In an exclusive Monitor roundtable, the leaders of the top five private independent equipment finance companies discuss how their teams rose to face the challenges of 2017. They discuss the increasing importance of technology in their businesses and share their views on the stock market correction, tax reform and how to attract top talent.
Monitor’s Top 25 Independents fared well in 2017, reaching a new record of $6.5 billion, thanks to a 12% year-over-year increase. But even the best years come with challenges.
“Ascentium Capital’s growth has been very rapid over the last six years,” says Tom Depping, CEO of No. 1-ranked Ascentium Capital, which, in 2017, surpassed $1 billion in new business volume. “Many other finance companies have had healthy growth as well and due to this, one challenge we face has been finding tenured sales representatives with financial experience to continue expanding our national footprint. As a result, we have invested in and built our own in-house recruiting department. Additionally, we have developed a substantial on-boarding and training
program, Ascentium University, to bring untenured sales personnel into our organization so they are set up to succeed.”
“Once again, our biggest challenge in 2017 was time management,” says Dave Fate, president and CEO of Stonebriar Commercial Finance, which rose to No. 2 on the power of a 32.6% year-over-year increase in new business volume. “We were extremely busy throughout the year, resulting in over 40% originations growth year-over-year. We also completed two additional ABS offerings, rebranded our Aviation Capital platform to include Commercial Aviation and closed our first transaction in that space, hired an experienced SVP to manage our corporate finance initiatives and investor relations, and acquired our Non-Bank Lender platform, which provides SBA 504 secured loans. We completed a great many things in a year that seemed to fly by.”
“Our competition continues to focus on price,” says Tony Golobic, chairman and CEO of No.3-ranked GreatAmerica Financial Services. “It doesn’t take any effort to lower one’s rates. Last year was a continuation in this regard. Unfortunately, when one starts, everyone else follows, despite the already unhealthy bottom line. At GreatAmerica we have always focused on value added and innovation as our competitive advantage. Our mission is to help our customers become more successful. Last year we added to our value add innovative offerings and experienced some nice growth.”
“The market has enjoyed an extended period of low interest rates with little to no volatility,” says Craig Weinewuth, CEO and president of No. 4-ranked ENGS Commercial Finance. “We anticipated that we would be entering an interest rate rising environment and have been studying the Federal Reserve minutes to understand the timing of the interest rate hikes. The Federal Reserve has done a reasonably good job of guiding their moves and we have been able to pass through increases to our customers that match the prime rate moves. LIBOR and the mid- and longer-term SWAP rates, however, have shown a higher rate of volatility and more rapid movement in rate increases. It has been harder to move in consistent lockstep with these rate moves, which are more indicative of our increased cost of capital. We have mitigated the impact of this volatility by continuing to access the securitization market and issue term deals which create a hedge against these movements.”
“We deal with many challenges in our industry but we view our largest challenge as the competitive landscape in our market,” says Evan Bokor, president and CEO of Somerset Capital Group, which joined the top five for the first time this year. “We are seeing bank-owned leasing companies, independents, etc. offer pricing and structures to customers that just don’t make sense. The
competition for a limited supply of business continues to drive yields down to a point where, when you combine increase costs of servicing our portfolios, compliance costs, etc. it is very difficult to derive any significant level of profitability. We don’t see anything that would change this dynamic in the near term. We have dealt with this challenge by diversifying our origination channels, expanding our product offerings and broadening our asset focus. We have enhanced our ability to compete for business by developing additional funding facilities to reduce our cost of funds and have streamlined our operations to reduce our operating costs.”
Honing Effective Go-to-Market Strategies
Even the top players need to create — and update — a unique blueprint for continued success.
Fate points to Stonebriar’s 32.6% year-over-year growth as proof of the success of its go-to-market strategy. “Our brand has become very well known in the marketplace primarily due to our continued focus on leveraging publications, such as Monitor, and regular posting on various social media feeds to keep the industry up to date on our activities and accomplishments. We also take pride in our continuing activity with the ELFA through various sponsorships, speaking engagements and committee involvement. We continue to tweak our direct origination strategy to drive better results from that team. As a private independent with no depository relationships, our direct originators continue to develop other avenues to find deals and develop new relationships. One such initiative is expanding efforts to include other sources such as private equity firms, family offices, financial consultants, attorneys, turnaround managers and accounting firms in an effort to source more deals and potential customers.”
“Continuing to be very involved in the industries we serve has been a benefit to us,” Golobic says. “On the flip side, in some of the less ‘finance savvy’ spaces in which we play, it has often been a struggle to get them to self-perpetuate financing activity without constantly staying in front of them and reminding them of the value/benefit. The inefficiency of these scenarios has us regrouping on how we might more effectively address this challenge.”
Weinewuth says ENGS continues to believe strongly in its core principals of sourcing originations through a vendor-centric strategy in transportation, industrial and construction. “By being specialized in specific industry verticals, you become a more important and relevant aspect of the market and produce more consistent originations through our vendor partners. The areas that are advancing in the market that we, as a leading financing source, need to keep up with are technology advances in vendor and customer facing experiences. We set out in 2017 to streamline our processes, move to … online e-signature paperless contracts and quicken the documentation and funding times for an even better customer experience. We are happy to say that we succeeded in launching a paperless contract environment, and streamlined the documentation and funding processes.” Weinewuth says ENGS also has engaged developers to create proprietary applications that will streamline processes even more in 2018.
“The most effective element of our strategy during 2017 was the diversification of our origination sources,” Bokor says. “We now have four distinct originations channels that provide steady and consistent volume for us. We continue to seek alternative avenues for generating reliable quality volume to avoid being dependent on any one model.”
Leading the Pack
Intense competition has become a hallmark of the industry in recent years, yet the top five independents have continued to achieve success in this environment.
“We stick to what works and what is true to our mission of helping our customers be more successful,” Golobic says. “This mantra guides us as we focus on innovations our customers can use to make their businesses more profitable. We have expanded well beyond the confines of just being a finance company and into areas that touch technological efficiencies, business processes consulting and employee retention and recruitment, to name a few.”
“Ascentium works very hard and focuses on providing a premier level of service, flexible finance products and competitive payment options,” Depping says. “The market has fiercely competitive pricing but many competitors cannot compete with our service and flexibility. We differentiate ourselves by providing an exceptional experience to our equipment providers and to SMBs. We are also proud of our award-winning business finance platform. Additionally, we took advantage of market competition by maximizing our returns through our capital markets team that succeeded in securing competitive funding rates.”
Differentiation was the key to success for Stonebriar and Somerset.
“We tried to ‘stay ahead of the pack’ by going where the pack wasn’t,” Bokor says. “We continue to seek industries and asset classes where the pack won’t follow, or at least where they aren’t yet following. We have focused on developing strong asset expertise in the verticals we support and offering a full array of products/structures for those assets as opposed to offering a plain vanilla lease product. We continue to strive to differentiate ourselves from the competition so we are not just part of the pack.”
“As a large-ticket, diversified commercial finance company, SCF operates in a different market than most of the other top private independents,” Fate says. “Our average deal size in 2017 was approximately $15 million. We look for companies that have large CAPEX needs, a unique story to tell or credit metrics that may affect their current ability to obtain bank financing. While
the last couple of years have seen new entrants in our market, the exit of GE and the transformation of other participants in the market to regulated institutions have left a significant void that has still not been filled. The ELFA has published data stating that equipment finance transactions total approximately $1 trillion annually with approximately 75% of that volume originated by banks and the remaining 25% originated by captives, small-ticket lessors and independents. That market gives SCF ample opportunity to maintain volume levels such as those it reached in 2017 without sacrificing our stringent credit, structure and pricing standards.”
While ENGS did not experience “fierce” competition in 2017, Weinewuth says it did experience pressure on yields, thanks to a decreasing number of competitors. “Customers were willing to walk away from a transaction rather than accept a higher interest rate. We tried to avoid the yield-only discussion by delivering a broader set of financing offerings to our customers. This helped us avoid the yield-only discussion and stay ahead of the pack by offering new products and services that made us more relevant to our customers’ entire business needs, rather than just one need.” Weinewuth points to the creation of ENGS Insurance Agency, which provides insurance products for companies that own equipment, and ENGS Commercial Capital, a working capital lender, which have contributed incremental growth to the company while making ENGS a much more relevant partner to its vendors and customers.
“We believe in product and process innovation,” Weinewuth adds, noting that ENGS rolled out e-documents in its Transportation, Industrial and Construction segments. “Customer experience and response have been very positive. These products and services certainly helped us stay ahead in 2017.”
Outlook for 2018
Although the year began on a high note, with the ELFF confidence index reaching another record-breaking level, the stock market dropped significantly soon afterward in what economists are labeling a correction. What does this mean for the industry in 2018?
“We are not overly optimistic about the overall economy and are concerned that the lofty expectations that many had at the beginning of the year will not be achieved,” Bokor says. “We have no confidence in the way our country is being governed and while the recent tax bill added to the overall confidence that businesses expressed at the beginning of the year, we expect to see higher interest rates, higher inflation and disarray in Washington ultimately leading to a dampening of economic activity later this year. Having said that, our forecast for our own business this year remains fairly positive with expectations for an increase in new originations of 10% versus 2017’s total.”
“We feel positive and the economy is still in fundamentally decent shape,” Depping says. “The tax cuts, along with reduced regulation, should provide a strong economy well into 2019. The stock market has a mind of its own and gave up some of the 2018 gains, which appear to be tied to a fear of rising interest rates.”
Weinewuth says stock market volatility is not a concern to ENGS. “We believe the fundamentals in the market are good and that it is not reasonable to expect a straight upward moving stock market. The equity markets have been on a tear following the election. A little correction or some volatility are normal after such a positive upward trend.”
“We continue to be cautiously optimistic and have significantly increased our investment in our future while at the same time being prepared for a downturn that will come sooner or later,” Golobic says.
“Our outlook for the remainder of the year remains positive,” Fate says. “Underlying economic fundamentals remain strong with GDP in excess of 3%, interest rates — while up somewhat over the past quarter — remain relatively low, unemployment is low, and Congress passed a significant reduction in the corporate tax rate and continues to ease regulatory burdens. We believe that all signs point to a strong year in 2018.”
Weinewuth is more concerned with the underlying economic metrics that influence the broader market and the performance of ENGS’ specific industry verticals. He believes tax reform, regulatory reform and the much-anticipated infrastructure bill will have positive implications on the economy. “U.S. businesses are by all accounts healthy. Business owners are innovating again and feeling more confident about investing in their businesses, which leads to upgrading equipment or expanding capacity by adding additional equipment. We have seen clear evidence of this in the transportation sector where the supply/demand imbalance has tilted favorably to carriers, who are our customers, which is driving new equipment purchases to satisfy the demand. Barring an unforeseen political or macro-economic event, we believe all of our industry verticals will do well in 2018 and for several years beyond.”
Finding Talent in a Full-Employment Economy
The February jobs report pointed to the continued strength of the U.S. economy, with the largest single month surge in job creation since July 2016 and an unemployment rate of 4.1%, indicating a return to full employment. How does this affect the quest for hiring and retaining qualified talent?
As mentioned earlier, Ascentium has developed in-house recruiting and onboarding/training departments to overcome this challenge. Since Somerset has not been adding to its staff, it has been unaffected by the current job market but plans to start its search much earlier than usual for planned hires in 2018.
“Looking at our local unemployment figures over the last year, we average a full percentage point below the national average, somewhere around 3.2%,” Golobic says. “One would expect challenges in finding good people in this situation, but we have been fortunate to have a reputation as a good place to work and have ready access to talented and eager individuals who want to stay in the Midwest and be part of a value-based culture and a growing community. Internship programs and feeder relationships with area colleges and universities have been in place for years and have provided a dependable recruitment base.”
“We continue to successfully grow and expand our business even in a tight labor market,” Weinewuth says. “We currently have approximately 185 employees today and a deep list of individuals that would like to join ENGS. We are very fortunate that even in a tight labor market, we have been able to attract top tier talent. We spend a lot of time and resources on creating the right culture, and this has helped recruiting … this has paid off as ENGS was voted one of the Top Workplaces in Chicago, one of only 55 companies chosen for this distinction, and the only independent finance company chosen.”
“In 2017 we increased headcount from 31 people to 44 people and have hired additional talent since the beginning of 2018,” Fate says. “While part of the growth was generated from the purchase of Non-Bank Lender noted earlier, a large part was also attributable to staff additions that enabled us to handle the growth in our portfolio. Our new hires included not only experienced
talent such as the SVP of Funding and Investor Relations noted previously but also with hires that adhere to the ELFA’s emerging talent initiative as we bring on personnel in the beginning and early stages of their careers. Our ability to attract this talent is based in large part on the outstanding performance we have demonstrated as we approach the third anniversary of our inception.”
The Impact of Tax Reform
Uncertainty surrounding the changes to the tax code led to stagnation in Q4/17, but the details have since been revealed. How will the Tax Cuts and Jobs Act affect business in 2018?
“Without a question, the Tax Act will result in increased capital expenditures and will therefore have a positive effect,” Golobic says. “Some of this effect may be just of a timing nature and some of it may be due to a stronger economy resulting from the Tax Act.”
“While some might have seen stagnation in the fourth quarter, a large portion of our volume for the year was funded in the fourth quarter,” Fate says. “Our customers seemed to be more interested in obtaining financing than with possible changes to the tax code.”
Fate expects to see a continuation of this trend in 2018 as underlying economic fundamentals remain strong, which is expected to spur both M&A activity and fulfillment of delayed CAPEX needs.
“We expect the changes to the tax code to positively influence our business, and we have already seen it,” Weinewuth says. “The U.S.-domiciled global businesses are repatriating funds and investing those dollars into their U.S. operations. The U.S.-based non-global businesses are taking their tax savings and increasing their capital spending for the year, upgrading their equipment and adding more equipment to service anticipated growth. The enhancements to bonus depreciation, allowing for full expensing of both new and used capital expenditures, should further accelerate capital expenditures in 2018.”
“Ascentium Capital is not really impacted as a company because we mainly provide loans to small businesses,” Depping says. “We do think the tax cuts will lead to a strong economy during 2018 and should also stimulate equipment and capital purchases across several vertical markets that we serve.”
“At this point, we don’t have a good feel for how the new tax act will affect business in 2018,” Bokor says. “We have seen increased optimism in corporate America, but we have not seen any appreciable upturn in leasing activity or equipment procurement yet, and we do expect the current levels of optimism to wane in the latter portion of the year.”
Staying Ahead of Digitization
Dexter Van Dango’s recent article reflected on the changing nature of a more digitized industry, cautioning equipment finance companies to change their thinking or risk being left behind. The top five independents have employed different approaches to stay ahead of the curve during this shift.
“Technology has always been a large part of our value proposition and will continue to be a key focus,” Depping says. “We constantly enhance our technology, including integrating new sales and marketing tools that benefit our vendor clients, the end-user, as well as our own sales team. Technology is critical in driving efficiencies as well as delivering an exceptional client experience. We are able to deliver this through our online portals for our vendors and end users, our mobile apps and the finance platform that facilitates a streamlined experience.”
“We continue to invest in technology to improve our internal systems as well as to provide greater customer experiences,” Bokor says. “We do believe that our industry will continue to gravitate towards a more digitized future and we expect to keep pace with that trend.”
“As a large-ticket finance and leasing company, we continue to view personal interaction with customers and the assets we lease or finance as the most important aspect of our underwriting
process” Fate says. “We will continue to capitalize on technological advances where appropriate to continue building efficiencies in the business where appropriate. For example, we recently hired an experienced professional as data processing manager who will help us streamline our internal processes and reporting capabilities so that management has up to the minute access to information on transactions from the front to the backend of the process. However, we do not currently foresee the use of fintech or automated credit approvals becoming a significant part of our business processes.”
“GreatAmerica is focused on consolidating our technology platforms to provide a better experience to both our customers and our employees,” Golobic says. “We are not only evaluating our systems but also streamlining our processes. By simplifying our architecture and removing inefficiencies, we will develop better tools, creating a seamless experience exceeding market demands for instant access. Financing is still the core of our business but our focus is on how we can provide this capability through technology while still providing the GreatAmerica Experience.”
“Advancement in technology is not an option, it is a necessity,” Weinewuth says. “We are constantly looking at ways to innovate our business — 2017 was a big year for us and as mentioned, 2018 will be an even bigger year of innovation for ENGS as we deliver market differentiating technology offerings. We have commenced two game-changing initiatives that will dramatically increase our relevancy with our customers and vendors by improving the way we process and execute our business and communicate with our customers.”
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