Blockbuster Deals: A Look at High Profile Independent Acquisitions
by Phil Neuffer September/October 2017
Over the last 12 months, several major independent equipment leasing companies have been acquired. Banks and private equity firms were some of the major acquirers, with People’s United Bank buying LEAF Commercial Capital and Solar Capital taking on Nations Equipment Finance. What has led to this spike in activity, and will it continue?
Independent equipment leasing companies are getting bought up left and right. In just the last year, notable independents LEAF Commercial Capital, Nations Equipment Finance, Ascentium Capital and ECN Capital have been acquired by a variety of purchasers, including private equity firms, banks and public business development companies.
While the recent influx of independent acquisitions might seem higher than usual, this is not a new trend. In fact, it dates back to the 1980s, according to Bruce Kropschot of The Alta Group. Kropschot explains that in the 80s, a number of new buyers entered the market, with savings and loans, other thrift institutions and the former AT&T regional telephone companies looking to enter the leasing industry. While most of these firms eventually exited, the attractiveness of successful independent leasing companies endured. The cycle has traveled in line with the economy, with activity falling in 2000 when the dot-com bubble burst. The sector progressed until 2008 when the Great Recession hit. Even during the downturn, however, the equipment leasing and finance industry fared relatively well.
Since 2011, the equipment finance market has been growing, and M&A in equipment leasing, especially for independents, is as strong as ever.
The need for competitive funding and an exit strategy drives the sale of the independents.
“Independents are typically owned by the management that started the business,” Kropschot says. “They need to look for liquidity at some point and time. Most independents will someday be acquired.”
The recent acceleration of acquisitions has a lot to do with the current environment, as independents are dealing in an M&A market that favors them immensely.
“Given the relatively low cost of capital, we’re at a time where evaluations are at very attractive levels for sellers and there’s no certainty that this will continue into the future,” Kropschot says. “Many independents are feeling like they may want to have an exit strategy or sell over the next three to five years, and this could be an opportune time. However, there’s no assurance that the high valuations will continue into the future.”
The benefits stretch beyond high valuations, however, with independents often gaining access to costly performance-related benefits from these deals.
“A number of independents don’t necessarily have the resources available to them to go out and upgrade technology platforms or invest heavily in certain areas of the company,” Kropschot says. “Partnering with an acquirer like a bank is a more efficient way to do that, since larger organizations often have greater systems capabilities and can provide economies of scale.”
From the acquirer’s side, there are an especially large number of reasons banks, in particular, are interested in making an acquisition.
“More and more of the banks I speak with are increasingly concerned with any acquisition they consider to be immediately or relatively quickly accretive to earnings to protect their shareholder base,” says Jim Jackson of The Alta Group.
“Acquisitions are much more likely to achieve that objective if they avoid the heavy expense burden that’s typically associated with a startup leasing company that might have little or no portfolio to provide the revenues required to offset those costs.”
“Banks see equipment leasing as a way to diversify their asset base with investments that can provide potentially greater returns within acceptable risk levels,” Jackson says. “It also provides the banks with the opportunity to provide their existing customer base with an equipment financing alternative that might not force their customers to look elsewhere for that offering.”
LEAF & People’s United
People’s United already had established equipment finance and leasing arms before it engaged LEAF Commercial Capital in talks about a possible partnership. However, LEAF presented a new opportunity for the Northeast regional bank to expand its offerings and enter new markets.
“Before the acquisition, we served our clients via People’s Capital and Leasing Corporation and People’s United Equipment Finance Corp.,” says Jeff Tengel, senior executive vice president of Commercial Banking for People’s United Bank. “We wanted to build on that success in other markets, preferably in a way that didn’t require us to build a presence in those markets from the ground up. LEAF presented an exciting opportunity to leverage an established platform, proven management team and complementary markets.”
Entering new markets was a major factor for People’s United, but it chose LEAF specifically for a number of other reasons. “LEAF’s value goes well beyond the fact that it provides us entry into complementary equipment financing markets,” Tengel says. “With LEAF, we’re acquiring a dynamic organization with leading automation, strong brand identity and outstanding people, all of which will be great assets to People’s United going forward.”
For LEAF, agreeing to an acquisition was not as out of the blue as it might seem. Miles Herman, LEAF president and chief operating officer, explains that the company is “always seeking opportunities to extend [its] reach.” Part of that comes from LEAF’s desire to avoid what Herman calls a “growth plateau.”
“In LEAF’s case, becoming part of People’s United gets us past that plateau while continuing to maintain the portfolio quality, flexibility and level of service that are integral to who we are as a company,” Herman says.
LEAF was clearly a successful company before getting involved with People’s United, having financed close to $6 billion for more than 243,000 customers. Maintaining the same level of service and strategy that got it to this level was important to both parties in this acquisition. Herman says that from a customer point of view, nothing will change other than the addition of new capabilities, which will be coming soon.
“People’s United supports and encourages LEAF’s approach to business while providing the stability of a $43 billion bank, plus the capability to offer added products and services,” Herman says. “Rather than change the qualities that have made LEAF so successful as an independent in the marketplace, People’s United leverages them. With this acquisition and LEAF’s transition to the bank-owned equipment leasing and finance space, we’re adding strength to strength, to the benefit of both our businesses and the customers who rely on them for equipment leasing and finance.”
Nations & Solar Capital
Banks are not the only financial institutions acquiring independent leasing companies. Private equity firms have also shown an increased willingness to invest in the industry.
“I think another factor, too, that we’ve seen more recently is the interest of more private equity firms in equipment leasing. These private equity firms generally have a five- to seven-year time horizon for liquidating their investments and distributing funds to their owners,” Kropschot says. “We’ve seen a number of acquisitions of leasing companies by PE firms and dispositions of [that] interest by those PE equity firms. One of the more recent examples is Financial Pacific, whose private equity backers were able to sell their holdings very quickly and at a huge profit. That just spurred the interest of PE firms in the equipment leasing sector.”
While the potential to reap a large profit is obviously tantalizing, Solar Capital had more reasons to go after Nations Equipment Finance. It began with familiarity with the management team.
“Solar has been following Nations for a number of years. Senior members of the Solar and Crystal teams have longstanding relationships with NEF executives having previously worked with them at GE Capital and have tremendous respect for their sector expertise and discipline in risk assessment,” says Scott Rosen, partner and specialty finance portfolio manager for Solar Capital. “We are highly selective when we look to expand our product offering and view the NEF team as best in class.”
For Rosen and Solar Capital, the acquisition of Nations, which was built with a similar approach to business, investment philosophy and culture, is the next step in the firm’s specialty finance strategy. That began in 2010 with a $75 million debt investment in MidCap Financial, the acquisition of asset-based lenders Crystal Financial and Gemino Healthcare Finance and, finally, with a $48 million loan in 2014 to Varilease Corporation, a mid-ticket equipment lessor.
Much like the benefits an independent receives from being acquired by a bank, Nations agreed to the acquisition because of the expanded capabilities Solar Capital would provide.
“Long-term we expect the permanence and structure of Solar’s capital to provide us with the flexibility to be nimble and to generate a highly attractive and defensible portfolio,” says Phil Carlson, president and CEO of Nations. “Over time, we expect Solar’s ownership to allow us to broaden the size and types of products we offer or potentially grow through tuck-in acquisitions of other collateralized credit products. Solar’s other strategies include cash flow lending, life science lending, healthcare ABL lending, specialty finance lending and middle market ABL lending. The addition of NEF allows both Nations and Solar to be a full solutions provider to middle market clients.”
As Kropschot explains, this trend of buying equipment leasing companies is more of a cycle than an actual trend. As such, the expectation is that as valuations remain high and financial institutions like banks and PE firms are increasingly attracted to the equipment leasing space, acquisitions will continue to be prevalent.
“Since Dodd-Frank and Basel III, there has been a significant push of credit products away from the banking system and into the independent market,” Carlson says. “Credit asset managers recognize this trend and view businesses like NEF attractive ways to broaden their platforms.”
Recent shifts in the landscape have opened up voids that independent leasing companies are moving into with great success, fueling the desire of larger institutions to buy.
“With the break-up of GE Capital and the regulation of bank-owned equipment finance companies there are a lot of opportunities for independent equipment finance companies to fill the voids left in the market,” Carlson says. “Acquisitions of companies like ours validate that investors see these opportunities in the equipment finance market.” That means there is more to come.
“We’ll see considerable activity the rest of the year. There are a number of acquirers that are very eager to acquire,” Kropschot says. “There are also a number of companies available in the market right now. It’s just a question of when do the deals get closed.”