Time Finance: Some views ahead of 7 July 2022 strategy update
Time Finance, the niche non prime SME lender, is holding a strategy update tomorrow. It’s an interesting time for Time…
4 major change/disruption factors
- Covid and the aftermath including govt backed spray gun lending to SMEs
- Inflation / recession risks
- New CEO and new growth strategy flagged last year
- Arena Investors took 20% stake in biz on 22/4/22 taking over Wellesley Finance’s stake (see notes at bottom to learn more on Arena)
1&2: is unwinding so SMEs are returning for ‘normal’ finance with early 2022 looking encouraging in asset financing, invoice financing and lending but clearly there are economic clouds so we wait to see what the impact is and how it meets with normalisation. On balance and very simply I’d say things going in the right direction but perhaps a bit slowly for many impatient equity investors.
3: I believe actions taken to focus on and support organic growth in ‘own book lending’ is good and where high durable returns can be generated.
4: This is what really gets my attention! Arena are hardcore…
Arena are not passive investors in stocks waiting for value to be realised and are highly averse to ‘roach motel’ value investing. Time Finance (previously 1pm) is the definition of a roach motel value trap…what’s going on?
They are control freaks and hands-on active investors focused on credit and asset value situations. Their preference is for illiquid and higher yielding assets that are securely value backed in some way that they can see through to value realisation on relatively short time frames or with very secure protection underpin. Often these assets are sub scale for other investors meaning that abundant global liquidity has not found its way into the situation to narrow the fundamental value gap. Arena is fully operationalised to execute on the personal investment biases of founder Dan Zwirn.
To a significant extent Arena’s approach echoes what and where Time Finance lend. Time’s individual transactions with clients are too sub scale for Arena but in aggregate you have a portfolio of loans that roughly fits the Arena DNA.
Q: Are Arena likely to be passive value investors in Time? A: Unlikely.
I thought it highly unlikely that Arena took their position without some meaningful interaction and prospective scene setting with current senior management of Time. It’s just not their approach. However, I exchanged emails with the Chairwomen Tanya Raynes several weeks ago and she says Arena have not communicated any activist inclinations so far. I expect it to come based on Arena’s strongly articulated identity.
Q: How will Arena be able to control/influence a positive outcome in a timely way in their Time Finance investment? A: Many options (some discussed later)…
Arena’s investment in Time is only about 0.15% of their global assets under management ($3bn). They run quite a diversified portfolio, nevertheless it’s probable they wish to scale that up to make it more worthwhile. How can that be done? The routes seem to be either owning more of the company or being directly and profitably exposed to Time’s lending.
Q: What should private investors like me worry about? A: A classic AIM squeeze and steal?…
It’s easier to believe that Arena’s return goals are best captured by owning Time as this means they can benefit directly by providing funding to Time and pocketing the whole spread after operating costs. But paying for the equity ownership of Time is an undesirable additional cost Arena will want to minimise…the lower the price the happier a hard-nosed ‘cynical by design’ financially focused operator like Arena is going to be….and the unhappier ordinary non insider shareholders like me will be.
Time assure me they are aligned and dedicated to guarding all shareholder interests.
Time is operationally at a delicate point with a new CEO and Chairwomen and a change in strategy, all happening mid covid upheaval. Lending volumes have been depressed in last couple of years, the overall economic risk picture is uncertain and CEO Rimmer has articulated a growth strategy that requires significant investment in personnel (and so suppressing short term profits) and pull on scarce capital to fund it. Note, I am a fan of the CEO’s aims and think it is the right approach (I told prior management I didn’t support paying a dividend and wanted more own book lending).
Growth is dependent on capital to underpin it. Not being a bank creates some limitations on the speed of growth (compensated for by lending margin of course…a trade off I’m happy about). The dynamic in play between sources of lending capital and lending it out means Time needs both proprietary cash to ‘co-invest’ (c.10–20% of loan made) to create equity buffer and growing net tangible assets (max gering of 6x NTA) to underpin lending. Organically increasing capital therefore lending capability is the best route to value creation for passive shareholders like me. It’s highly unlikely Time can raise capital at the moment at anything other than a very poor dilutive price.
Clearly, Arena can provide capital support and it’s sensible to assume this is their aim as that makes their engagement with Time worthwhile and allows them to allocate more capital and generate returns at level impactful for their size. However, as a shareholder this worries me as I do not easily see a route that aligns Arena and private investor interests like mine. I can’t help but think that Arena will want control at the lowest price possible. This is why I got in touch with Time re being aware of Arena and safeguarding all shareholder interests.
My first preference is that Time stays listed and grows, overtime attracting interest and higher valuation than currently and maybe providing a window for ‘growth funding’. Secondly, a bid at a premium to current price…and not a low price. This is much less attractive than remaining independent and listed. Sadly, there is another option that is trodden frequently on AIM and that is a lowball take private. This can be favoured by management as it secures their job. Clearly, it is a very bad outcome for most shareholders. An operational misstep by Time could put them on that third trajectory.
A low priced take private can be engineered. How? An over investment in new capability/staff relative to business transacted could deflate already low share price, particularly if it combines with something like a warning about market outlook and even raised provisioning. I’m just saying this, not predicting! But anyone with AIM experience knows this is not unheard of. TBC I’ve always perceived Time management to be trustworthy etc.
The markets that board members and senior employees have operated in over time and companies they have worked with will have generated connections close to people that now work for or are advisors to Arena. If I want to be paranoid then this provides a route through which interested parties can communicate and sound things out!
There is much scope for something different from the simple scenarios I paint above and more ‘constructive’ from my perspective…
For example, Arena could provide some convertible financing to enable Time to scale lending more through extra growth capital to unlock funding for lending growth with a conversion price that is not dilutive to existing shareholders.
I fear this sort of ‘collaboration’ isn’t in Arena’s DNA plus the reliance on equity upside (what they would call ‘greater fool’ upside) to generate the return they desire is too uncertain for them. Also, there are problems around repayment of debt that doesn’t convert… a potential long game to cheap take out, classic vulture private equity strategy creating an environment where not achieving high (unrealistic?) growth targets pass control of what is probably a much bigger business on the cheap (as prior capital providers pay for the ride).
Or maybe Arena wishes to provide direct lending capacity to Time to support their investment in Time and drive value. This is hard to believe as they aren’t happy to lend at 4%. I’d guess a minimum hurdle is something like 10–12%. That leaves no upside or risk compensation for Time. There’s some scope for collaboration here as Arena could provide financing for asset backed lending or invoice financing. Both these business lines are areas where Arena can countenance lower returns as the risks are lower and secured relative to straight lending. Time might give them a little more than they would to their other financiers in return for a beneficial strategic collaboration on growth.
Then there is also the opportunity to broker on business. If something is too risky or large for Time’s balance sheet they do broker it on. This could suit Arena well.
My interest in Time is for reasons that are probably very similar to Arena. I believe there is a persistent and greatly underpriced return opportunity available in providing liquidity to relatively ignored small businesses on favourable risk adjusted terms.
Conclusion
The above may just be a fever dream by me and Arena are passive value investors in Time Finance. It doesn’t seem like their DNA, but I don’t know for sure.
A great solution is Arena as capital source and Time as originator of good high return risks…but only if ‘passive’ investors aren’t squeezed out.
Some extra info on Arena so as you can understand what they are:
If you wish to learn more about Arena Investors and founder Dan Zwirn then the following links are instructive. The podcasts are probably the best.
Two recent podcasts outlining Zwirn’s attitude and approach to investment (whole interviews informative and relevant but if you want the ‘Time Finance’ moment then listen to Meb Faber one from about 12mins for few minutes):
https://mebfaber.com/2022/01/12/e382-dan-zwirn/
Article re why DB Zwirn was forced to closed:
https://www.bloomberg.com/news/articles/2012-02-28/dan-zwirn-the-man-who-fell-to-earth
Dan’s beginning of 2022 letter:
https://www.arenaco.com/wp-content/uploads/2022/02/Arena_Investors_2021_Letter_Jan_2022.pdf
