Markets & Finance

Wentworth's Pocket of Gold


Over the last 14 years, privately held J.G. Wentworth has mined a profitable but largely overlooked niche of the vast finance market. The company, based in Bryn Mawr, Pa., allows people who are receiving fixed payments tied to legal settlements and annuities to exchange some or all of their long-term revenue for a lump sum of cash.

While the market is worth several hundred million dollars a year in revenue, it's too small to attract the attention of major banks and finance companies. That has allowed Wentworth to build up a lead in both markets, according to CEO Michael Goodman.

Wentworth is hoping to capitalize on its success by going public, people close to the company say. No decision has been made, but Goodman confirms the possibility of an IPO. "We are certainly exploring that avenue," Goodman says.

Goodman, 44, met the founding partners in the early 1990s when they helped him sell his tech startup, which was called Corporate Technology Devices. Goodman joined Wentworth in 1994.

An IPO could be a boon for private-equity player JLL Partners. The New York investment firm, led by founder and managing director Paul Levy, acquired 70% of Wentworth just one year ago for about $170 million. Management owns the remaining 30%. Private-equity firms have been fueling the IPO market as they look for profitable exits for their investments (see BusinessWeek.com, 5/25/06, "IPOs' Comeback: Solid, Not Splashy").

ROOM TO GROW. The company's value has increased over the last year, according to Goodman. He said Wentworth was valued at $240 million when the JLL deal was done last year. Several investment banks have analyzed Wentworth. An IPO could generate several times that value, people familiar with the matter say. Revenues, in the several-hundred-million-dollar range, are growing at a double-digit pace. Such numbers are drawing private-equity firms into new areas such as finance and retail (see BusinessWeek.com, 12/20/05, "Of Donuts, Debt, and Deals").

Proceeds of an IPO could help the company grow. Wentworth, which currently employs about 160 people full-time, wants to increase its business in its current markets and expand into new ones.

There's plenty of room for growth. Every year racks up about $7.5 billion in U.S. legal settlements with multiyear payments. Only a small percentage—in the low to mid single digits, at most—of these so-called structured settlements are converted into lump-sum payments by firms such as Wentworth.

Wentworth can grow simply by boosting its marketing efforts to locate more people who want to cash out. The transactions must be approved by a judge, who rules in court that a deal with Wentworth is in the client's interest. The client must have legal representation, as well.

Most of the claims are small. The average settlement is $38,000. Wentworth avoids dealing with settlements that involve catastrophic injuries.

LUMP SUM. Wentworth also offers payouts to people who own annuities. Again, only a small percentage of people convert their multiyear payouts into lump-sum payouts.

The annuity market is similar in nature to the one for settlements, though. People buy these investment vehicles from insurance firms. An investor might, for example, purchase an annuity for $50,000 in cash. The policy would return about $1,300 a month over a period of 10 years. Wentworth would allow the user to exchange some or all of those payments, which have a total value of $160,000, for a lump sum of cash.

Goodman says new markets can be tapped as well. For example, it recently did a deal with tobacco growers who received a final 10-year subsidy from the federal government. They were able to trade their payments for a lump sum from Wentworth.

Goodman says all three businesses—annuities, structured settlements, and tobacco—share several things in common. They have a predictable source of revenue from a highly rated source such as an insurance company or the federal government.

Wentworth also makes money by packaging the payments that it buys and selling them into the securities market. It has generated about $1.5 billion in securities so far.

FORMIDABLE EFFICIENCY. The biggest risk may be that someone else decides to enter the fray. But as large as the market for structured settlements may be, it's a pittance compared with the mortgage, home-equity, or car-loan market. That has discouraged big banks from competing.

There's always the chance that another private-equity firm will enter the business. It would be easy enough to do: One might simply buy a few smaller firms and build a national retail platform.

Goodman says Wentworth could fend off rivals because of its efficiency, though. "We have very high margins because of the way we were able to finance the business," he said. Institutional investors gave the company 100% financing during the startup stage years ago. That eliminated the need to issue debt. And the company now funds itself based on operating profits, Goodman says. That, he says, should help pave the way for an IPO if the company decides to go that route.


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