Big Data and the Appraiser
Mitigating Risk and Unleashing Value
Date august 2015
Featured in ABF Journal
In today’s always-connected world, lenders have more access to information than ever before. More reports. More news. More insights. Theoretically, that should mean a well-informed boost of confidence behind every deal-related decision.
But it’s not so simple. More data doesn’t always mean smarter data, which in turn, doesn’t always mean smarter deals. Asset-based lenders are under great pressure to execute aggressively in a competitive environment, which is casting a new, harsher light on collateral valuations and placing additional demands on appraisers. A new generation of appraisers has emerged to meet those demands, with access to rich data and the ability to distill meaning from it and related offerings that mitigate risk and access untapped value in a tight marketplace.
A decade ago, it wasn’t uncommon for most appraisal firms to reference just a handful of data sources for their research. And many today still do. But as the industry has evolved, appraisers at the forefront have broadened their access to data and, in turn, their perspective. This change in thinking has been necessary as the secondary market has become increasingly globalized. Lenders shouldn’t assume that all appraisers have access to the same information, and should ask if they don’t know what data is backing reports.
In the age of big data, we have more access to information than ever before, but how and whether that data is being managed is an important distinction. Gordon Brothers-AccuVal has always seen this as critical in the evolution of the field, and accordingly, we have built a sophisticated infrastructure to manage this data. One of the primary drivers behind Gordon Brothers Group’s acquisition of AccuVal, announced in April, was accessing the firm’s extraordinary data management platform. Rather than merely relying on internal sale records, the company conglomerates research from every major auction event. This information is collected from hundreds of sources worldwide, amounting to a groundbreaking database when combined with Gordon Brothers’ proprietary orderly liquidation transaction data of more than 10 million data points.
No matter how big the data, figures mean nothing without the ability to interpret them. For today’s appraisers, analysis is no longer merely done in spreadsheets. It’s generated from onsite visits by seasoned professionals and sophisticated algorithms that help pinpoint relevant transactions and estimate values that reflect current market realities. That insight is then reviewed by the relevant deal makers who are investing principal in similar assets today, matching current market insight with deep historical data. More reliable reporting and deeper understanding of values means lenders can compete on deals more aggressively.
While this big data represents the science, an equal amount of artistry is involved in appraisals. This skill derives from hands-on understanding of liquidation processes and market trends, gained only through day-to-day trading in the assets themselves. While the data piece speaks to an aggregation of historical asset sales — providing a meaningful reference point — each case is unique and shaped by distinct factors that hold important implications for recovery values. Lenders are recognizing that top-tier appraisers must have both to be successful in today’s market.
Growing Investor Confidence
When differentials emerge between borrowers’ needs and advance rates, partnering with Tranche B lenders can offer more attractive financing packages. The next generation of appraisers is evolving to meet this market need by coordinating additional capital to fill or offset that differential. This would have been unheard of even a few years ago, but investors have grown more confident in top-tier appraisers and related disposition experts to deliver results based on reliable data, and are more willing to take riskier positions after being shown hypothetical exit strategies. This has created an interesting new environment, where secured lenders are partnering with secondary financing solutions affiliated with appraisers backed by powerful data and deep asset knowledge.
For instance, Gordon Brothers-AccuVal can facilitate secondary financing through Gordon Brothers Finance Company. For senior, regulated banks, association with nimble, less-regulated entities that have the asset knowledge and ability to extend additional capital in otherwise restrictive situations can be a tremendous advantage. These kinds of relationships help insulate the loan from risk, and enable the lender to execute more aggressively by accessing previously excluded collateral, or extending beyond existing advance rates.
Assuming Risk to Stay Competitive
Certainly, one of the most significant developments in the industry has been the willingness of appraisal firms to mitigate risks to lenders holding distressed assets in their portfolios. Lenders have come to expect appraisers to stand by their values, both by offering guaranteed solutions and by bidding on and disposing of assets using their own balance sheets. However, even today, there are very few providers willing and able to execute on these critical risk management strategies, particularly when aggressive timelines are involved.
As an example, Gordon Brothers Group’s Commercial and Industrial Division recently became involved in a situation where the appraiser-of-record failed to bid on the assets it had valued. The bank became exposed when the energy assets in question declined in value, and had to look elsewhere for the exit it needed. Next-generation appraisers are anticipating these needs and offering guaranteed solutions to companies and their lenders. When the risks are real, having the right partnerships is critical. To remain competitive, appraisers have to be willing to put their money where their mouths are, and have the resources to do so.
Next-generation appraisers also offer lenders insight across every asset class — from machinery, equipment and inventory to brands and lease streams. Most appraisal firms have relationships with a variety of specialists to which they can refer business, but very few actually have these capabilities in-house and routinely engage in these types of hybrid engagements. By leveraging a truly integrated appraisal team, lenders can gain unique perspective and flexibility into various value streams and valuation approaches.
For example, in a recent transaction, one of the country’s largest commercial lenders asked Gordon Brothers-AccuVal to assess the machinery value of a large rental equipment company. Leveraging expertise gained from liquidating similar companies, the appraisal team suggested that, in addition to evaluating the machinery on a traditional basis, the lender also consider short-term cash-flow generated from rental contracts on assets prior to their return for liquidation.
After analyzing the rental contracts and payment patterns, the team calculated the net cash-flow during the return period. That cash-flow, combined with the equipment’s liquidation value, revealed the true value of the exit strategy. As a result, the lender was able to offer a compelling package to the borrower, won the business and added a large, solidly performing company to its portfolio.
Additionally, to offer lenders the best possible guidance, today’s appraisers need deep industry vertical expertise. Clients are demanding that knowledge, and they should be. That means generalists are gradually losing favor.
The appraisal industry is shifting substantially towards developing vertical teams to closely monitor sectors. Industries such as construction, building products, automotive, food and agriculture, e-commerce and apparel, as well as energy and technology are just some examples of areas in which appraisers need vertical expertise to meet the specialized needs of lenders. At Gordon Brothers-AccuVal, we have developed dedicated practice groups such as GB Energy Partners and Emerald Technology Valuations to address these sectors, which demand heavy monitoring due to the rapidity of change and deal volume within them.
In the current market, global resources are a must-have for best-in-class appraisers. Many North American deals today have components in Europe and Asia, yet few appraisal firms offer the boots-on-the-ground and local market knowledge needed to underwrite these transactions, therefore leaving lenders to patch together resources on their own.
Lenders gain an edge when choosing top-tier appraisers with a global team experienced in cross-border transactions. They also benefit from more competitive timelines and a more coordinated approach. A group with international operations that is conducting valuations and dispositions across the globe is essential today. Gordon Brothers Group continues to expand into new domains, such as South America so appraisers have access to global due diligence and disposition experts during cross-border scenarios.
In the asset-based lending industry, more data is not what makes this new era of underwriting and appraising unique; it’s the ability to make it actionable. From offering smarter data with better analysis to providing expert teams who know their industries from top to bottom, next- generation appraisers are bringing more value to the table than ever before. They’re also becoming full-service, supportive partners for clients by backing reports with their own balance sheets, and facilitating secondary capital to execute compelling transactions — advancing the evolution of asset-based lending to new heights.