- 11 Global Capital lost more than $40 million on one dealership group deal.
- 2Par Funding's top nine deals made up $228 million, 54% of its portfolio.
- 3The CEOs of all three firms were convicted of crimes tied to the lies and losses.
Three failures in small business finance show how oversized deals can turn a funder's mistakes into collapses. Each firm took a different route, but the underlying errors overlap.
1 Global Capital: funding to avoid a loss
In November 2018, a conglomerate of California car dealerships went out of business. Within three weeks, MCA company 1 Global Capital was discovered to have filed for bankruptcy as a result, after losing more than $40 million on that deal alone. Other funders then disclosed they had been exposed too, and some closed. Industry observers then regarded it as the biggest single deal and the biggest default the business had seen.
Internal emails showed 1 Global knew the dealerships were near collapse but kept funding them to avoid taking the loss. Its director of accounting wrote that if they became insolvent, everyone loses. The company dug deeper until its exposure became existential. It was not forthcoming with investors about its portfolio's performance, and regulators and prosecutors moved in after the dealerships failed.
Par Funding: hidden losses and concentration
Less than two years later, an even bigger deal surfaced: a $91 million MCA made by Par Funding. Foul play appears to have been central. Large advances and low defaults looked good to investors because the books were not accurately reported. Par maintained that compounding could offset losses, but regulators said it had not properly disclosed its losses and investors did not know about them.
The $91 million deal was only part of the problem. Another customer purportedly owed $35 million, and those two combined with the next eight largest deals totaled $228 million, or 54% of the portfolio. That concentration meant compounding likely could not have rescued the firm if those deals failed.
Direct Lending Investments: denial and a Hail Mary
Sometime between the two, a $1 billion hedge fund that extended credit lines to small business lenders also collapsed and dragged some of those lenders down with it. Its CEO had publicly argued that small businesses overpaid for credit and that this was how investors profited. Over time, some of the lenders it backed turned out to have customers underpaying, and the losses overwhelmed the fund.
The CEO would not concede the losses and told investors the fund was profitable. To recover, the fund lent nearly $200 million to telecom companies at high interest rates. Those loans were made in distress and probably without careful underwriting, and the borrowers scammed the fund and disappeared with the money. The CEO resigned. The receiver initially estimated the portfolio was worth $500 million less than what had last been reported to investors.
What they share
The CEOs of all three companies were convicted of crimes over the lies and losses. Concentration risk, misleading investors and the sunk-cost fallacy were the common threads. For some, deals grew larger to keep a dead deal alive. For others, a big bet was a last attempt to make back losses elsewhere.
Source reporting: deBanked.
