In 2014, after a long period of reduced activity resulting from the Great Recession, the equipment financing merger and acquisition (M&A) market finally showed signs of heating up. In fact, by the end of the year, the pace had experienced strong growth. While predicting the future can be a perilous business, I do expect the upswing in M&A activity to continue — at least through the first half of 2015.

With a lot of liquidity continuing in the financial system, the search is on to find higher yielding investments. Banks, in particular, are eager to enjoy the higher yields obtained by expanding into leasing or diversifying their existing leasing business. Unlike previous years — in which a few large acquisitions of equipment leasing and financing businesses by top 100 banks dominated M&A activity — there is now a growing trend of small- to mid-sized banks acquiring small leasing companies to provide them with the expertise to expand in the equipment financing business.

As always, though, banks are not alone in this quest. At this time, active buyers include other leasing companies and private equity firms, a good sign of market robustness. We expect there to be a continuing active M&A market as long as satisfactory liquidity levels continue, interest rates stay at current levels and business prospects remain positive.

Rising demand for leasing company acquisitions has resulted in some of the highest acquisition valuations that we have seen in the past 10 years. Thus it is not surprising that an increasing number of independent leasing companies have been exploring the M&A market to see if they can obtain the level of pricing that would be attractive enough for them to give up their independence.

Business Confidence and Economic Factors

Business confidence and economic factors are two of the most important influences on M&A activity. The January 2015 Monthly Confidence Index – Equipment Finance Industry, published by the Equipment Leasing & Finance Foundation, shows the highest confidence level in our market in over three years. Additionally, the MCI showed that none of the respondents expected business conditions to worsen over the next four months, although it must be noted that the percentage of respondents that expected business conditions to improve was down somewhat from December’s rating.

One dampening influence that has received much attention recently is the uncertainty surrounding the fall of oil prices. While the overall impact is still playing out, it is clear that not all results are positive. The retail and transportation sectors — and lessees in those industries — are clearly benefiting from the reduced prices. However, other capital-intensive sectors with significant equipment finance activity, particularly renewable fuel and oil services companies, could see a real shake-out starting in mid-2015. Since strong portfolio performance is a critical factor in M&A pricing, the longer-term performance impact on struggling sectors could negatively affect acquisition prices as the year goes along.

Recent Notable Transactions

The second half of 2014 began with two relatively large M&A transactions. In July, Element Financial acquired PHH Arval. This fleet management services business did not fit into the plans of its parent company, PHH Corporation, to concentrate on its mortgage business. One of the largest independent lessors, Direct Capital, was acquired by CIT in August 2014. With assets of about $500 million, Direct Capital provided CIT with expanded capabilities to serve small businesses, particularly with its online lending platform.

In October and November 2014, three banks that did not have significant equipment leasing activities acquired equipment leasing businesses. First Midwest Bank, the principal operating subsidiary of First Midwest Bancorp, a $9 billion financial institution headquartered in Itasca, IL, acquired National Machine Tool Financial of Elk Grove Village, IL. Crestmark Bank, a $0.6 billion bank based in Troy, MI, acquired Bloomfield Hills, MI-based TIP Capital. Finally, North Community Bank, now operating as Byline Bank, a subsidiary of $2.4 billion Chicago-based Metropolitan Bank Group, acquired the equipment leasing and financing assets and business of Baytree National Bank & Trust of Lake Forest, IL. It is interesting that all three of the acquiring banks bought leasing businesses that are based in their own metropolitan areas.

The year 2014 ended with the December announcement that Microfinancial Incorporated, one of the few publicly-owned equipment leasing companies, had entered into an agreement to be acquired by an affiliate of Fortress Investment Group, a large investment management company. The acquisition was completed in January 2015.

Thoughts for the Future

Near Term

Following on the strong M&A activity for leasing companies in late 2014, the economy continues in a relative period of stability — at least through the first quarter — and high excess liquidity allows attractive lessors to command very strong valuations.

Activity in 2014 also means that the number of acquisition candidates is somewhat limited, fueling an even more robust seller’s market. As of now, the potential longer-term uncertainty noted above provides some incentive to close M&A transactions sooner rather than later this year.

Advice for Sellers

If you are thinking about selling, but plan to put it off for a year or two, be prepared for M&A market conditions that may not be as favorable. Market conditions may even decline somewhat by the end of this year. Remember that the value of your company is dependent not only on its performance but also on overall market prices.
However, you may simply not be ready to sell your company at this time. You can still be proactive by taking steps to position your company so it will be worth more when you choose the right time to sell.

Advice for Buyers

Buyers must be sure to perform thorough due diligence. When evaluating a leasing company, the company’s credit parameters and collections experience are critically important. Don’t give in to the temptation to assume that today’s all-time-low bad debt losses for leasing companies will remain steady in the future.

Some buyers do not perform enough due diligence on residual values. Whether a company has been conservative or aggressive in its residual assumptions can make a big difference in its financial results. Buyer company evaluations need to consider carefully the target leasing company’s accounting assumptions for both residual values and loss reserves.

Conclusion

The current market may be one of the best for M&A for the next few years. Our economy will always have cycles, and we need look back only a few years to see the difficult times experienced by many leasing companies, fueled by sky-rocketing losses during the Great Recession. There are already some clouds on the horizon, although no one is expecting another precipitous downturn, at least at this point. The message is clear: Now is a great environment for the equipment leasing M&A market.

Bruce Kropschot is senior managing director of The Alta Group and heads the global consultancy’s merger and acquisition advisory practice in North America. Alta executives have arranged the sale of more than 200 equipment leasing and finance companies in the U.S. and several other countries. In 2014, Alta represented two buyers and two sellers in M&A transactions completed in the U.S. and Canada. In addition to representing buyers and sellers of leasing companies, Alta’s M&A advisors arrange the sale of lease portfolios, assist leasing companies in obtaining debt and equity capital, perform business valuations, and provide acquisition due diligence support. Kropschot, active in the equipment leasing industry since 1972, served as a senior executive with three large leasing companies and has been providing M&A advisory services for 29 years. For more information call (239) 260-4405 or email [email protected].