#7 - The Art of Flipping in the Rain

This may not come as a surprise to some but there are some uncanny similarities between the market for supercars and the bond market. Liquidity in both is underwhelming, especially in the “higher yielding”, higher value and more niche subsets. Furthermore, the days of dealers being able to make egregious margins/spreads are long gone as competition becomes fiercer and automation of both processes an ever more real concern. However, our most fond likeness between the two is that the concept of “Flipping” remains as prolific as ever in both and still somewhat of a dirty little secret to all of those involved.

Now the idea of flipping is nothing particularly new or ground breaking. Neither is it a concept which is unique to these two particular markets. No in fact quite the opposite…..any market where it is possible to achieve some form of short term arbitrage or competitive advantage over the rest of the participants involved allows for a quick flip to occur. What remains consistent however is the need for a relatively low downside risk scenario, a meaningfully worthwhile return (interesting but not blowing the doors off) and a relatively short time period for it to play out.

Interestingly, the area in both supercar and bond markets that typically provides the best opportunity for the quick flip remains without a question of a doubt the new car/new issue market. The idea, quite simply rests on an individual’s ability to guarantee themselves an allocation for a build slot of a new car or bond deal which is likely to be in demand and then sell it, at a premium onto another party who was unable to secure their desired allocation for the same thing…….as we said, nothing particularly ground breaking. That said, if you can nail down the process, it can be a somewhat lucrative business. We use the phrase “somewhat” as there are a number of intricacies which you need to be aware of if you are thinking of getting involved.

Focusing on the supercar market for now, it is important to realise early on that Manufacturers have eyes everywhere. This has the biggest implications for you, the flipper. Nowadays, if you are fortunate enough to secure a build slot allocation for a new and in demand car model, it is likely because you are deemed a valued customer by the manufacturer in question. More often than not this is because you have bought several cars from that same manufacturer over the years….well done you. But when you come to flip the new car, if you don’t have a buyer already lined up, you will inevitably have to advertise on some form of online market place, Auto Trader for example. The second that advertisement goes live, it suddenly gets a lot easier for the manufacturer to see what you are up to. This is especially true of rarer, lower volume cars where the level of customisation is high and the spec you have chosen is the same as writing your name and address in the paint work…..think of cars like the McLaren Senna and Aventador SVJ. What’s more, to combat this penchant for flipping, many manufacturers are now inserting into their new car sales agreements a clause that actually prohibits the on sale of the vehicle within a certain time period. While we have yet to see an actual law suit filed against a customer, if they catch you it is likely you will get a slap on the wrists and black listed by the manufacturer which ultimately means……no more build slots for you.

Another increasingly popular method of flipping is the sale of the build slot rather than the actual physical vehicle before it arrives. The hope (and that is the correct term) is you can lock in any premium you want to make on the vehicle before you have had to front up the full balance to pay for the car. In some circumstances, it allows the flipper to literally step out of the transaction there and then whilst allowing the new buyer to step in and take their place. Again, this is no more loved by the manufacturer selling you the car and in most cases it is likely you will still have to be involved as “the customer” throughout the entire build and sale process. 

This brings us to the pertinent question…….is the flip actually worth it? With bonds yes, with cars no. You see while both markets share many similarities and flipping in either forum is no less frowned upon in one than the other (just replace the car manufacturer with the investment bank allocating the bond deal), with bonds there is a little bit more science behind the madness. The car flip is solely based on a belief that someone who wants the new car in question will be happy to pay through the list price to get hold of it and potentially beat any waiting list. That’s not a dissuasion from doing it but that is all you are playing for…..its binary, they do or they don’t. With the bond flip, there are a few more variables at play. The same rationale for flipping with the car can exist but it is secondary or tertiary to other factors such as relative value in comparison to other bond deals, a more transparent picture of the true market demand and ultimately more liquidity to help facilitate the flipping.   

The bottom line is that while people are still willing to pay up for the latest and greatest supercars, the market for flipping them will still exist. That said it is a time intensive process that doesn’t always yield the return you were after. Maybe spending the time sourcing a car that displays the traits necessary to make it a future classic and with that an appreciating asset is a more worthwhile investment.

Happy Motoring,

 CC’s Investment Team