The art of repayment

Analysts at the downtown Reno offices of Summit Alternative Investments LLC crunch the numbers hard.

They project the probable default rate on portfolios of consumer debt. They estimate the likelihood of prepayment. They calculate the discount that Summit Alternative Investments will require to close the purchase of a portfolio of debt from a retailer.

But the company attributes its success over the past three years to more than high-powered mathematics and computer screens filled with spreadsheets.

"There's a lot of art with the science in it," says Eric Gangloff, the company's managing director.

On the face of it, the business of Summit Alternative Investments is the height of simplicity:

It raises money from accredited investors and uses its bank lines of credit to acquire portfolios of consumer paper most of it unsecured from furniture and appliance retailers, plastic surgeons and other small- and medium-sized companies that extend credit to their customers.

Sierra Alternative Investments buys the portfolio at a discount ranging from 5 percent to 35 percent of the face value of the loans. It collects monthly payments on the debt until it matures in an average 40 months. The company generates a profit on the interest payments interest rates on its portfolios average about 16 percent as well full repayment of notes that it purchased at a discount.

Ah, says Gangloff, if only it were so easy!

Take two seemingly identical portfolios of education loans one, a portfolio of loans to nursing students, the other a portfolio of loans from a truck driving school. The credit scores of borrowers who took out the loans in the two portfolios are very similar.

But the default rate from newly trained truck drivers is double the default rate from nurses a bit of sociology that no amount of number-crunching is likely to disclose.

Gangloff's team of 15 employees 12 of them at the company's Reno headquarters have been honing both the science and the art of their business since early 2007.

After earning an electrical engineering degree from Villanova University and a master's degree in business from Northwestern University's Kellogg Graduate School of Management, Gangloff was working as a management consultant when he began thinking about investing in portfolios of consumer loans.

The sector, he found, didn't have many competitors and is very fragmented fertile ground for a start-up.

Founding Summit Alternative Investments in early 2007, he began raising money from investors that include well-heeled, sophisticated individuals as well as wealthy families seeking investments that serve as an alternative to stocks, bonds and real estate.

Raising investor money has been more challenging, Gangloff acknowledges, since the Bernie Madoff fraud caused investors to become far more cautious.

While the recession has increased default rates on consumer paper, Summit Alternative Investments has weathered the storm well, Gangloff says.

In large measure, that reflects the company's conservative portfolio standards and its tightened standards since the economy turned sour.

It looks to buy consumer loans totaling $20,000 or less, generally involving some sort of delivered product whether it's a refrigerator from the appliance store or a new smile from a specialist in cosmetic dentistry.

The weighted average credit score from borrowers in the portfolios acquired by the company is 670, and Gangloff says Summit Alternative Investments favors loans made to prime or near-prime borrowers.

Before buying a portfolio, the company digs deep to learn about the potential for default, even gathering information from individual borrowers.

"Historically, we've been pretty accurate in predicting default rates," Gangloff says.

It's acquired portfolios ranging in size from a few hundred thousand dollars to more than $41 million in receivables, and its portfolio these days stands just shy of $70 million.

Summit Alternative Investments also provides ongoing, loan-by-loan financing to some retailers and professionals.

Along with careful underwriting, the company pays close attention to its efforts to collect payments on the loans it buys.

While most of that work is outsourced to several third-party providers, Gangloff says the company is likely to begin moving more of it in-house in coming years.

That's part of the company's strategy to become the dominant player in providing a market to small and mid-sized companies looking to sell consumer receivables.

Gangloff notes the company has assembled an executive team with deep experience in consumer receivables, finance and collections operations.

"We've positioned ourselves very well to take advantage of significant growth opportunities," he says.

It's highly likely the growth will be centered on northern Nevada. An avid skier he founded a ski club at the Kellogg School that's still going strong Gangloff moved to northern Nevada to take advantage of its slopes.

And now, with a wife and young daughter, he's equally taken with the area's work-life balance.