2023 Monitor 100: Growth Amid Economic Anxiety

by Rita E. Garwood Monitor 100 2023
The Monitor 100 companies continued to chart steady growth despite a looming recession, ongoing inflation, a rising rate environment, climbing capital costs and mounting margin pressure. With a recession in the forecast and a cooling job market, the group continues to contend with supply chain challenges while striving to become more efficient and effective companies.

Rita E. Garwood,
Editor in Chief,

Monitor Suite members can download a copy of the 2023 Monitor 100 charts in PDF or Excel form here.

This year’s Monitor 100 companies reported net assets of $555.9 billion, new business volume of $216.6 billion and 26,609 employees.

The portfolios of the 100 largest equipment finance companies experienced a solid 6.9% rate of year-over-year growth in 2022, up from 2021’s holding pattern of 0.9% portfolio growth. Eighty-three companies combined to reported $43.6 billion in growth and 17 combined to record a decline of $7.7 billion, resulting in a collective gain of nearly $38.9 billion for the group.

After achieving the highest rate of new business volume recorded in the history of the ranking last year, the Monitor 100 companies reported $216.6 billion in new business volume in this year’s ranking, which continued the group’s volume growth, albeit at a lower year-over-year rate of 7.5%. Of the group, 79 combined to report origination increases equal to $21.5 billion, while 20 combined to record declines totaling $6.5 billion and one company reported no change, resulting in a collective net gain of $15 billion.

Looming Recession

The greatest concern for more than half (55%) of Monitor 100 companies this year is the economy and capital spending.

“As we’ve seen, the economy has experienced a lot of tumult this year, and while we seem to be reaching more stable ground, there is always an unpredictable element to it — particularly because of external forces that we cannot control,” Dan Clark, head of vehicle and equipment finance at BMO, says.

In June, zero equipment finance leaders surveyed for the Equipment Leasing and Finance Foundations’ Monthly Confidence Index characterized the U.S. economy as “excellent.” In July, 11.5% of ELFA MCI-25 leaders believed that the economy would improve in the next six months, while 53.9% expected no change and 34.6% predicted that economic conditions would decline.

The threat of an impending recession has been looming over the industry for quite some time. After rising rapidly for two years, inflation began to slow in June, according to the Personal Consumption Expenditures (PCE) Index released by the Bureau of Economic Activity.

Equipment finance companies have felt the impact of inflation in various ways, including through fluctuating asset values as well as the rising cost of materials and talent. But the Federal Reserve’s “war on inflation,” which has led to incremental increases in the Federal Funds Rate at 11 of the Fed’s last 12 meetings since March 2022, has created a rising rate environment that has increased the cost of funds for borrowers and independents while simultaneously affecting the buy and sell sides of the syndication market.

Paper Trading Dilemmas

“There is definitely a higher premium on pricing in today’s indirect market as bank groups compete for capital internally, deposits are more expensive and with talks of a possible recession,” Chris Lerma, president of AP Equipment Financing, says. “This premium pricing is putting downward pressure on the gain on sale or fees when selling paper. If you believe we are close to the terminal Fed rate, the economy will achieve a ‘soft landing’ and rates will start to go down next year, it may be a great time to buy quality paper at higher rate levels with the right debt structure. We are definitely more inclined to buy and hold and continue growing a quality portfolio in this environment.”

“We had to syndicate at lower gain to reduce rate risk and executed swaps to lock in rates and portfolio profits,” the leader of a Foreign Affiliate says.

“The decision to buy or sell more paper depends on several factors when closely analyzing the market conditions we’re experiencing today,” Amrita Patel, head of equipment finance at Wells Fargo, says. “My team and I will first measure whether we have an appetite for risk or are looking to mitigate exposures and focus on improving liquidity. This forces us to closely examine our portfolio and ensure we’re diversifying our footprint across industries and managing risks accordingly.”

Climbing Cost of Capital

When lenders scrutinize their portfolios and tighten up credit standards, independents tend to experience increased deal flow. But with this opportunity in today’s rising rate environment comes the need to closely monitor the cost of capital.

“The biggest challenge [in 2022] was the increase in cost of funds for both us and our customers,” the leader of an Independent says, citing higher rates on asset-backed securities transactions, which led to an increase in cost of funds that impacted liquidity and profitability.

“2022 was most challenging due to the rising rate environment from the aspect that cost of funds were constantly changing, and we were having to update internal automations and processes constantly,” the leader of a U.S. Bank Affiliate says. “Most of our sales team has not experienced selling in a time of rising uncertainty with rates increasing regularly.”

“The increased cost of capital across all markets could potentially drive us toward recession,” Steve Grosso, CEO of Auxilior Capital Partners, says.

Mounting Margin Pressure

Maintaining competitive pricing amid inflation and rising rates has proved challenging for many equipment finance companies. In fact, 22% of Monitor 100 leaders cited margin compression as their greatest concern in today’s economic environment.

“The most significant challenge would be the compression of spreads on new originations,” the leader of an Independent says. “The market was slow to respond to sharp increases in the cost of borrowing with increased yields, as there was heightened competition for volume as the supply chain was initially slow to rebound in the first half of the year. Additionally, borrowing costs increased materially in many situations from the time a transaction was agreed upon and the equipment was ultimately installed and contract commenced.”

“Maintaining portfolio spreads while growing originations and the portfolio has definitely been the primary challenge this year and will continue to be for the remainder of the year,” Lerma says. “Demand seems to hold up and equipment inventory levels and prices are starting to normalize. It’s just taking some extra effort to maintain margins and provide a product that commands premium pricing.”

“Anticipating a possible small recession, our one main focus is our continued effort in finding and winning quality origination sources within our chosen markets,” the leader of a U.S. Bank Affiliate says. “Focusing on what we know and have experience in will help us maintain a quality performing portfolio.”

Economic Outlook

In its July U.S. Economic Outlook report, aptly titled, “Better-Than-Expected Does Not Mean All is Well,” the economics group of Wells Fargo indicated that the Fed’s quest to vanquish inflation will most likely lead to an economic downturn in early 2024. As the once rapidly accelerating employment market begins to lose steam and pandemic-era savings begin to dwindle, consumption and business investment are predicted to decline the second half of 2023, according to the report.

The June 2023 Beige Book, published by the Federal Reserve, noted a slight increase in economic activity with mixed reports on consumer spending and manufacturing and reports of “subdued” banking conditions as lending experienced declines. The Beige Book also indicated that the jobs market is showing signs of a slowdown. While demand for talent remained “healthy,” the Fed indicated that the ease of hiring quality candidates had improved, while the sky-high turnover rates that have characterized the past few years have started returning to pre-pandemic levels.

Where to Work?

Many equipment finance companies will welcome this news, as hiring has been a top priority for many leaders. In January, the unemployment rate hit 3.4%, the lowest rate recorded in 54 years, and despite layoffs by many large employers, the rate has remained low throughout 2023.

“Employee recruitment and development are near the top of the list [of concerns],” Joe Leonard, CEO of Oakmont Capital Services, says. “Technology has significantly enhanced many of our tasks, and we continue to deploy IT resources. However, this is an industry that has been built on relationships. Recruiting skilled employees and developing talent remains a priority.”

Even as the job market cools, lingering issues from the pandemic remain, such as the ongoing discussion about where employees work.

“There continues to be many diverse and conflicting perspectives and opinions but no agreement as to what we can or should expect of the social contract between employee and employer,” the leader of a U.S. Bank Affiliate says. “We have proven that companies can work digitally and remotely more than previously believed but it has been at the expense of colleague engagement and development. This has created a distance between colleagues and deterioration of company culture which has contributed to ‘quiet quitting,’ higher turnover and overall lower efficacy of the organization. Although customers have been understanding of the challenges faced during COVID and accepted lower service levels, customers are now fatigued and expecting better. Colleagues are frustrated and pushing back against employers’ requirements to return to some pre-COVID normalcy, but no one knows what the balance needs to be.”

According to research from Stanford University, the ongoing ‘where to work’ debate offers many options to consider. While fully remote work is associated with a 10% drop in productivity, hybrid workers maintain the same level of productivity as their in-person peers. But at the same time, lower costs associated with a fully remote workforce, including the ability to hire globally and forgo dedicated office space, continue to make this a popular approach, according to the report.

Regardless of where employees are working, many equipment finance companies encountered workforce challenges over the last year, with several Monitor 100 companies citing higher than average turnover rates, pressure to increase wages and apathetic or unproductive employees leading to operational constraints.

Despite these challenges, the Monitor 100 companies posted positive gains in staff headcount, employing 26,609 people by year end 2022, up 1,146 (4.5%) from 25,463 the previous year. Independents increased the size of their teams by 8.3%, while the teams of Foreign Affiliates, U.S. Banks and Captives grew by 5.5%, 3.8% and 3.3%, respectively.

The Supply Chain Saga

In addition to workforce woes, supply chain challenges were another COVID-19 carryover that impacted many equipment finance companies in 2022.

“Supply chain challenges led to elongated construction timelines and lack of available equipment,” the leader of a U.S. Bank Affiliate says. “This negatively affected some equipment- heavy business channels.”

“While the environment has substantially improved, there are still meaningful supply chain challenges throughout the industry,” the leader of a U.S. Bank Affiliate says. “These challenges are most apparent in equipment finance through the timing of equipment delivery and equipment pricing.”

“Equipment shortages related to supply chain were the No. 1 issue we had during 2022,” another U.S. Bank Affiliate leader says. “Our approved backlog was extremely high, but the lack of equipment to be delivered significantly impacted bookings.”

While supply chain issues caused delays and curtailed new business volume in many cases, a Captive noted that these challenges also helped drive cloud adoption.

Stronger, Better, Faster

No matter the market, there is always room for improvement. Many Monitor 100 companies are on a mission to become more efficient in 2023, citing goals to improve processing and funding times, streamline underwriting and documentation, and implement technology to automate as much as possible.

Leaders today are curious about artificial intelligence, supporting the environmental sustainability goals of customers, shifting go-to-market strategies from direct sales to digital and creating workplaces where mental health can be discussed openly and honestly.

What the Future Holds

Of the 94 Monitor 100 companies that provided a forecast for estimated year-end 2023 net assets, 64 (68%) predicted an increase, eight (9%) forecast a decrease and 22 (23%) anticipated no change to the size of their portfolios. The forecast for the group, calculated on an average weighted basis, is 6.4%, which would increase total Monitor 100 assets to $591.3 billion by year-end 2023, an increase of $35.4 billion. Last year, the group predicted an increase of 5.9%, which was slightly lower than the 6.9% increase achieved by this year’s group.

Of the 94 companies that provided a new business volume forecast for year-end 2023, 64 (68%) expected an increase, eight (9%) anticipated a net decline and 22 (23%) predicted originations would remain stable on a year-over-year basis. Calculating the forecast on an average weighted basis, the group predicted a 4.1% year-over-year increase in new business volume, which would bring year-end 2023 volume to $225.6 billion, an almost $9 billion increase. Looking back to last year’s prediction of 7.7% volume growth in 2022, the companies came incredibly close to making that prediction come true with a 7.5% year-over-year increase.

Of the 81 companies that completed a staffing forecast, 64 (79%) anticipate hiring in 2023, while three (4%) plan to decrease staffing levels and 14 anticipate no change. As a group, the Monitor 100 companies plan to hire 880 new employees in 2023, a 5% year-over-year increase, with U.S. Bank Affiliates providing 40.4% of the total, Captives 34.6%, Independents 10% and Foreign Affiliates 14.9%.

The path forward may be riddled with challenges — economic, internal, competitive, regulatory and geopolitical — but as the Monitor 100 companies have demonstrated for more than 30 years, the top 100 companies in equipment finance will continue to surmount every obstacle that’s thrown their way and will inevitably emerge stronger because of the struggle.

As always, we appreciate the time and effort of the equipment finance companies that participate in our annual survey. The Monitor 100 would not be possible without the ongoing cooperation of the equipment finance community.

ABOUT THE AUTHOR: Rita E. Garwood is editor in chief of Monitor.

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