Monitor: Who are some of the new institutions entering the investment market?

Robert Rinek: It is varied; from large privately managed hedge funds and private equity firms of all sizes to investment banks, BDCs and REITs, to diversified finance companies. (For example, Merrill Lynch, Bear Stearns Merchant Banking and Cerberus, Goldman Sachs.)

M: What factors are attracting these new entrants?

RR: There is a perception that there is a good return for the risk; there’s been a lot of consolidation. (People who left those companies are now available to build new ones). There are various assets to finance and various kinds of financing needs to be met. (For example, the number of seasoned executives that came from Finova, Comdisco and Heller, all successful companies in their time.)

This is a huge market with billions of dollars of opportunities and many market niches creating opportunities from micro- to middle- to large-ticket and then from venture finance to technology and to rail assets. You can spread your risk and differentiate yourself. There will be margin pressures for everyone, but you’re better off here than in bank loans that all look the same. Also, there is a lot of experience among the leaders and that is creating trust.

M: What are some of the new entrants’ challenges?

RR: All financial institutions are going to be challenged in this “inverted yield” environment that we’re in. Conditions are challenging, but equipment finance is safer on a secured basis than in unsecured financial transactions. When you are in a credit cycle where things are as good as they are going to get, you have to question whether you are going to get paid for taking the risk. Much depends on the competitive environment.

There is some caution in the credit cycle that we are in … it’s been good … so long as you remain aware that it has to turn at some point.

M: How do these new institutions expect to grow their business?

RR: They’ll expand through both internal growth and acquisitions, but the internal growth is more important. This will be both core growth of existing business, through hiring new talent and gaining market share, as well as expanding the array of products and sales. Most people are looking at doing some term lending on a secured basis, real estate or other asset-based lending, but they won’t expand to unsecured financing. As far as acquisitions, many of the good ones right now have high price tags.

M: Who will be the winners and losers?

RR: The question should be, ‘Who will be the survivors?’ The survivors will have a strong franchise with control over their originations; they will have a direct sales force, have solid underwriting policies and back office efficiency. Being able to manage growth and having a diversified approach to the market will be critical.

M: Do you agree with some of the broad trends noted in the industry, for example, increasing strategic partnering, and community bank interest in leasing and international expansion?

RR: Captives are following their parents overseas. You see this with the large diversified financial services companies such as CIT and GE. Community banks are looking for ways to creatively add to their array of services, and leasing is viewed as an attractive form of secured lending. Outsourcing is the largest form of partnering and is stemming from the need to control costs, be more efficient and take pressure off of shrinking margins.