Colonnade publishes industry commentary on below-prime auto finance.
The fundamentals of the below-prime auto finance industry have not deteriorated significantly, but the sector is now out of favor with traditional financial sponsors. The wave of investments in 2010-12 led to heightened competition and loose underwriting, followed by a spike in delinquencies and losses. The result is a significant decrease in new equity capital available to the sector. While banks that lend to the below-prime auto finance industry are more cautious and selective, senior debt availability remains strong for performing industry participants due, in large part, to the asset-backed securities market.
The industry has bifurcated between large (total receivables over $300 million) and small below-prime auto finance firms. Large, well-run players continue to grow profitably; a few smaller firms have failed.
Few M&A transactions have been completed in recent years, although there have been some capitulations (business exits/liquidations). Several of the large, successful firms are still seeking change of control as their private equity owners run through their investment horizons.
Colonnade expects to see an uptick in mergers and acquisitions activity in the industry over the next eighteen months as private equity investors are forced to take their properties to market. There will be transactions, but the valuations are unlikely to meet the original expectations of the investors. These market dynamics will create compelling investment opportunities for long-term, yield-oriented investors, such as family offices and other non-traditional financial sponsors.