Gresham renews faith in 1st Credit

Gresham, the private equity firm focused on the UK mid-market, is pinning its faith on continued growth in consumer debt through a fresh investment in 1st Credit.

1st Credit, the consumer debt purchase and collection business, has received £20m in second-round funding from Gresham and Barclays Bank. Gresham previously structured and arranged £15m of development capital for 1st Credit in January 2002 and has now invested a total of £10m.

The risk taken by Gresham is not inconsiderable, as the purchase of consumer debt is highly capital-intensive and the business is currently swallowing its investors’ cash at the rate of £2.5m a month. In addition, such businesses normally take around two years to reach profitability – although 1st Credit achieved the landmark around a year ago. “We are backing the management team’s experience and their ability to price the debt properly, as well as their investment in system controls and people,” says Mike Henebery, a director who led the deal on behalf of Gresham.   

1st Credit has capitalised on the boom in UK consumer debt, growing from around 15 staff to 110 in the period of Gresham’s ownership. Although some joined the firm when it acquired rival EJI earlier in the year, most have been recruited to beef up its telephone-based debt collection unit. In the two years since the firm was founded, it has built up 400,000 individual accounts and now manages £750m of consumer debt. Turnover is expected to exceed £20m in 2003.

The 1st Credit management team is led by chief executive Mike Cleary, who spent ten years leading BT’s debt collection operations before founding debt collection agency CCI in 1992. He then led a £4m management buyout of part of the business in 1997, with Gresham’s backing, before selling it the following year to Equifax.

The firm purchases uncollected consumer debt at a discount to face value from lenders including banks, credit card companies, utilities and retailers and then evaluates and recovers the debt on its own behalf. It seeks purchases at an early stage in the cycle – as little as 37 days – to maximise recovery rates and provide credit corporations with an immediate return on overdue debt.

Henebery says Gresham took the decision to take 1st Credit to its next stage of growth, despite receiving bid approaches for the company from a number of institutions.

Gresham is currently raising its Gresham III fund, having launched it in May 2003 with a target of up to £250m. The fund is its first since gaining independence, though former parent Zurich Financial has committed £75m as a cornerstone investor. The fund will target businesses with an enterprise value of between £5m and £75m.