When you are riding Amtrak’s “City of New Orleans” en route to Chicago, you’ve just got to sing the tune… Well, the sun is just rising. So, a cup of coffee and a whistled version of “Good Mornin’ America, How are Ya?” works fine.

Maybe Steve Goodman, who wrote “City of New Orleans,” had grander concepts in mind, but the recent Equipment Leasing and Finance Association Funding Conference in Chicago prompted a more immediate question: “Good morning lessors! How’s your equity appetite?” This year’s funding conference platform showcased a healthy stable of equipment lenders with debt appetites across the board. Regional, national and global lenders, hungry for a wide range of credits, filled the conference. The vigorous nature of the debt market begs the question of leasing’s other component. Does the equipment leasing equity market match the strength of the debt market?

The dynamic debt market is a sign of a healthy economy. Possibly because of America’s forward-presence strategy to defeat terrorism, those of us fortunate enough to enjoy our own pursuits are seeing solid economic opportunity. The demand for new commercial aircraft, machine tools, medical imaging equipment, computers, rail cars and other capital equipment is measurably strong.

The old — “City of New Orleans” — passed “grave yards of rusted automobiles” and other iconic images of rust belt industrial Chicago. Today’s “City of New Orleans” passes revitalized steel fabrication plants, tower cranes raising steel, telecommunication centers filled with endless computer capacity, state-of-the-art hospitals tracking patients electronically, corporate jets landing in “Kankakee,” fuel-efficient and telemetry monitored trucks hauling electric generation components, other trains hauling grain for fuel and food as all are operated by people carrying hand-held devices communicating at an ever efficient and technology driven pace. Thankfully, it seems Intel’s Gordon Moore, author of “Moore’s Law,” hijacked Steve Goodman’s train.

Interestingly, in this fundamentally sound economy, it seems as though opportunities for aggressive equity positions in equipment are here but not so well recognized. Fewer lessors are willing — let alone hungry — to pony up equity and take real equity risk. What’s the reason?

Is the lack of equity risk due to the market balancing a FASB/IASB refocus on operating lease accounting regulations? Are there fewer institutional equity investors due to further definition of FIN 46 for variable interest entities? Are lessees finding operating leasing problematic? Is it cyclical? Are ever-changing tax appetites driving the market? Has an inverted yield curve of short-term investment grade corporate bonds vs. long-term treasuries over the past few years attracted equity away from hard assets?

Employing some wisdom and a long-term focus along with smart risk management techniques is critical for any equity-based lessor to take advantage of the current equity opportunities. Establishing an infrastructure with best practices, based on four pillars is key to meeting Return-on-Equity (ROE) objectives:

Globalization and Internet marketing act to “commoditize” as well as increase margins in the secondary equipment market. The availability of a specific plastic-injection molding tool with unique production capability is easily found through the Internet. However, if you are remarketing this tool, you may quickly realize your “unique” tool is not so unique.

Has immediate access to the global market turned leased equipment into a commodity or has it provided a platform to derive a premium? Sure, lessors can advertise equipment availability to every possible secondary user via a few websites. And, those secondary users can track recent equipment sales for the specific equipment they demand. So, when a MRI system or laptop computer comes off lease, does listing it on an electronic auction site or other Web platform add value by creating broader and immediate accessibility, or does it dissolve a premium that a slower but possibility more value-added marketing process would provide? MRIs and laptops are at different ends of the technology spectrum but the strategy to improve on-book positions at the end-of-lease are the same. Pulling at either end of the rope, lessors can track secondary-user demand and secondary users can find the machine tool coming off lease for “just-in-time” production delivery.

The inherent nature and function of aircraft and aircraft engines has driven a global secondary market for decades. Airlines, arrangers, appraisers, lenders, lessors, airframe and engine manufacturers, and maintenance companies have tracked aircraft, engine and helicopter transactions through a solid foundation of formal organizations like ISTAT, informal networking conferences like the upcoming CHISTAT, bulwark publications like JP Fleets and SpeedNews and through significant commercial experience well before the Internet’s existence. The Web enhanced the global aircraft market but it didn’t create the market. The variety of Web-based equipment markets and Internet marketing methods provide the global platform to remarket other equipment assets at end-of-lease similar to the fluid air finance industry.

Geographic and industrial niches of operation are now accessible to all. Developing a regional market through a lessee in a specific technology based in Boise, ID, Research Park, NC, or adjacent to a Big Ten Midwestern campus often identifies a lessor as “the” equipment lessor with expertise that permits margin-added deals. Often, these technology pockets attract lenders who could use an “equity” partner to provide true leases. Partnering with a regional or industry specific lender enhances a lessor’s credibility and access to decision makers.

The institutional investor interest in ethanol producers and production facilities has cooled to some degree. However, hundreds of facilities have been built or are under construction near the crossroads of major river, rail and interstate highway access. In Illinois alone, more than 50 ethanol plants are either in the permitting phase or currently under construction. Capital equipment budgets for the typical 150 million gallon-per-year ethanol facility are more than $50 million. Lessors targeting this regional market might find themselves becoming global leaders.

This is just one example where lessors can find equity opportunities by “thinking locally” with your customers but “acting globally” by accessing capital and remarketing equipment.

“Local” or lessees in industries with traditionally limited access to capital are no longer limited to swallowing “challenging” terms and conditions. The standard lease/finance/pay-cash decision-making process includes joint consideration of operating requirements. CFOs and treasurers across the board understand the imperative to match equipment finance terms to the volume of production, hours and cycles projected, and the transferability of the asset. Competitive lessors place their equity at risk in a manner that truly assumes the ownership risk in an operating lease. Successful lessors provide terms and conditions reflective of their equity appetite. The ability for lessee and lessor to track jointly all aspects of the asset through a standard Internet-based system has become standard.

The CPR process is fundamental to risking equity. Improving margins by engaging customers on a continual— not just periodic — basis creates the relationships, which breed opportunities. Not unlike traditional stock (equity) analysts, lessors offering an ongoing, solution-based dialogue with their customers provide that tangible differentiation from other equipment lenders in the market. This process couples management of the lessor’s equity risk with the lessee’s requirements.

Countering commercial bank lessors’ lean equity appetite to own assets, private equity’s approximately $720 billion of M&A activity in 2006 impacted the equipment finance world. Private equity firms’ recent acquisition of aircraft lessors and construction equipment rental firms is tangible evidence of equity opportunities in the underlying equipment. Have private equity firms recognized undervalued equipment assets and upside residual opportunity in the portfolios of their acquisition targets? Does it take equity investors outside the day-to-day of the equipment leasing industry to see the bigger picture? Private equity acquisitions of specific lessors may include a revitalized lessee (portfolio) engagement process in an effort to unlock ROE improvement opportunities through lease restructuring and syndication. Looks like private equity — with a different perspective than we are accustomed to — will be driving the equipment leasing industry’s train for the next several years.

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Dan Sholem is an equipment leasing and finance consultant. His clients have included electronics, steel and component manufacturers, transportation companies, technology service providers as well as private equity firms, investment and commercial banks. Previously, Sholem was portfolio manager for Comdisco Electronics Group in San Jose, CA. His 17 years of equipment leasing experience also includes remarketing commercial and corporate aircraft as well as arranging debt and equity to fund equipment transactions. Additionally, he serves as an adjunct lecturer for the School of Business at The University of Illinois. He earned a BA from Southern Methodist University and a MBA from Saint Louis University.