Phil Carlson President & CEO, Nations Equipment Finance

Tom Fanelli Chief Risk Officer, Nations Equipment Finance

Conventional thinking would lead most people to think that being engaged in any one profession would, at best, yield a sense of security and predictability and, at worst, an experience of monotony. When it comes to Phil Carlson, a 30-year veteran of the commercial lending and leasing profession and president and CEO of the newly launched Nations Equipment Finance (NEF), conventional thinking seems to take a back seat. “For me, I think this is a fun business,” Carlson says candidly. And to set the record straight, he acknowledges that with the launch of the Norwalk, CT-based equipment finance company, “I’m coming back to equipment leasing from having done a little bit of cash-flow lending at GE and FirstLight Financial Corporation. But most of my career has been in the equipment leasing and finance business … and it’s just a fun industry.”

Carlson typifies many longtime professionals in the equipment finance industry in that even when times are tough, there’s something that keeps them in the game. Carlson explains, “I like the deals … they are creative, you work with some pretty smart people and you can get paid well for that. It’s really no more complicated than that.”

Veterans Reconvene to Fill the Void…
But there may be more to it … like the thrill of the launch. Carlson, who began in the industry in 1980, started a leasing company in 1986 with a colleague from Integrated Resources. “That was fun too. I went on to John Hancock as a director of lease syndications and then onto GE Capital in 1992 where I spent 14 years.” While at GE Capital, Carlson led the leveraged finance business for three years and, in 2007, he was part of a group from GE that formed FirstLight Financial Corporation. The venture, which billed itself as a one-stop source of capital offering senior, second lien and mezzanine debt, was short lived due to the funding problems brought on by the 2008 recession. Yet, Carlson was undaunted and in short order, gathered another group from GE Capital to form Nations Equipment Finance.

At Carlson’s side stands Tom Fanelli, NEF’s chief risk officer. A 41-year veteran of GE Capital, Fanelli served as chief risk officer of its Commercial Equipment Financing business from 1985 to 2005. During that time, he oversaw the credit risk components for some $62 billion worth of assets in 15 countries. He formally retired from GE in 2009, and recalls those days as fun and exciting as well. But like Carlson, Fanelli sees today’s environment as ripe with opportunity for the new company. With regard to his time at GE Capital, Fanelli explains, “It was a good run with great people and leadership … we learned a lot, built a lot and had a great time doing it. And today, the market is such that it’s lending itself right into our hands. Most banks are restrictive as to what they can loan against or to whom they can loan money to. The finance companies have pulled back as well… They are all looking for investment-grade quality credits. Aside from that, many of us have worked together for the last 14 to 20 years. It’s more like a family than it is a business. It’s a lot of fun and I think that’s what it really comes down to in the end.”

And, of course, there are the possibilities given the current state of the markets. Carlson explains, “We’ve put together a team with some people from GE… We’ve worked together for many years and we’re excited to get back into the equipment finance business, frankly, because we see a great opportunity.” As Carlson assesses the landscape, he notes that banks have retrenched and are forced into what he calls “a smaller credit box.” The other finance companies — not only GE and CIT, but others as well — have also pulled back significantly and no longer fill the financing void for smaller and middle-market companies. He concedes that the equipment finance market is smaller on the demand side these days, “But,” he notes, “there are a lot fewer players servicing it than there were three or four years ago. And I can tell you, we’ve already seen a lot of deal activity in a very short period of time.”

In its first six weeks of operation, Fanelli notes the NEF team has reviewed over $232 million in deals with another $176 million pending in the system. “Personally, I think that’s amazing … the floodgates are open.” But from whence cometh the deal flow?

Carlson says, “We’re not expecting to have it be a really large organization with a large leasing sales force. Two of the guys on our team are technically salesmen, and we plan to have two or three more by the end of our second year. But we’re focused primarily on building a high-quality portfolio and not focused on building a big infrastructure.” As such, he explains, “We’re tapping the leasing brokerage community and other leasing companies for our deal flow … at least for the near future.”

Looking once again at conventional thinking, this approach could seem a bit counterculture, given the fact many banks and funding sources have pulled away from funding transactions sourced through the indirect channel in recent years. The 2010 Monitor 100 noted that new business funded through indirect sources slipped from $13.6 billion in 2007 to $6.6 billion in 2009 — the largest percentage decrease registered among the origination sources in the report’s two-year comparison.

Therefore, Carlson is certain leasing brokers will delight in hearing word of a new funding source. He says good-naturedly, “I’m sure that will be good news for those folks… I was a leasing broker a million years ago and I know how it works. You’re always looking for new sources.”

In describing NEF’s approach, Fanelli further explains, “There’s a benefit here too — we all have a strong risk background. We’ve lived in risk for all our lives and that’s the other part of the equation. Personally, I’ve lived through five recessions and, as a group, we’ve learned over the course of time how to do business in a recessionary cycle and that is obviously important. We understand the market and we know how to make sure we are collaterally safe in our transactions.”

‘A Disciplined Risk Culture … Extensive Knowledge’
While much has been written and said about the GE Capital culture — 
after all, there are more than 10,500 mentions on Google alone — I asked both Carlson and Fanelli to share their thoughts on the topic. Which aspects of GE Capital’s culture would be emulated in the culture at Nations Equipment Finance?

Carlson says, “First and foremost, I would say we’ll have a disciplined risk culture with an extensive knowledge of equipment and equipment values. And I’d add creative deal structuring to that.”

Fanelli agrees. “My thoughts are just about the same. I spent 41 years at GE and Phil spent 14, and that culture has a lot to do with what we know today. I’d add that we are in an environment today where we can make a play for middle-market customers … an area where many don’t care to be in right now. GE was a great training environment and we learned a great deal there.”

And the facts underscore Fanelli’s and Carlson’s appreciation for the skills acquired while at GE. Nations Equipment Finance is comprised of 12 employees, nine with GE experience. Aside from Carlson and Fanelli, the new firm is staffed by Dennis Bickerstaff, Randy Hicks, Saurin Shah and Ed Stolarski, who Carlson refers to as the “original six.” He adds,” We expect to have 12-14 on board by mid-May 2011, and in two years we’re looking to employ 23 people. In three years, we’re projecting 30 professionals in total.”

The thrust of the business is pretty straightforward, providing equipment financing across a broad variety of equipment types. Transactions will range from $500,000 to $20 million. What then, will it be that differentiates the new company in the marketplace? “That’s a good question … for now, it’s just the fact that we have liquidity coupled with the fact that we are a creative group that has been at this a long time. And that’s the bigger of the two because people will start having money again and things will be more competitive. So our experience of having seen every type of equipment leasing deal out there over 30 to 40 years will have us stand out.”

Abrams Capital… ‘A Thoughtful, Pragmatic Investor’
As announced at the firm’s launch in October, NEF is backed by Abrams Capital, a Boston-based investment firm. Carlson notes the transaction was unique in that it didn’t come about through the normal money-raising process. He states, “We spoke with a great many investors, maybe 30 or so and Abrams Capital was the only one that truly understood what we were out to accomplish. They are very thoughtful and pragmatic investors with a great deal of foresight. As we all know, there isn’t a whole lot of liquidity in this market. They see the opportunity to fill that void and, in time, realize decent returns with managed risk … they just get it.”

Both Carlson and Fanelli are surprised by the reception they have received thus far. Apart from the 60-plus deals that have crossed their desks, the two have received many congratulatory phone calls and e-mails on the launch. Carlson says, “It’s been extremely positive … much more than I thought with people just calling to wish us luck. I think it’s encouraging for people to see a new equipment finance company coming on the scene.”

Fanelli reiterates, “It’s really been great … yes, and the floodgates are open.”