Colonnade publishes article with The Monitor
INDEPENDENTS: The Innovators of Today & Tomorrow
BY CHRISTOPHER GILLOCK
The size and market share of independent finance and leasing firms will fluctuate with the economic cycle, but the sector will always play an important role in the industry. Our industry’s $1 trillion size combined with the wide variety of equipment users’ requirements, creates multiple segments and a plethora of opportunities for creative entrepreneurs to disrupt and innovate.
As the financial crisis and recession of 2008-2009 faded and the economic recovery lengthened, commercial banks and other financial institution “rediscovered” the equipment finance and leasing sector. This led to a flurry of M&A activity, and several independent players in the United States were acquired by larger institutions. The massive financial disruption that occurred ten years ago caused several formidable equipment finance and leasing players to exit the sector, shutting down or selling their operations to other financial institutions (GE Capital is the most notable example). Some observers see this as a sign that independent finance and leasing companies can’t compete with institutional participants that have scale and lower costs of capital.
I disagree.
The absolute size of the $1 trillion equipment finance and leasing industry in the United States, combined with the wide variety of equipment users’ requirements, creates multiple segments and a plethora of opportunities for creative entrepreneurs to disrupt and innovate. In addition, when an independent equipment finance/leasing firm is acquired by a bank or other large financial institution, there is often a group of professionals that “don’t fit” in the new environment — they leave and seek to re-create the environment they enjoyed before their company was sold. A similar dynamic emerges when an industry participant decides to exit the equipment finance and leasing business — the displaced professionals provide the human capital for a new firm.
Specialized Players and Innovators
Here is a short list of a few of the specialized players in the equipment finance and leasing sector: Air Lease Corporation, Aztec Financial, Crossroads Equipment Finance & Leasing, GATX Corporation, MedOne Group, Northland Capital Financial, Onpoint Capital, Triton International, and Wheels, Inc.
This group specializes in specific equipment categories. There are other forms of specialization — by transaction size (small ticket, mid-ticket, big ticket), by origination methodology (direct vs. indirect/vendor/broker), by credit tier (investment grade, non-investment grade, small business) and by product type (equipment secured loans, finance leases, operating leases). While commercial banks and other institutions can and do participate in many of these specialized sub-markets, independents continue to be the innovators. Banks and other financial institutions often enter specialized equipment leasing and finance businesses by acquiring the innovative independents. Here are some of recent transactions that fit the description of “large institution buys successful innovative independent leasing firm.”
Independents often take the lead with innovative approaches to meeting emerging market demands. GreatAmerica Financial Services, a major independent equipment leasing and finance firm, recently provided an example of a creative response to a market need:
Pinnaca is a global provider of audio/visual (AV) managed services for a broad range of customers — from large enterprises to boutique AV systems integrators. The company was seeking a way to provide customers with a flexible, bundled approach to financing its multifaceted offering of systems and services. GreatAmerica developed a bespoke solution that combines “AV as a service” with flexible equipment financing, enabling Pinnaca customers to seamlessly upgrade to new technology while controlling IT costs and conserving capital required for periodic systems refresh investments. Equipment lease/loan payments, systems charges and services are combined into a single invoice and Pinnaca’s customers have full control of the assets at the end of the lease term. This is the sort of nimble market response that independents bring to their customers.
The Next Generation of Independents
As demonstrated in the list of transactions in chart 2, independents are often acquisition targets for larger institutions. Over the past five years, some of the larger independent equipment finance firms have been absorbed — People’s United Bank acquired LEAF Commercial Capital, United Community Banks acquired Navitas Credit Corp., Solar Capital acquired Nations Equipment Finance, Providence Bank acquired Cobra Capital and State Bank Financial acquired Patriot Capital. Over the same period, there have also been significant investments by private equity firms into existing independent leasing and finance companies — TZP Group bought a majority stake in Kingsbridge Holdings (an IT equipment lessor), Copley Equity Partners bought North Star Leasing (a 30-year old small ticket equipment finance firm) and Warburg Pincus bought Ascentium Capital (one of the largest independent equipment finance and leasing companies in the U.S.). The investment thesis adopted by these PE firms focuses on growth, with opportunities created when independent firms are absorbed by larger institutions and abandon markets that don’t fit with the priorities of the new owner. These PE-backed independents are part of the next generation.
The demise of GE Capital also put a large share of the equipment finance and leasing market “up for grabs.” Some former GE Capital personnel have migrated to the next generation of independent equipment leasing/finance firms to take advantage of the disruption caused by the break-up and sale of GE Capital’s equipment finance and leasing operations. Other significant institutional participants in equipment finance also significantly reduced their participation in the sector in the past few years — AIG is one example.
Stonebriar Commercial Finance was launched four years ago with a team of displaced senior executives from AIG Commercial Equipment Finance and GE Capital. This firm has found a significant underserved segment of the equipment finance sector and has been able to quickly establish a significant position by focusing on uncontested markets.
Verdant Commercial Capital was launched about one year ago by a team of senior executives from PNC Equipment Finance (part of PNC Bank). The CEO of Verdant was the co-founder of Information Leasing Corporation, which was purchased in 1996 by a bank that ultimately became part of PNC via acquisition. Verdant raised its initial equity capital from Orchard Holdings, the investment arm of a wealthy family. Verdant is using both organic growth and acquisitions to establish market position in select niche equipment finance/leasing markets, such as machine tools, specialty vehicles, renewable energy and information technology.
The Consolidation/Fragmentation Cycle in Equipment Finance and Leasing
The financial crisis and recession forced a contraction in the equipment finance and leasing sector. Independent firms, dependent on commercial banks and the capital markets for funding, were disproportionately affected by the liquidity crunch caused by severe contagion from the collapse of the mortgage-backed securities and derivatives markets. Some independent firms lost access to their funding sources and were forced to halt new originations. The market share held by independent equipment and leasing firms contracted. The market share of larger institutions grew (although the absolute volume of equipment finance and leasing transactions declined due to the crisis and recession). The crisis caused some consolidation in the equipment finance and leasing sector.
By 2010, the economic recovery was underway. The dislocation in the equipment finance and leasing sector attracted the attention of private equity firms and other contrarian investors. This led to a number of transactions involving independent firms. LEAF Commercial Capital raised $50 million of equity in 2011 from EOS Partners to meet the unmet demand for equipment finance on the part of small and mid-sized businesses. Also in 2011, Navitas Credit Corp., a three-year old firm, sold a majority stake to Blue Mountain Capital Management. The consolidation/fragmentation cycle shifted towards fragmentation as new capital and personnel came into the independent segment of the equipment finance and leasing industry.
As I mentioned at the beginning of this article, large institutions rediscovered the equipment finance and leasing sector about three years ago, and several significant independents have been acquired by banks and other financial services firms. This consolidation period may be ending, and we are beginning to see migration of capital and personnel to the “NextGen” of independent finance firms.
Conclusion
The size and market share of independent finance and leasing firms will fluctuate with the economic cycle, but the sector will always play an important role in the industry. Innovation and nimbleness allow these scrappy firms to succeed against their larger, lower cost competitors. Successful independents will always become acquisition targets, as banks remember that leasing firms originate attractive assets. And the consolidation/fragmentation cycle will continue. There will always be an up and coming Next Generation of independents.
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