Monitor contributing editor Howard Brod Brownstein spends time with Michael Gay, group head of NXT Capital Equipment Finance, to discuss the goals, organizational structure and go-to-market strategy of the recently launched unit.
MONITOR: Please describe your career, and how it led to you to NXT Capital.
MG: Over the last 20 years, I’ve held positions across a broad array of equipment financing companies, banks and commercial finance companies. I was most recently the managing director of Capital Markets at Banc of America Leasing. Previously, I led large equipment financing originations and syndications across the western United States for Key Bank Equipment Finance. I also spent significant time at GE Capital, where I held regional sales management positions, and led a commercial financing equipment portfolio acquisition team in the company’s Corporate Development Group.
In these and other roles over two decades, I saw a significant shift away from providing larger equipment financings to middle-market companies with non-investment grade ratings. Some of this was due to consolidation, especially as GE Capital acquired companies like Heller Financial and Merrill Lynch Capital. However, the trend became more pronounced with the financial crisis, which cut deeply into financing capacity.
When NXT Capital expressed interest in starting an equipment financing group focused on this segment of the market, I recognized that NXT’s entrepreneurial culture, strong balance sheet, client focus and the senior management team’s past experience in equipment financing at Heller Financial and Merrill Lynch Capital made NXT an ideal place to pursue my goal of building a market-leading equipment finance business.
MONITOR: What types of financing does NXT Capital Equipment Finance offer? How was the decision made to offer those financing products?
MG: We offer a full range of equipment loans and leases: secured term loans, tax-oriented leases, finance leases, operating leases and TRAC leases, in sizes from $2 million to $20 million and with terms up to seven years. This comprehensive product offering allows NXT to structure solutions for a segment of the market that badly needs financing but generally can’t get it from regulated banks.
MONITOR: What type of borrowers are a good match for NXT Capital Equipment Finance? Please describe a few of your borrower relationships.
MG: Our prototypical borrower is a middle-market or larger company (annual revenue from $200 million and above), with a non-investment grade profile and an annual CAPEX requirement of $10 million-plus. The lack of financing caused by the economic crisis and lender consolidation has made it very difficult for these companies to get cost-effective capital to replace existing or buy new equipment.
We’re generalists, so we work in a wide range of industries from transportation to manufacturing; energy; construction; mining; healthcare; technology; distribution; food, beverage and agriculture; retail; media and communications; and business services. As examples, our recent funded transactions cover many equipment types, including food processing, mining, manufacturing, IT and furniture, fixtures & equipment.
MONITOR: What is NXT Capital Equipment Finance’s brand? What differentiates NXT Equipment Finance from its competitors?
MG: Our ability to finance up to $20 million is a major differentiator. Larger, regulated institutions usually have a limited appetite for financing non-investment grade companies. If they already have such exposure, adding to it can be very challenging, if not impossible.
NXT Capital is less affected by these types of constraints. If we like a company, we’re prepared to step up and do a larger deal.
NXT also has extensive experience originating and underwriting deals. This helps us distinguish between real risk and perceived risk, so we can design structures to mitigate actual risk and make sure a company gets the CAPEX financing it needs. Larger institutions are often reluctant to do these transactions because of so-called “headline risks.”
We launched in April 2013, so our brand is still developing. But the team is very energized about having the flexibility and capacity to address such an important and underserved market. We’re extremely responsive to opportunities and move quickly.
Over time, we expect that NXT Capital Equipment Finance will be known as a smart, flexible and responsive source of capital. We can handle complicated situations, quickly provide a well-thought out structure, and close transactions before most lenders can provide an approval.
MONITOR: What is the source of NXT Equipment Finance’s capital? Is it leveraged?
MG: We’re funded by NXT Capital. We’re not a broker. We originate and fund deals directly and hold them on our balance sheet. Since its founding in 2010, NXT Capital has raised $850 million in institutional equity capital to support growth. The company also maintains more than $1.6 billion in committed bank financing from 13 different lenders, and has completed two CLOs providing $650 million in funding capacity.
Asset management is also an important part of NXT Capital’s strategy. Existing mandates complement balance sheet funding capacity, by providing third-party capital to fund deals side by side with our own investment. Today, asset management vehicles represent more than $2 billion in capacity, and we expect to add equipment finance-specific programs over time.
MONITOR: Describe NXT Capital Equipment Finance Group’s organization. What is its organizational culture?
MG: NXT Capital as a whole has almost 100 employees and a national origination footprint. The Equipment Finance Group currently consists of nine people, including indirect originations and originators on the West Coast and the Midwest. We’re continuing to add to our direct origination team and should have five direct originators across the U.S. by early 2014.
Our size allows us to be nimble, flexible and solutions-oriented. I like to say, “We’re all about doing deals.” If we’re not underwriting a deal or closing a transaction, we’re talking about new opportunities and ways to deliver a solution. Most of the team came from bureaucratic corporate and regulated bank environments. Leaving those behind has been liberating and given us tremendous deal focus and energy. As we grow, these traits will define NXT Capital Equipment Finance’s brand and differentiate us from most competitors.
MONITOR: As a nonbank lender, how does NXT Capital Equipment Finance compete with banks that have a lower cost of capital?
MG: We rarely compete with banks. Most banks aren’t particularly interested in middle-market companies at the lower end of the credit spectrum, which is where we play. Further, banks usually can’t offer the level of equipment financing these companies need and are much less flexible with respect to structure and terms.
MONITOR: How does NXT Capital Equipment Finance find its prospective borrowers? How does it go to market?
MG: From a direct origination standpoint, we’re focused on blocking and tackling. We identify companies that have significant capital investment requirements and that we believe will have difficulty raising sufficient cost-effective capital to meet their needs.
We also have an indirect channel focusing on financial institutions that routinely come across these kinds of opportunities or have relationships with companies that meet this profile. We can help these institutions meet their clients’ equipment finance needs or capture an opportunity by syndicating transactions directly to NXT Capital.
MONITOR: What do you want referral sources to think of when NXT Capital Equipment Finance comes to mind?
MG: When people hear “NXT Capital,” I want them to think of a smart, reliable, responsive source of equipment financing for middle market companies. I also hope they’ll think of NXT Capital for transactions with unique and even challenging elements that require expertise to balance risk with a structure that addresses each borrower’s unique needs.
MONITOR: How has NXT Capital developed since it was created? What are some of the milestones in NXT’s history of which it is most proud?
MG: NXT was launched in 2010, and has very quickly grown into a leading middle-market lender. In just more than three years, we’ve closed more than 232 deals totaling over $5.3 billion in commitments and expanded nationally (through June 2013). The speed of NXT’s growth, and the scale it has achieved, ratify the company’s platform and vision on many levels. First, these show that the market needs our products and appreciates how we deliver them.
Second, NXT’s impressive growth demonstrates the financial and institutional community’s validation of our direct loan origination capacity and disciplined risk management practices. The institutional capital we’ve attracted has helped NXT Capital achieve critical mass financially, strategically and competitively and has positioned us well going forward.
MONITOR: What are your plans for NXT Capital Equipment Finance? Where would you like to see NXT Capital in five years?
MG: Five years from now, NXT Capital Equipment Finance will have established a leadership position in our target market and have the capacity to continue to grow with our clients as we expand our capital base and asset management capabilities. The business will be an important contributor to NXT’s overall goal of creating a diversified, high-returning, middle market-focused commercial finance business and will provide our team with exciting, challenging career opportunities.
Howard Brod Brownstein is a Certified Turnaround Professional, the president of The Brownstein Corp. and a contributing editor of Monitor. He can be reached at Howard@BrownsteinCorp.com.
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