In the last six years Cabot Square Capital has invested in a number of brokers across a wide range of asset classes. In each case this has been due to the businesses having strong, long-term, established relationships with a wide base of customers that demonstrate high-quality customer service and therefore consistent and proven origination volumes, explains the business’s partner, Richard McDougall.
“We then use our capital and expertise to work with management teams to build the necessary team, systems, infrastructure and funding to both grow origination and build a hybrid funding strategy, where a proportion of the origination is captured on our own book,” he adds. “To execute this type of strategy requires deep financial services and lending expertise, and therefore has generally attracted only specialist financial services-focused private equity funds.”
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Cabot maintains a significant brokerage capability across its businesses to ensure it can almost always fulfil a customer’s need, irrespective of pricing, exposure or product capability demands. “Clearly there have also been acquisitions of brokers made by banks and other types of buyer where the strategy is more directly to access the origination for own book lending, which will have taken some distribution out of the market,” says McDougall.
When Acuity acquired Tower Leasing, the focus was on track record, explains Tower Leasing managing director, Kerry Howells. “This was down to two factors: strong sustainable relationships with introducers who continued to support us during the trough of originations in 2009-2011, and our prudent and thoughtful approach to risk.”
She suggests that the biggest challenge for brokers owned by private equity firms is dealing with the operational strains of volume growth. Tower has doubled its origination volumes in three years and expanded its on-balance sheet funding by five times, which has placed a significant strain on day-to-day operations, many of which are manual.
“It has been challenging to juggle the different demands of managing IT project delivery, recruitment and training at the same time as growing sales,” adds Howells.
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By GlobalDataSome of the brokers that have been acquired have been in the market for many years, she continues. “If the management team are retained – which we have seen in most instances – the people behind the private equity firm often don’t understand the dynamic of ‘relationships’, which can exasperate the relationship between the management team and the new owners. I believe this is a case of the private equity firms not fully appreciating the marketplace.”
