The Great Recession a decade ago left the finances of millions of Americans in tatters, but times were good for CardWorks founder Don Berman.
“We’ve been able to ride very successfully through the economics swings and really take advantage of opportunities when they present themselves,” he said Wednesday on a conference call after Ally Financial Inc. agreed to buy his firm, a credit-card lender focused on people with patchy credit.
Today, more than three decades after founding the company, he’s poised to cash out as a billionaire. Ally, the biggest U.S. auto lender, plans to acquire CardWorks for $2.65 billion, most of which will go to Berman, a New Yorker who owns a 70% stake. The deal boosts his net worth to $2 billion, according to theBloomberg Billionaires Index.
Tremendous wealth can be amassed by catering to lower-income consumers who often lack access to the traditional banking system. Others who have built fortunes through subprime lending include billionaires Ben Navarro, whose Sherman Financial Group owns Credit One Bank, and Capital One Financial Corp.’s Richard Fairbank.
U.S. credit-card issuers have benefited in recent years as consumers loaded up on debt while still managing to keep up with their payments. Write-off rates remain near historic lows even as total card balances climbed to$930 billion at year-end, an increase of about 35% since early 2014, according to Federal Reserve data.
About one-third of that debt is held by people whose credit scores are near or below 670, the threshold for being considered subprime, according to Ally. Such borrowers may struggle to obtain financing and often face higher interest rates.
Merrick Bank, a CardWorks subsidiary, charges annual percentage rates of as much as 31.95%, compared with the 14.87%national average. The cards also can carry account setup fees of as much as $75.
CardWorks has primarily targeted consumers with credit scores ranging from 550 to 700, a segment it estimates encompasses more than 50 million people. Competition for these customers in recent years has become fierce as banks bruised by persistently low interest rates have sought better returns.
On Wednesday, Berman was asked how his business manages to navigate economic downturns, when delinquencies and write-offs tend to spike.
“It’s one word,” he said. “Discipline.”
Read more: Ally sinks most since 2014 after $2.65 billion subprime-card bet
Ally, the former financing arm of General Motors Co. that received a $17.2 billion bailout from U.S. taxpayers, faced a deluge of questions from analysts who balked at the price of the CardWorks acquisition. Shares of the Detroit-based lender tumbled 11% to $28.41 at 12:47 p.m., the biggest intraday decline in almost six years.
Chief Executive Officer Jeffrey Brown defended the deal, which is expected to be completed in the third quarter.
“I look at this as acquiring a very mature business that’s done a great job,” Brown said during the conference call.
Berman, who was raised in the Bronx, played basketball in college and worked at a credit-card processor before founding CardWorks in 1987. His Woodbury, New York-based firm generates more than $1 billion in revenue and employs 1,700 people. About one-fifth of the staff has worked there for at least a decade, according to Ally.
In 2017, Bermansold minority stakes to Pacific Investment Management Co., Parthenon Capital Partners and Reverence Capital Partners for undisclosed amounts. He will remain on Ally’s executive management team and join the board.
While Brown and Berman have known each other for years, the two companies started discussions in earnest about 18 months ago, Ally Chief Financial Officer Jennifer LaClair said in a phone interview. The talks became more serious as CardWorks received inquiries from other potential suitors, she said.
— With assistance by Tom Metcalf, and Devon Pendleton
Source: Read Full Article