Top Five Private Independents: Providing Flexibility and Value to Stay Ahead of the Competition
by Rita E. Garwood March/April 2017
In a Monitor Q&A, leaders from the top five private independent equipment finance companies discuss the challenges and opportunities they encountered in 2016, their strategies for staying competitive and their outlook for the year ahead.
Craig Weinewuth, CEO & President, ENGS Commercial Finance
Tony Golobic, Chairman & CEO, GreatAmerica Financial Services
Dave Fate, President & CEO, Stonebriar Commercial Finance
Crit DeMent, CEO, LEAF Commercial Capital
Richard Baccaro, Chief Sales & Marketing Officer, Ascentium Capital
MONITOR: What was the most significant challenge you and your team faced going into 2016?
BACCARO: SMBs tend to be reactionary with respect to capital investment and economic trends. At the commencement of last year, we were still being challenged, like other lenders, with weakened economic confidence and its impact on business owners and equipment vendors. As the year progressed, we saw a positive shift, but during this time, it was even more critical to be closely partnered with our vendors through the sales process to help close the sale via financing.
DEMENT: Our most significant challenge for 2016 was uncertainty. What would the Fed do in regard to rate changes? Who would win the election, and what effect would that have on our business? There were other uncertainties too, such as how 1071 would be implemented, how GE’s exit would change the industry and what consumer protection changes might be coming. All of this combined to create an environment that was exceptionally unpredictable — one where even small mistakes in planning could grow to have disproportionate impacts. On the other hand, good bets could spin up into great ones.
FATE: The most significant challenge was finding the time and resources to successfully execute on several milestones we achieved throughout 2016 that enabled us to achieve the growth we experienced for the year. In the first half of the year we completed our initial “hybrid” ABS offering that saw SCF, as a first time issuer, complete the offering despite being in existence only for 14 months. We launched our Realty Capital vertical, which is not included in our reported numbers, with a team of highly experienced professionals that was able to accelerate its start with the purchase of a significant portfolio within its first several months of operation. In addition, we purchased a portfolio of 16 corporate aircraft assets including a team of professionals to manage and grow that portfolio. At the same time, we continued to build out our general staff. We started SCF in April 2015 with six people, increasing to 15 by year end. We further added additional staff up to 31 in all segments of our business to manage the growth that we achieved in 2016 and to position us going forward in 2017 and beyond.
GOLOBIC: While there hasn’t been a year without strong competitive pressures in GreatAmerica’s 25-year history, we have rarely before observed so much emphasis on incredibly low spreads and substantially increased credit appetites. At GreatAmerica, our competitive focus is to provide value by fulfilling our mission to help our customers be more successful. During 2016, as our competitors increasingly focused on price and credit as their competitive differential, we increasingly emphasized providing even greater value to our customers.
WEINEWUTH: Going into 2016, we said it was going to be a transformative year for the company. By this, we meant that we were going to diversify the company into new industry verticals and expand our product offerings to our customers. The new industry verticals and products were strategically identified to maintain our focus on hard asset equipment lending sold through leading vendor partners. The challenge was finding the right opportunities and leadership to lead these new businesses all the while staying focused on growing our core business of transportation equipment. We spent a lot of time vetting the opportunities and individuals, and we feel very confident that we have the best leaders in the business leading our new business lines of industrial equipment, construction, factoring and insurance.
MONITOR: In the context of your growth in 2016, please comment on your go-to-market strategy that, in retrospect, made a significant difference in the outcome.
BACCARO: Ascentium’s growth can be attributed to our three-prong approach: people, processes and products. Ascentium invested in people — business development managers and seasoned sales professionals across the 2017key industries we serve. This ensures we have two-way market knowledge: expertise coming into the organization and going back out to the market helping drive client success. From a process perspective, Ascentium continually improves the finance experience internally and externally. MyAscentium.com portal was launched to further streamline the finance process and to provide access to in-depth portfolio data that our business partners and equipment vendors can use to drive business initiatives. Ascentium also developed a customized financing solution and launched our Merchant Finance division. This enables us to serve this niche market effectively and helps drive new-client growth.
DEMENT: We took a two-pronged approach to growth in 2016: adding additional lines of business and implementing a re-engineered lead prioritization and intelligence solution that helped us extract significantly more value from our prospects, customers and sales team. Results were better than expected, with a 50% drop in our sales-call-to-submitted-application ratio.
FATE: In 2016, as noted previously, we added our Realty Capital net leasing vertical and significantly expanded our corporate aircraft portfolio and staff. Both these initiatives resulted in significant growth for SCF. In addition, we continued the build-out of our direct origination capabilities, which allowed us to double the amount of new business compared to 2015.
GOLOBIC: Our go-to-market strategy has always been helping to differentiate our customers from their competitors by offering innovative and customized solutions that fit their market circumstances. This has always been a winning strategy for us, and so it was in 2016. WEINEWUTH: In 2016, we wanted to increase our relevance to our vendor partners by extending our lease and loan products to a wider credit spectrum and expand our finance offerings to include factoring and insurance. We did this by investing in our technology platform and developing market leading tools that help our vendors sell more equipment more efficiently as well as structuring several strategic relationships with third parties that broaden our product offering and help us be much more relevant to our vendors. It worked. We increased our market share with most of our major vendors.
MONITOR: Thinking back to your expectations for last year, what pleasant surprises and/or disappointments did 2016 bring? How do you plan to capitalize on the positive and adjust for the negative in the year ahead?
BACCARO: Recruitment of tenured finance professionals is always an interesting mix of expectations. Equipment financing is a specialized niche in our economy. Due to this, it demands organizational proficiency that is supported by personnel with substantial expertise, which makes recruitment challenging. Ascentium attacks this challenge with a proprietary platform that helps our reps sell, continual sales tools development and substantial marketing support. This enables us to offer an easier sales process and improve the client experience. Since inception, we’ve been able to secure industry leading growth. We will continue to capitalize on our people and processes.
DEMENT: Our most pleasant surprise was the degree of sales efficiency driven by our new lead prioritization and intelligence solution. For example, we were looking for a 33% drop in the number of calls made per financing application submitted. As of now, we’re seeing a 50% reduction. Our biggest disappointment was the irrational way capital markets behaved in anticipation of potential federal rate hikes. Capital spreads were out of sync with benchmarks, leading to an ultra-competitive market in which it was needlessly difficult to price.
In 2017, we will continue to leverage our lead prioritization and intelligence solution and deploy its technologies and processes company-wide. We also expect that capital markets will return to a more rational footing as the Federal Reserve moves from rumor to action on rates.
FATE: We did not have any disappointments. There were no major surprises and we continued to see more opportunities primarily due to the void created by the exit of GE Capital from the market. We believe that our business will continue to grow in the future as we focus on that area of the market between the banks on one end and private equity on the other.
GOLOBIC: 2016 was a fairly uneventful year for GreatAmerica. We didn’t really experience any sub-stantial pleasant surprises or disappointments. The great positive was that we not only maintained, but also somewhat increased our market share, despite an intense price cutting competition. This, to us, means that we are offering increasingly better value to our customers. We will capitalize on this and continue to help our customers to become even more successful.
WEINEWUTH: We experienced a couple pleasant surprises in 2016. First, competition was very aggressive in 2015, and that caused some irrational behavior by some fringe lenders. By 2016, those fringe lenders exited the market or retrenched, and that has enabled us to improve our market share and efficiency ratios with many of our vendors. Second, and related to the first question, we saw several portfolios and platforms come to market at more reasonable valuations than the prior couple years. We believe there will be more portfolios coming to market, and we plan to be a buyer in 2017.
MONITOR: Please comment on your ability to compete with commercial banks given the negative of lower cost of funds versus the positive of being highly regulated and, as a consequence, restricted with regard to investment choices.
BACCARO: The most successful alternative finance companies sell value and simplicity. The focus cannot be on rate. If it is, companies exchange short-term funding for long-term loyalty. We successfully compete by focusing on continuous improvement to our offering. The results of our annual client survey support this: 97% of end-user respondents indicate our finance products meet their needs and 92% indicate Ascentium’s finance process is fast and flexible. Service excellence and product flexibility help in the delivery of a positive client experience.
DEMENT: As an independent, we’ve always enjoyed flexibility commercial banks don’t have, though competing was more challenging due to Federal Reserve rate uncertainty and unpredictable, irrational behavior from the capital markets in 2016. However, our greater agility and responsiveness continued to give us the edge we needed to compete at a high level.
FATE: We do not view banks as our competitors. Unburdened by the regulatory environment faced by banks, our underwriting parameters can be more flexible when we are able to focus on essential use, integral, income-producing assets as well as the balance sheet construct and cash flow of obligor. Our overall theme is that if we are competing with a bank for a particular transaction, it is not for us.
GOLOBIC: GreatAmerica has always competed in spaces dominated by large commercial banks and, even today, they are, by far, our main competitors. We did this intentionally knowing that this was a David versus Goliath(s) situation. But the banks had the highest quality business, and that was the business we wanted. We knew that they not only had lower cost of funds, but they enjoyed higher leverage and lower ROE goals. This would seem to be a formidable obstacle, but it wasn’t for us. Our vision was to build a company that would continuously pursue standards of excellence so high in everything we do, that we would have no competition. That was our vision 25 years ago, and this is our vision today. It inspires us and makes us proud while our customers cheer us on.
WEINEWUTH: Where commercial banks historically were our largest competitor, particularly the local and regional banks, since the credit crisis we don’t see as much activity out of these banks. The regulatory environment has limited their ability to lend outside their footprint, and most of our vendors today sell across the country and need a lender that can work with them wherever they go, not just at home. Additionally, banks generally are not set up to properly service a flow vendor. The banks tend to be more transactional, which does not suit the vendor flow model that requires quick decision-making, easy documentation and feet on street to meet with customers. While banks may have better pricing, that takes a back seat to these other service points that banks have trouble executing on and where we excel.
MONITOR: How does your company rise to the challenge of competing with fintechs?
BACCARO: In many ways Ascentium is a hybrid. We are able to provide strength and stability via our strong balance sheet and diversified portfolio, as well as having a leading lending platform that competes directly with fintech companies. Our technology platform was recently recognized by LendIt; we are a finalist for the “Top Small Business Lending Platform.”
DEMENT: Though we’re as automated as fintechs are, if not more, and enjoy many of their various technology and agility advantages over other business capital sources, we don’t consider ourselves direct competitors. In our specialized market, fintechs, as relative newcomers and generalists, don’t offer the level of experience and expertise our customers and partners require. Technology without experienced, trained and focused human capital is just technology. It’s a tool, but it’s not a solution — and it’s been our experience that solutions aren’t assembled so much as evolved over time. Thanks to our history and focus, we’re able to provide the technology, the agility and the domain-specific knowledge and tools businesses rely on to acquire equipment in a way that best suits their budgets and goals.
FATE: We don’t compete with fintechs. The transactions we focus on are large ($5 million to more than $50 million), highly structured and do not fit into the fintech model.
GOLOBIC: When we examine American business history, we see a graveyard of once great companies that refused to pay attention to the changes on the horizon. We believe that fintechs, in some future form, represent one of these seismic shifts, so we’re paying a lot of attention to them. We not only intend to stay out of the graveyard, but we are working to benefit by the upcoming shifts.
WEINEWUTH: We have studied this long and hard, and have looked at several fintech platforms on the market. We certainly believe the commercial equipment space is ripe for fintech-type advancements, but most of the fintechs we have seen do not have a balance sheet and are losing money because the cost of acquisition is so high. We think enhancing a balance sheet lender like ENGS with greater fintech-type offerings can increase our breadth of product offerings, which will create greater value for our customers and vendor partners. We will continue to focus on introducing greater tech enabled finance products through ongoing organic build efforts or if the right opportunity presented itself to acquire a fintech company.
MONITOR: Assuming you set an aggressive plan for 2017, what are a few of the positive and negative variables that you expect to impact the ultimate outcome?
BACCARO: We see a lot of potential that will drive increased equipment acquisition and SMB growth. Companies are sharing their optimism regarding tax reform and reduction in regulations. We set healthy growth goals and believe the business climate will support this.
DEMENT: If the new administration can implement some of its policies, there’s the potential for strong economic tailwinds and consequently greater equipment finance activity. On the negative side, federal rates will likely rise, posing attendant challenges and possibly damping equipment finance activity.
FATE: We don’t consider our plan for 2017 to be aggressive. We see it as a continuation of our execution in 2016. We do not chase volume for the sake of volume. We do, however, see a growing GDP, lower unemployment and larger CAPEX spend by companies as well as a reform to the tax code lowering both corporate and personal income taxes as positives to the overall equipment finance industry. We really don’t see a lot of negatives that could affect us, although a tightening of credit spreads in the high yield markets could impact our ability to win transactions as we price our transactions based on a relative value proposition as well as on the perceived risk. If credit spreads tighten to the point that we feel the transaction rates don’t match the risk, that could impact our growth.
GOLOBIC: Actually, we did not set an aggressive plan for 2017. But 2017 will surely be a year of growth for GreatAmerica, just it has been every year for the past 25 years, including the years of the Great Recession. The reason for our modest growth plan for this year is simply that we foresee some of the same competitive pressures, while starting to lessen, still continuing. Our focus is on building our GreatAmerica to last, on solid foundations of profitability, credit quality and high employee and customer satisfaction. These are foundations that will enable our customers 25 years from now to say, “It was a great day indeed when I chose GreatAmerica.”
WEINEWUTH: A significant amount of our growth in 2017 will come through expansion into our new industry verticals. Additionally, one of the positives we hope to see is continued improvement in the general economy. Fiscal stimulus such as tax reform, infrastructure spending, deregulation and increased military spending we believe will significantly improve the landscape for investment in all of our core industry verticals.
MONITOR: What are some of the most significant events that could alter the landscape of our industry enough to be consider a headwind or a tailwind?
BACCARO: The new White House administration is business-centric and this should create a tailwind in business growth and improve SMB confidence in the economy. Based on recent announcements, the Federal Reserve may be looking at more aggressive rate increases. This impacts everyone in the finance industry as well as business owners and consumers. The way to counter this is to ensure a company provides value over rate.
DEMENT: Proposed tax reform is something we’re watching very closely. On one hand, these reforms could spark considerable economic growth. On the other, possible changes in the deductibility of interest expenses could pose real challenges for us and our customers.
FATE: The issues I mentioned previously could provide headwinds or tailwinds in addition to an unforeseen slowdown of the economy as a whole. However, a slowdown in the economy as a whole could also provide additional opportunities as banks retrench and restrict credit to their customers.
GOLOBIC: There are a number of such events on the horizon; everything from the evolution of the way equipment is financed away from a traditional hell or high water structure to increasing use of big data utilization, for example.
Because our industry has enjoyed unprecedented low credit losses over the past seven years, I am concerned that some of us are beginning to think of this as being the new normal. At least they seem to be acting this way. I think the future will see some of these portfolios underperform and at the same time, the emphasis on historically low spreads will most likely create some headwinds. We at GreatAmerica are well positioned to take advantage of this when the time comes. WEINEWUTH: A looming headwind can be the continued uninspired performance of our economy that we have seen over the past few years. GDP at +/- 2% does not instill much confidence in companies willing to invest in their businesses. Certainly, we need to keep an eye on the trade policies. This can have fairly significant benefits or negative impact to our vendors depending on how it is managed.
Vice President of Financial Services,
Corcentric Capital Equipment Solutions
The first step in developing a long-term equipment financing strategy is to identify all of the fixed and variable costs associated with operating your current fleet. Patrick Gaskins of Corcentric recommends developing a spend analysis to identify current and future potential purchases.
Kenneth P. Weinberg,
Baker, Donelson, Bearman, Caldwell & Berkowitz
Usury laws vary from state to state, which can make a lease or loan more complicated when the lessor is in one state and the lessee in another. Kenneth Weinberg discusses how this has played out so far in the courts, with favorable rulings for a lessor often depending not only on who files first, but where they file from.