ERC). In the first quarter the group boosted its loans with an 84-month and 120-month ERC by 5 per cent to £1.08bn and £1.29bn respectively.

Arrow is building on its success in the UK by diversifying into the higher-margin European markets. In May this year the group acquired Dutch and Belgian consumer debt purchaser and collector InVesting for €100m (£76m). The purchase was financed via a €230m bond issued in April, some of the remaining proceeds of which have been earmarked for future investments. The group also has a 15 per cent stake in French debt recovery specialist MCS.

This builds on the presence Arrow has already established in Portugal, via its acquisitions of loan purchase and management companies Whitestar and Gesphone last year. The group looks well positioned to take advantage of ongoing bank deleveraging on the continent. And management reckons restructuring within the European banking sector, which is driving consolidation, will increase the level of debt available to purchase.

Arrow is also diversifying its income stream more into capital-light "asset management", which is regarded as a higher-quality source of earnings. Its 2014 acquisition of collections specialist Capquest in the UK and Whitestar has increased the group's revenues from this source. This income includes commission income, debt collection, due diligence, real estate management and advisory fees. Asset management revenue was 8.9 per cent of total revenue last year. Management had expected this to increase to around 15 per cent this year at the time of the release of its 2015 results, but at the end of March forecast non-capital-intensive operations would account for around a quarter of group pro-forma full-year revenue.