Thrasio, a company that momentarily occupied the apex of the e-commerce industry in North America at the onset of the pandemic in early 2021, is a fact that many individuals are unaware of. At that time, the valuation of this aggregator corporation was astonishingly high at $10 billion. It aggressively acquired successful brands within Amazon’s ecosystem, promising to leverage data and operational expertise to elevate these brands’ sales to new heights. Goldman Sachs, Blackstone, and JPMorgan Chase, financial titans, were also drawn to the company, investing $3.4 billion in equity and debt financing to support its business model and vision.
However, three years later, this erstwhile e-commerce aggregation king filed for bankruptcy protection. This voyage from the peak of the industry to the abyss serves as a profound reminder of a fundamental principle in North America’s private credit markets: the quality of collateral is the determining factor.
Major financial institutions demonstrated substantial disagreements regarding the valuation of their loans to Thrasio during its financial difficulties. The company’s shares were priced at $0.65 and $0.79 by Bain Capital and Oaktree Capital, respectively. Monroe Capital assigned a price of $0.84, while Goldman Sachs was the most pessimistic, estimating it at $0.59. Two Blackstone funds valued it at $0.71 and $0.75. This significant valuation discrepancy revealed a reality: even the most sophisticated financial analysts become perplexed when collateral lacks distinct value standards.
I hope to offer some valuable insights to high-net-worth Chinese individuals in North America through this narrative. It is important to note that not all debt investments are created equal, even in North America. The quality and fortitude of collateral are the foundation of genuine protection. Solid tangible assets can frequently withstand market cyclones, whereas investments that depend on intangible assets that are difficult to value may collapse immediately during crises.
Thrasio’s collateral was not genuinely physical assets, as it lacked unified valuation techniques. This resulted in significant price discrepancies and made it challenging to liquidate when collateral needed to be seized. Ultimately, this once-proud organization realized that its brand portfolio and data-driven operational model were as frail as paper in the event of a financial crisis.
The value of e-commerce brands is significantly influenced by the evolving competitive environment, changing consumer preferences, and continuous marketing investments. The values of these brands can swiftly deteriorate in response to changes in market conditions. More importantly, these digital assets are challenging to assess using conventional valuation methods, and appraisers may arrive at wildly varying conclusions based on their own assumptions and models.
Conversely, lenders who prioritize tangible asset collateral are inclined to endure economic crises more effectively. Real estate developers are also subject to market volatility; however, the value of land and buildings is relatively consistent. In the worst-case scenario, financiers can at least seize physical assets.
It is imperative for high-net-worth Chinese investors in North America to comprehend these collateral characteristics. The initial inquiry to be addressed when assessing any comparable projects is not the magnitude of the returns, but rather whether there are an adequate number of tangible assets to facilitate rapid liquidation. Will the values of these assets experience a substantial decline in response to market pressure?
The history of the financial market reveals a straightforward yet profound truth: whilst lending is effortless, the primary objective is to recover funds. As the old Wall Street adage goes, “There are old lenders and there are bold lenders, but there are no old, bold lenders.”
