SL Financial Services

by Christopher Moraff June 2009

Since its launch in 2000 with a staff of four, Connecticut-based SL Financial — a subsidiary of Germany’s Landesbank Baden-Württemberg — has grown its staff five-fold, opened offices both north and south of the U.S. border, and broke half-a-billion dollars in managed assets. In recognition of its debut on the Monitor 100, we asked CEO Klaus Knuth to tell us how the company did it.

Klaus Knuth CEO, SL Financial Services

Among the 13 new entrants to this year’s Monitor 100, we welcome two companies whose parent is domiciled overseas. Coming in at number 62, Connecticut-based SL Financial Services traces its roots back to 1818, when Queen Katharina of Württemberg founded Württembergische Sparkasse, one of the first savings banks in Germany. More than 150 years later, an offspring of that bank, Stuttgart-based Landesbank Baden-Württemberg (LBBW), or “State Bank of Baden-Württemberg,” entered the leasing business in Germany through a subsidiary, SudLeasing (South Leasing).

In the more than three decades since its founding, the unit has grown to become a major player in the European market with some 800 employees, and now does business all over the continent. More recently, it reached across the Atlantic and SL Financial Services was born. The U.S. arm of SudLeasing, launched in 2000, began with a core staff of just four people, headed up by an ambitious Frankfurt native named Klaus Knuth.

A longtime employee of LBBW with a background in corporate banking, Knuth had come to America a decade earlier to help establish the bank’s first U.S. branch. So when it came time to expand the brand into the leasing space, he was a natural choice to take the helm.

“We started very small initially,” Knuth explains. “It was a real boutique. I had the opportunity over the previous ten years to build contacts in the finance community in and around New York, so we were very quickly able to build a balance sheet; we were profitable by year-two.”

After spending about a year in the heart of the New York financial district, Knuth decided the company needed some breathing room. He moved SL Financial out of the city — 
where LBBW still maintains its U.S. headquarters — and set up shop at its current location in Westport, CT.

From the start SL Financial maintained a singular strategic focus: to introduce financing services to the U.S. subsidiaries of German firms. Today, the company’s vendor list reads like a who’s who of leading European industrials, and includes Liebherr Cranes, printing press manufacturer Heidelberg, construction equipment company Putzmeister, and Eurocopter Helicopters, a subsidiary of French firm EADS (European Aeronautic, Defense & Space Company), the maker of Airbus.

“The basic idea, and where we found our niche, was to help medium-sized companies that are not large enough or didn’t want to set up their own financing arm in the U.S. to compete with companies like John Deere or Caterpillar or GE; to put them on a similar footing so that they could go out and offer their clients not just the product but the financing,” Knuth says.

The company also made an early effort to court the syndication market, a move that paid off initially and helped fuel the new firm’s growth spurt. But by its third year in business, Knuth says shifting market factors made the secondary market less appealing. As the company matured, so did its approach to the market.

“When we started with a fairly small staff, the secondary market was quite interesting to us because it was fairly deep; but in 2003 as liquidity started flooding the market and what we now call the housing bubble had an effect on spreads in the secondary market, we went back to the drawing board to focus on middle-market vendor financing,” he explains. “But we followed this up by starting to hire people who are able to go after clients directly and serve them.”

The strategy had its intended effect. Between 2007 and 2008, SL Financial’s indirect originations shrunk from $49 million to just over $5 million, while its direct business more than doubled. Meanwhile SL Financial’s vendor business continued to flourish, accounting for roughly 65% of it $210 million in new business volume in 2008.

SL Financial specializes in deals ranging from $500,000 to $5 million in three main industry sectors: trucking, construction and printing. As anyone with even a rudimentary understanding of the current recession knows, those three sectors comprise a trifecta of the hardest hit industries. Knuth says the economic crisis has had the biggest impact on the company’s construction and printing assets — given the severe pullback in residential and commercial building and the less dramatic, but equally worrisome decline in print advertising.

“We certainly have more requests for restructures than we’ve ever had before in pretty much any industry, but the hardest hit is certainly the construction sector,” he says.

But the company is also cleverly opportunistic, which has enabled it to offset some of the effects of the economic crisis. Knuth says given the effect the economy has had on its bread and butter industries, SL Financial is presently looking for new partners in areas such as packaging, infrastructure and pharmaceuticals — sectors in which the company has recently gained a foothold.

“We are pretty diversified so for instance we see a stable situation in everything that has to do with infrastructure; and we still see a fairly stable business in helicopters,” he says. “Then there are other areas, like special packaging for the food and drug industries, for example in plastic molding machines for companies that cater to the pharmaceuticals. Pharmaceuticals in general is one area where we do quite a bit of financing. This area is stable if not growing.”

Over its decade of existence, SL Financial’s staff size has grown more than five-fold, and now consists of 23 people — still tiny by market standards. But the company is also branching out geographically, and is now scouting business both north and south of the U.S. border. In Mexico City, SL Financial maintains an office of five employees. The Mexico operation is headed up by Volker Helms, who joined LBBW following assignments with Deutsche Bank in Mexico and New York. And in Toronto, a single “pioneer” as Knuth calls him, is laying the groundwork for SL Financial’s new Canadian office.

Knuth has a positive outlook for the future of his company, but at the same time he maintains a realistic view of the challenges the market will bring for the foreseeable future. Last year, new business volume declined slightly, while the company’s net investment in equipment-related loans and leases broke $500 million for the first time. He admits the company’s forecast for 2009 — a 22% increase in new business volume — is optimistic; but, he adds, even in a down market there are chances for growth.

“Obviously the market could be in better shape but we think it’s still a good strategy; we actually see that, especially in this difficult market, if you play anti-cyclical it can be very beneficial,” he says. “We put new people on board and hope that we will get additional business through those channels.”

What’s more, the company is now looking to push back into the syndication market, influenced by some of the same factors — albeit in reverse — that promoted its gradual withdrawal five years ago.

“We definitely see an opening up of the secondary market where other big players are pulling back or setting the bar so high that they do not book business themselves anymore but would rather sell it, so if you’re very selective there are actually chances to grow,” he says.

With a total of eight children ranging in age from their teens to mid-thirties (three of his own, plus his wife’s five) Knuth says much of his time out of the office is spent with family.

Christopher Moraff is an associate editor of the Monitor.

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