Matt Tallo is a Managing Director in the Asset-Backed Finance Group, responsible for originating and structuring senior debt transactions for specialty finance companies as well as relationship management. Matt joined Capital One in 2013 after serving for nine years as Executive Director, Structured Finance at WestLB AG’s New York office. There he managed a $2.3 billion portfolio of structured finance transactions. Matt sourced and structured senior secured debt facilities for a variety of clients including asset-based lenders and factors as well as equipment finance, consumer finance, and student loan finance companies.
In a Q&A with Capital One’s Matt Tallo, three equipment finance executives predict the biggest headwinds and tailwinds of 2020.
The beginning of a new year is always filled with predictions and outlooks. For those looking to read into the future and opine on the past, the end of this decade seemed to offer us all ample opportunity to reflect. For me, the importance of separating hype from reality is critically important as we weigh important financing decisions. I find that listening to our clients, and asking the tough questions, is the best way to ground myself in what the year will truly look like for our business.
With that in mind, I recently reached out to a few of my trusted industry colleagues for their input on what will shape 2020. Here’s what they said:
With 2019 in the rearview mirror, can you discuss what events over the past year have had the greatest impact on your business?
Di Lillo: The economy has certainly been the biggest driver for us with the additional fact that Maxus Capital Group is going into its 28th year which has led to many new funding relationships. With the current regulatory environment, many banks are looking to lend to established companies that have stood the test of time versus starting new lending relationships with a flavor-of-the-month lessor.
Silva: We experienced fierce competition with regards to underwriting and pricing in 2019, especially from the bank-owned equipment finance companies. Some of our key vendor relationships did not grow as anticipated; however, we recently hired several experienced salespeople which contributed to taking us in new vendor relationships and increased originations. In addition, we continued to enjoy the business from our national accounts, continued to invest in our industry-leading technology products and reporting that we provide to our salespeople and our vendor partners.
We hear a lot of talk about the use of Artificial Intelligence improving efficiencies for businesses. Has your firm embraced AI in its day-to-day business? If so, what impact has it had on the business?
Di Lillo: Maxus has always valued using alternative means to harvest capital intensive niches and customers, yet we have not used artificial intelligence other than for background checks, since we are not a small-ticket lessor.
Feeney: NSL does not necessarily use AI in our day-to-day business, but we do believe that accurate data is critical in making informed business decisions. This translates to better and more accurate predictions for fundings, seasonality and staffing — and, most importantly, provides insight into capital requirements in the future.
It’s been nine years since the end of the last recession and portfolios are performing well. Delinquencies and losses remain low by historic measures. How long can this last?
Di Lillo: If we could predict when the next recession would be, we would be in a different spot for sure. When Maxus assesses new opportunities, we always look for multiple ways out. Our historical losses are below 0.20%, or said a different way, under a quarter of 1%, and during the 2008 to 2010 crisis never exceeded 2% of originations. Yes, we definitely are a cash flow lessor, yet we have a deep understanding of the collateral which is why our historical net losses are so low.
Feeney: If we could predict business cycles, we would not be in the leasing industry but rather on TV. We continue to provide equipment financing, regardless of where we are in any given economic cycle, as companies need equipment to service their customers. 2019 was an extraordinary year at NSL and we expect 2020 to be even better.
Silva: I would describe the market as tepid with industry growth of 5% in 2019. It was a grind all year.
What are the lessons learned from your experiences during the last market downturn? What is your company doing now to prepare for the next downturn — whenever it may occur?
Di Lillo: Maxus Capital Group has always had discipline regarding its credit exposure; the biggest lesson that we learned was to have multiple funding sources since our funding sources can exit the market very quickly and without notice.
Feeney: “Stick to your knitting” is a common phrase you hear around the NSL office. The team has experienced economic downturns before, and we have found that growth opportunities often increase during downturns, as other lending sources pull back and become more stringent. That leaves a lot of low-hanging fruit for NSL.
Silva: In retrospect, we moved too slowly coming out of the recession. We should have been more aggressive in the early days of recovery with our underwriting and hiring of experienced talent.
The economy continues to expand, perhaps at a slower rate than in 2019. Clients continue to finance new or upgrade equipment. What potential wildcards are out there that could change the current market direction?
Di Lillo: The election results in 2020 may certainly change the velocity of the current economic growth, yet we are prepared if there is a softening in 2020 or beyond.
Silva: I am not an economist, but I would assume the upcoming election, trade talks with China and the current struggles with Iran and North Korea could have repercussions. New home sales, unemployment and consumer spending are interesting indicators as well.
In closing, what do you see as the biggest headwinds and tailwinds for the industry for 2020?
Di Lillo: Great talent is always something that is a concern, finding new sales personnel than can structure transactions is becoming more challenging.
Feeney: Getting through the 2020 election cycle — hopefully with some civility from both sides — will benefit everyone. Uncertainty is not good for business. A business owner can deal with good times and bad times, and react to either, but uncertainty has shown to be more difficult to navigate. Regardless of economic booms and busts, businesses will always need to replace old equipment, invest in efficiency, and upgrade equipment and technology to stay competitive. Whatever the headwinds or tailwinds, NSL is prepared to provide funding for these mission-critical investments that businesses need to grow their business.
Thanks to Chris, Dan and Phil for sharing their insights. While the biggest trends of 2020 have yet to be discovered, we look forward to an exciting year filled with new challenges, innovation and change.
Chris Di Lillo is an accomplished business owner who has owned and operated several successful enterprises, the primary being Maxus Capital Group, which he founded in 1993 after a successful tenure at LDI Corporation.
Dan Feeney is President & CEO of North Star Leasing (NSL), a provider of equipment financing solutions for businesses since 1979. Feeney purchased NSL in 2006, and in January 2018, the company was purchased by Copley Equity Partners.
Phil Silva has been working with Balboa Capital since 2006 and was promoted to President in 2008. He has been in the equipment finance industry for more than 30 years and leads the company’s sales divisions.
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