Stacey Schacter: Well, yeah, we talk about cases all the time.

Brian Dally: That's awesome. Well, so, one thing we didn't mention, and that I had the opportunity to do with you, is, and maybe we'll get into it, was the Credit Provider Think Tank conference that you put together. And this is my first time, but there are people who've been there numerous years. Obviously, a great group that you pulled together. You've had a long history in the space. I don't think we've talked about this. How did you first get into it? Where did you get your start?

Stacey Schacter: First just get into the space altogether. Well, I started off my law career doing tax law, and I hated it. I didn't last a year doing tax law. I was at a big [00:03:00] firm and moved into corporate and securities law, and doing it for Fortune 500-type companies. But I was getting pigeonholed into a particular area, and that was securities litigation, and it just, again, wasn't that appealing, and I wasn't necessarily that good at it.

So, I was negotiating a deal across a couple of guys, attorneys, and when the deal was done, they said, "Hey, look, we're leaving our big firm and we're starting up a new firm. Would you like to come and be our first associate?" But when they told me who the client list was, I was like, "Yeah, this sounds really, really interesting."

And so I left, and that started me, and this is only two years into my law career, into the world of financial distress. And I worked on some of the largest and most complicated bankruptcy cases in the nation. Our primary client was also one of the [00:04:00] largest liquidators in the country, if not the world, at the time, and liquidated things like the DeLorean car company. And good stories there about what the most valuable asset was in that bankruptcy. And lots and lots of retail, wholesalers, distributors, manufacturing, and it really is an interesting space. The bankruptcy bar itself is sort of a bespoke unit, and everybody gets to know everybody. Everybody knows the rules. Everybody knows how everybody else is going to do things, and the judges get to know you as well. And so that was really, really great.

My largest client at the time, who I was doing probably 70%, 80% of my work for, made me one of those offers you couldn't refuse to move over as general counsel. And I saw where the money was being made by then, and I [00:05:00] said, "No, only if I can move to the dark side," which meant, more the business side, the business of liquidation. And so they made me CEO of their receivables division as well as general counsel or chief legal officer, and I did that for another seven, eight years. And by then I knew I wasn't going to go any further where I was at, and needed to... if I wanted to do something more, I had to venture out on my own.

And so, 17 years ago, I was fortunate enough to raise some money from a New York private equity group, and it was like a scene out of Risky Business or something. It was like, "Well, here's the money. Don't..." Can I curse on this podcast? [00:06:00] "Don't fuck it up."

Brian Dally: Yeah, absolutely.

Stacey Schacter: That was the start of VION. And the very first deal we did involved buying expat receivables from a UK bank, and that put us in, like, 230 countries overnight. Now, understand, it might have been one or two accounts in some of these countries, like Sudan, which we did not put a high value on, but that was the first deal. And then, I started the company in 2008. Well, Brian, what else happened in 2008?

Brian Dally: Several things.

Stacey Schacter: The Great Recession.

Brian Dally: For sure.

Stacey Schacter: So, the Great Recession, I started a company focused on distress just before the start of the Great Recession. So some of this was being in the right place at the right time, and we were flush with new cash.

Brian Dally: Exactly when needed to be, in order get good value, for sure.

Stacey Schacter: Yeah, [00:07:00] it was like being a kid in a candy store without a parent telling you, "Don't eat sugar."

Brian Dally: So, walk people through what VION does.

Stacey Schacter: So, VION, we always say we're a liquidity provider, and people go, "Oh, you're a factoring company." It's like, "No, no, no, we don't factor." "Oh, okay, you provide debt." And we'll say, "Well, we can provide debt, but we really don't provide debt." For the most part, we come in as an alternative to a bank to provide liquidity in the asset that the company is involved in, typically almost always receivables.

And I can give a commercial example and a consumer example. There's one that is the biggest deal we ever did, and it's sort of a little bit of both. So we bought, during the Great Recession from the FDIC, a bank known as Advanta. Advanta was the largest commercial credit card issuing bank in the country. But it failed.

Brian Dally: They had a lot of affinity cards, right? Do I remember that right? [00:08:00]

Stacey Schacter: Exactly right. Exactly right. So, if you were a mom and pop bakery, let's say, you needed a credit card that might've been in the name of the bakery or was at least a business card for that bakery, Advanta was one of these banks that would provide that card. But it was a lot of mom and pop. While it truly was commercial, it behaved a lot like a consumer portfolio, and that was over $6 billion of receivables, and that was in 2010.

Just to give you the breadth of this, we were one of the largest buyers of oil and gas tax credits in the state of Alaska, and we were a purchaser of bad debt in the United States and in Spain, and we provided liquidity solutions to Italian hospitals. And so everything we do, though, has a receivable focus one way or another.

[00:09:00] So it could be purchase order that turns into a receivable, but there's going to be a receivable somehow involved. So it's all, whether it be secured or unsecured, most of what we do is unsecured, but we get involved in things like auto finance. And on the auto side, we've been on both sides. We've done the floor planning for the dealer, while at the same time providing the debt to the consumer. I will tell you that the consumer was a better credit risk than the dealer.

Brian Dally: Interesting. I imagine dealers are pretty adventuresome, financially speaking.

Stacey Schacter: We were doing some of these, what you might call buy here, pay here type things where, multiple lots and you have to go out there and do these inventories. And I like giving a talk at conferences about fraud because we've seen over 17 years just about every kind that you can imagine.

And yes, we had dealers that we'd go count the cars on one lot. [00:10:00] They'd have some people go drive it to another lot like we wouldn't notice. "Hey, didn't we just see that lime green car missing the right mirror or something?" I mean, it's just that sort of stuff always seems to happen.

Brian Dally: And so when you guys are providing liquidity, sometimes it's performing assets, sometimes it's non-performing. In practice, are you looking at performing assets thinking, I'm prepared for them to be non-performing? Do you prefer one or the other, opportunistically?

Stacey Schacter: It's just all a matter of risk versus return. I'm more than happy to buy an entire non-performing portfolio, or one that is FICO scored, 750 and higher. With different risk comes different return, and it just has to meet the requirements of our [00:11:00] sponsor and their LPs.

Brian Dally: Yeah. Got it. And so, it feels to me like over this time you've been pretty broad, and there's a wonderful diversity of different situations and assets that you've been in. When you boil it down, what makes an opportunity attractive to you? What really draws you in?

Stacey Schacter: There typically has to be a story. Stuff becomes commoditized these days so much faster than they used to be. That's in part due to the availability of data and information, companies getting much, much larger. I like working on transactions where it requires a little bit of specialized knowledge. And that's like, the oil and gas tax credits was very, very detailed, [00:12:00] and you have to make the deep dive.

In the case of even buying Advanta, we knew there were a lot of risks in buying this particular type of portfolio. We knew the economy was absolute garbage, and we also knew there were risks from bondholders because there's multiple bondholders that weren't getting paid off, and there was risk associated with that.

So, I think it's like with anything, it doesn't matter what your business is, this applies across all businesses. You invest in what you understand, and you get in trouble when you invest in things you don't understand. True, we didn't know much about the oil and gas business, but we took the deep dive to make sure we understood it, and we made sure we'd hired people who had that background.

You always hear the word frothy, and I always get concerned about frothy, whether it be private credit or, there's lots of areas that come in and out of [00:13:00] favor. And when things are frothy, that means they're priced to perfection, and if anything goes wrong, the deal can go south. Or sometimes, you probably have seen this, Brian, where people go, "Oh yeah, I'm originating this credit card, and I have a 95% leverage facility or even a 100% leverage facility." And it's like, well that's great. You're going to get amazing returns as long as everything goes right, until it doesn't.

Brian Dally: Leverage can do wonders on the upside, but it can do so much damage you're over-leveraged on downturn.

Stacey Schacter: We won't do that. And I think one way to think about it is, is it binary? We don't get involved in binary things. Either you make a lot of money or you lose your investment. So, you have to have this downside risk protection. It doesn't mean you won't lose money, but it has to be something that you understand in a worst case, what might happen.

Perfect [00:14:00] example is the tariffs. When Trump put on all those tariffs, that increased costs to a lot of the consumers who had those credit cards, and you saw default rates skyrocket up and that no way was in the model. So, that's one example.

Brian Dally: People didn't count on that. You mentioned private credit, and private credit has gotten a lot of attention lately. Maybe that fits sort of, hey, when something's growing really fast, everybody's piling into it. Maybe what we're seeing is some of the effect of pricing it to perfection. There's so many people piling into it. How would you contrast more specialty finance with that? In what's happened over the last decade in private credit, are there similar things happening in specialty finance? Or, because of the expertise that you're talking [00:15:00] about, is that less of an issue or a risk?

Stacey Schacter: No, I think that you always have to keep in mind who is using this credit. In the case of private credit, it's companies. In the case of spec fin, it's often consumers, and consumers that may not have a certain credit worthiness. But it does include the super prime and prime as well. But the fundamentals have not necessarily changed from fifty years ago. A person can only take on so much debt, and it is human nature to, "Oh, I was just offered this credit card with a $30,000 credit line. I'll take it." And they take it, and they use it until they can't. Right now, the consumer is definitely stretched.

Sometimes I think [00:16:00] it's actually more stretched for those that are used to living a particular way than those who have struggled with money maybe their whole lives. Because for them, it's their way of life. They know how to get by. For others, they don't, and they fall into the debt cycle trap.

Brian Dally: Right.

Stacey Schacter: And can come crashing down. People like to talk about private credit and say, "Oh, look at private credit. Look how bad it is." But you paint with such a broad brush, where you have to be more of a Monet. And if you know Monet's style, it's dot, dot, dot, dot, dot, right? So if you know what you're doing, you know where your dots are, you know that area of private credit or that area of spec fin, that specialization gives you a leg up on those who don't understand it.

Brian Dally: And I guess when it becomes a crowded trade, [00:17:00] there are a lot of people who don't understand it piling in and aping what others have done, but they don't have the edge. That sets us up for a fall in the end.

Stacey Schacter: There's the pressure to deploy capital. There's still a lot of fresh powder out there, and the one thing that my sponsor told me, besides don't fuck it up, is just be patient. And it has stuck with me. And there were times I wasn't patient, and the results were not necessarily good on that transaction, but it sticks with me. I tell everybody that we hire, "Just be patient." It's when you try to force it that bad things happen.

Brian Dally: If you have FOMO, that's a form that people fall into. "I have to get into this. This is my one chance." That's a bad signal, generally.[00:18:00]

Stacey Schacter: I agree. Well, you can see it right now with SpaceX. Everybody's... Well, I shouldn't say everybody. Those who can are piling in and, yet are they one bad launch away from losing a bunch of money? I don't know. I haven't analyzed the trade. I don't understand the space, literally.

Brian Dally: Space, so to speak.

Stacey Schacter: I can't speak to whether it's a good investment or not. I personally had an opportunity to invest in it and chose not to, for multiple reasons. But one of them is, I don't understand the industry, and I like to invest in what I understand.

Brian Dally: Yeah. And it sounds like you're also capable of diving in and choosing to understand something when an opportunity presents itself, as you've done so much, to build that expertise. I love that.

One more question, then we'll wrap up this segment. You've talked a little bit about buying debt or getting involved in distressed assets. When people who aren't [00:19:00] familiar think about that, they just think of risk, in a bad way. How do you evaluate and manage that type of risk? I think I heard you say that you're really thinking about, is the return worth it, in exchange for the risk? How do you know?

Stacey Schacter: Well, sometimes no amount of potential return is worth it, as we talked about it, if it's binary. You see a lot of binary stuff in litigation finance, and there are funds that are designed to invest in a particular case, and they know they may lose one case, but if they invest in 30 cases, they'll probably average out to where they want to be.

Brian Dally: Power law type funds. Yeah, that type of thing.

Stacey Schacter: When we look at any consumer, and like I said, we do both consumer and commercial, but when we look at consumer or commercial, it's all about the data. And Brian, you may be a horrible credit risk, but you're piled in with 10,000 or 20,000 or 30,000 [00:20:00] others, and we can look at the performance and means and then stress what happens under various scenarios. And most of the time, we're pretty darn good at getting that part right.

Brian Dally: And so that's handicapping the scenarios, basically.

Stacey Schacter: Yeah. So, let me put it this way. If you have a super prime portfolio, average FICO score 780, and you expect the default rate to be 1.6% and it moves up to 3%, doesn't sound like a lot, but your default rate actually doubled and your margins were so skinny you probably just lost all your profit.

Whereas if you're buying something that's maybe even charged off and maybe you paid 12 cents for it, and you expect to collect, let's say, 36 gross, and you end up collecting [00:21:00] 34 or 30, you're still okay. So it gives you wider margin to be wrong. And so whenever we look at a portfolio, probably the same as, again, most people who think about this stuff. You have to know your bookends and understand that if it, as I said, again, if we think there's a more than such-and-such percent chance that this is going to be a total loss, then we will choose not to do that transaction.

Brian Dally: Interesting. Thanks for educating everybody about that. I think that's a very, very powerful insights for people who are getting oriented to this type of investing.

Great start to our conversation. We're going to pause here, and when we come back for part two, I want to talk more about the market and how you see the market, because the market's pretty interesting right now. A lot of people have a wide range of takes. [00:22:00] Curious to get yours.

For our audience, as we wrap up here, know that you can connect with Stacey via his LinkedIn, which we'll include in the show notes, or check out VION at vioninv.com. So that's V-I-O-N-I-N-V dot com.

You can check out all episodes of our podcast at groundfloor.com/podcast. If you are so inclined, please like and subscribe whenever you tune in so more people learn about it, and thanks again for joining us on Beyond the Stock Market. ​