How Do We Prepare for Another Potential Economic Perfect Storm?
by John C. Deane November/December 2008
In these times of economic turmoil, it helps to take a look back to figure out how to deal with the present and prepare for the future. The Alta Group’s John Deane examines the processes of the past — what worked, what didn’t and how we managed through the last Perfect Storm — to try to steer the industry on the right course.
I have been in the equipment leasing and financing industry long enough to remember the “good old days,” when macroeconomic factors didn’t impact most members of our industry very much. Sure, we had to make adjustments for economic factors and other outside drivers, but our attention was primarily focused on the more mundane requirements of building our businesses and our industry. Things have certainly changed.
Even though our industry’s last major challenge — the so-called “Perfect Storm” — is roughly eight years behind us, many are wondering whether we may be in yet another. If so, what can we do about it?
In times of great challenge, historical perspective is often useful. After my own 37 years in the business, what does such a retrospective glance show us?
Industry Milestones: The Ugly, the Bad & the Good
Ugly
Industry frauds (e.g., Bennett Leasing, Nelco, MoneyCenter, Le-Nature’s, etc.)
Our “own” original (1999-2001) Perfect Storm (e.g., gain on sale accounting, the roll-up strategy, abuse of securitization and a growth-at-any-cost focus, etc.)
Today’s capital market collapse and ensuing panic
Bad
IT residual value problems
Tax Benefit Transfers (TBTs)
Abusive lease strips, LILOs and SILOs
Norvergence-like events
Lessors with no real value proposition
Good
Attractive growth
Consistent industry profitability
Resilience
Many individual success stories
The perseverance of a core industry that is an important contributor to the U.S. economy
These milestones outline our industry’s history. What can almost four decades tell us about the factors that have propelled our most successful leasing companies? A review of the successes and failures of my own “practitioner” experience, and the lessons of hundreds of client relationships with equipment lessors and lenders across the spectrum of our industry, boils down to the following:
Luck: This is undeniably a major factor that should humble some major success stories and give comfort to some failures.
A Clear, Aligned Value Proposition: In this context, a value proposition means what the lessor brings to the market and its customers. “Aligned” means that this value proposition is consistent with the goals and objectives of the stockholder(s) and the broader requirements of the investor community. We all know (or knew) lessors that never had a clear value proposition. We also know (or knew) lessors whose value proposition were not aligned with their parent companies and/or were not transferable to new owners.
A Ruthless Focus on ‘What Matters’: Of course, the trick is the never-ending challenge of identifying “what matters.” It is also critically important to remember that “what matters” often changes over time. One-trick ponies seldom grow to adulthood. Successful leasing companies and leasing associations continuously review “what matters” most to them, and make the necessary adjustments to stay focused on it.
The Resurrection of Conservative Balance-Sheet Management and Operating Controls: Access to capital is the key ingredient of our industry. A sound balance sheet and strong operating controls provide the cushion for resilience in hard times, reassurance to those that provide our capital, and the foundation for exploiting opportunities.
So, What Now? Are We as an Industry in Another Perfect Storm?
As I write these thoughts, the answer certainly appears to be “yes,” although the nature of today’s Perfect Storm is much different from that of the original, in 1999-2001. Here’s why:
The original Perfect Storm was mostly contained within our and similar industries.
Today’s Perfect Storm is really unprecedented, at least in most of our lifetimes, in that it is savaging the entire spectrum of capital markets.
The current storm has been mostly imposed on our industry. At least so far, the equipment leasing and financing industry has continued to perform well with regard to new business volume, earnings and asset quality.
Where Do We Go From Here?
If we are indeed in another Perfect Storm, what does the future hold for our industry? Here are some possible courses of action:
We must develop transparent and diverse vehicles/sources of capital.
We must maintain a customer-facing pricing model that is sustainable over time and consistent with the individual business model.
We must provide a clear and rational value proposition. Remember, the business world has been turned upside down. What does the customer now demand, and what will the capital markets support? Is our role as an industry now being refocused away from over-engineered financings, tax benefits and on- or off-balance-sheet issues, and toward being the supplier of cash (at sustainable spreads) to important segments of the economy (e.g., nonpublic companies) for equipment acquisitions?
An industry trend reversal will allow captive and independent equipment leasing and financing companies to claim a larger market share. There really will be tremendous opportunities for those lessors/lenders that can take advantage of the current and nearly complete dislocation in the financial services industry.
Above all else, we need to look to the fact that the equipment leasing and financing business is a core industry in the U.S. While some lessors may not be providing what is viewed as a core product or service within their respective companies, there is no question that our business — which provides hundreds of billions of dollars each year to the economy — is truly a core industry.
To paraphrase Peter Drucker:
An industry is not like a tree or an animal, successful merely by dint of perpetuation of the species. An industry is successful based on the contribution it makes to the outside environment.
Our resilience may be tested by the current challenges, the “who” that do our business may change, and how the “who” do that business may change, but our industry will weather today’s Perfect Storm and continue to meet Drucker’s definition of successful.
John C. Deane is a founding principal of The Alta Group, a global consultancy exclusively focused since 1992 on helping equipment leasing and finance companies implement best practices. He has managed hundreds of consulting and advisory projects worldwide for clients of all sizes. Prior to co-founding The Alta Group, Deane served as a principal in the firm of Amembal, Deane & Associates, a provider of training, educational and consulting services for the equipment leasing industry, and was CEO of both Great Western Leasing and BancOne Leasing. He also worked as the CFO and president of several major financial corporations. Deane has served as chairman of the ELFA and a member of the World Leasing Council. For more information, visit www.thealtagroup.com.
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John C. Deane is a founding principal of The Alta Group, a global consultancy exclusively focused since 1992 on helping equipment leasing and finance companies implement best practices. He has managed hundreds of consulting and advisory projects worldwide for clients of all sizes. Prior to co-founding The Alta Group, Deane served as a principal in the firm of Amembal, Deane & Associates, a provider of training, educational and consulting services for the equipment leasing industry, and was CEO of both Great Western Leasing and BancOne Leasing. He also worked as the CFO and president of several major financial corporations. Deane has served as chairman of the ELFA and a member of the World Leasing Council. For more information, visit www.thealtagroup.com.
