Strong Intrest in M&A Activity Continues as Japanese Investment Remains Active

by James Jackson Mar/Apr 2020
2019 marked another active year of mergers and acquisitions for the equipment leasing and finance industry. The Alta Group anticipates that these trends will continue throughout 2020, as buyers look for opportunities to put capital to work and the number of sizable independent leasing companies continues to shrink.
James Jackson Managing Director, Merger and Acquisition Advisory Practice, The Alta Group
James Jackson Managing Director, Merger and Acquisition Advisory Practice,    The Alta Group

2019 marked another active year of mergers and acquisitions for the equipment leasing and finance industry. The Alta Group anticipates that these trends will continue throughout 2020, as buyers look for opportunities to put capital to work and the number of sizable independent leasing companies continues to shrink.

In 2019, record stock market levels, low unemployment, low interest rates and access to capital drove a strong economy. This fueled another active year in mergers and acquisitions for the equipment leasing and finance industry.

Buyers were motivated by the opportunity to expand market offerings and access new customers to grow their businesses, driving profits more quickly than possible through organic growth. Sellers were interested in entering the M&A market while valuation multiples were still high. Sellers continued to face the challenges associated with margin compression, the cost of technology platforms, aging senior management teams and the notion that, at some point, the favorable valuation cycle will end.

The Alta Group anticipates that these trends will continue throughout 2020, as buyers look for opportunities to put capital to work and the number of sizable independent leasing companies continues to shrink. Past sales of independents have limited the supply of quality acquisition targets for acquirers.

Notable Transactions in 2019

In January 2019, Brookline Bank acquired the remaining 15.93% stake in Eastern Funding. Brookline purchased the majority stake in February 2006 when it increased ownership from approximately 29% of the equipment finance company. The minority stake had been retained by current and prior members of Eastern Funding’s senior management team.

VAR Technology Finance also was acquired in January 2019, retaining its brand and operating under LEAF Commercial Capital, a subsidiary of Peoples United Bank.

TimePayment, a micro-ticket finance company, acquired the LeaseQ platform and the services of certain LeaseQ personnel in April 2019. Both companies were headquartered in Burlington, MA.

In March 2019, Macquarie Rotorcraft Leasing completed a portfolio acquisition from Waypoint Leasing Holdings consisting of 120 medium and heavy helicopters leased to various operators. Macquarie agreed to buy the bankrupt helicopter lessor for approximately $650 million, representing a significant discount from the value expected.

In October, Mintaka Financial acquired Summit Commercial Finance Company, a vendor-based lessor located in Phoenix. Mintaka’s objective was to expand the distribution model beyond its third-party affiliate origination platform to include the vendor channel.

Kingsbridge Holdings also was able to broaden its distribution channel for technology equipment through the acquisition of Technology Finance Corporation, a lessor that sources originations through vendors and value-added resellers. The acquisition, disclosed in October 2019, also provided Kingsbridge with the opportunity to extend its offering to small and mid-size businesses in the technology space.

2019 also saw certain Spanish banks pulling away from the U.S. equipment finance market, including Santander’s exit and the subsequent sale of approximately $800 million of equipment leases and loans to Sterling National Bank in October.

Japanese firms continued to be active investors in the U.S. equipment finance market in 2019 after a strong showing the previous year. Acquisitions included ENGS Commercial Finance by Mitsubishi UFJ Lease and Finance in October 2018, and NXT Capital, a middle market commercial finance company, by Orix, USA in August 2018.

Japanese companies see the U.S. as an opportunity for continued expansion as their own country suffers from persistent low growth, an aging population and low interest rates. Many economists are predicting that the Japanese economy will fall into a recession in 2020. Given these conditions, it is likely that Japanese companies will continue to invest in the U.S. through opportunistic acquisitions.

Several acquisitions driven by Japanese investment interest occurred last year. Fuyo General Lease Co. acquired a 49% stake in Pacific Rim Capital in January 2019. Pacific Rim provides equipment financing with a focus on material handling equipment, primarily to investment grade credits. Fuyo was able to structure the investment in such a way as to retain Pacific Rim’s minority-owned status designation.

In March 2019, MUFG Bank, a subsidiary of Mitsubishi UFJ Financial Group, acquired DVB Bank Aviation Finance, the aviation finance division of DZ Bank.

In June 2019, JA Mitsui Leasing acquired First Financial Corporate Services, an equipment lessor focused on the healthcare, technology, material handling and warehouse automation segments.

Tokyo Century Corporation and its subsidiary, Tokyo Century USA, both made the 2019 notable transactions list with the announcements that Tokyo Century Corporation acquired its remaining interest in Aviation Capital Group in September, and Tokyo Century USA acquired Allegiant Partners in November. Allegiant continues to operate under the brand name AP Equipment Financing and is a wholly owned subsidiary.

Current Market

Based on the current level of activity at the beginning of 2020, Alta has reason to expect another good year for M&A transactions. Merger and acquisition activity is primarily driven by economic factors, including but not limited to, interest rates, stock market trends, unemployment rates, liquidity, access to credit, portfolio quality and political uncertainty. Based in part on the current economic climate, several attractive companies are considering a sale or are being offered for sale, and a number of qualified buyers continue to show interest in acquiring quality finance companies.

Interest rates play a pivotal role in company valuations and the level of M&A activity. When interest rates rise, acquirers also must increase their hurdle rates on acceptable investments, which generally results in lower acquisition values and fewer successful transactions.

While the federal funds rate increased consistently during 2017 and 2018, as the U.S. economy grew, rates were cut throughout 2019 and resulted in a stronger economy and stock market increases. The Fed recently indicated that it plans to leave rates unchanged through the end of 2020. Federal Reserve Chairman Jerome Powell announced that he would need to see a sustained rise in the rate of inflation before he would consider raising rates. This position provides a strong signal to the market and has a positive impact on the expected level of M&A activity this year.

It should be noted, however, that despite the majority of economic factors pointing to another strong year in M&A, there are other events that could potentially derail the economic optimism. As history demonstrates, when economic conditions are as strong as they are currently, it only takes a small impact to set off a decline in the market.

The ability for the new coronavirus, COVID-19, to spread throughout the world, an uptick in portfolio delinquencies across the spectrum or in certain market segments, or the Fed’s decision to increase the federal funds rate unexpectedly could hamper the M&A market for 2020.

Another factor that could influence M&A activity is business confidence. The Equipment Leasing and Finance Foundation’s 24-month confidence index for the equipment finance industry stood at 58.7 in February 2020, down from 59.9 in January. The index is significantly lower than the 73.2 recorded in January 2018. This index, which is designed to reflect a qualitative assessment of industry leaders’ perceptions of current and future business conditions, has been generally declining in recent years, which may suggest that the strong M&A cycle is in its later stages.

Potential Impact of Recent Bank Mergers

In an effort to compete against their larger national rivals, several regional banks have recently announced or consummated mergers. The mergers are structured to drive economies of scale and improve efficiency ratios through larger customer bases and deposit balances. They also are intended to drive cost reduction efforts through personnel costs and technology platform investments.

In February 2019, SunTrust and Branch Banking and Trust disclosed a merger of equals to form Truist. This merger created the sixth largest bank in the U.S., with approximately 10 million customers.

In March 2019, Fifth Third Bancorp completed its acquisition of MB Financial. The deal, originally announced in May 2018, made it the fourth largest bank in Chicago.

In August, TCF Financial merged into Chemical Financial, with Chemical as the surviving company. The merger of equals was renamed TCF Financial, with TCF Bank becoming the 27th largest bank in the country.

Based on the competitive nature of the industry, one would anticipate that bank mergers will continue during 2020. Since many of the regional banks in the country offer equipment financing, it will be interesting to see what impact these mergers have on the industry. It seems only logical that we will begin to see experienced equipment finance lift-out teams emerge from these bank mergers, as industry veterans elect to locate a new bank sponsor or otherwise exit to create their own independent finance companies to serve specific niches in the industry.

Summary & Conclusion

Current levels of M&A activity and economic indicators generally point to another successful year of acquisition activity in 2020. Barring the occurrence of potential risks outlined earlier in this article, Alta expects the M&A market to remain active this year and for valuations of quality equipment finance companies to remain strong.

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