Despite originating in Australia and being based in the US, Macquarie Equipment Finance’s strongest growth is from Europe. Grant Collinson talks to global head of sales David Coons about the company’s European experience
For Macquarie Equipment Finance (MEF), the leasing arm of Australian financial services group Macquarie, Europe is currently its second-smallest market but is also its fastest growing. And the company has real ambitions to expand across the continent from its current UK base.
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MEF has offices in London, Dublin, Paris, and Prague and covers all of Western Europe but, according to David Coons, MEF’s global head of sales, in Europe the UK office generates the biggest business volume by far.
MEF, Coons explains, operates in four regions globally: Europe, Asia, Australia and New Zealand and North America, with the US market the biggest by volume. Globally the company does between Aus$1.2bn (802m) and Aus$1.6bn (1bn) in business each year, according to Coons.
Global headquarters
Originally from Australia, MEF acquired Michigan-based CIT Systems Leasing in 2007 which gave the company "a fairly large footprint in the US". So much so in fact, MEF is moving its global headquarters from Sydney to its US office.
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By GlobalData"This is just to reflect the fact most of our business is coming from North America," says Coons, and adds that none of the remaining three regions in which it operates are likely to come close in size anytime soon.
"We are fairly mature in Australia but the Australian market is only so big.
"Europe is our fastest-growing market and the third-largest of the four regions but we anticipate in the next few years it will probably be the same size as Australia.
"But I don’t think either of them will approach the size of the US market – it’s a much more mature leasing business in the US," he says. Coons adds that MEF has a smaller presence in Asia.
He also says the European market is a harder market to penetrate than North America. When people say Europe – what do they really mean? Ideally you really need to have a physical presence in each of the countries. Companies in Germany and France like to do business with German and French speaking people who can turn around their documentation, turn around their business, know their business, and be on the ground there.
"We are not in that position yet. So until that happens, either organically or through acquisitions, Europe will be predominantly UK-driven," he says.
However, when the company originally came to Europe in 2004 it set up in Vienna partnering with local banks because it viewed the UK market as overcrowded. With a small team based in the Austrian capital, MEF began offering the equity for leases with local bank partners providing the debt, says Coons.
"We felt at the time the UK leasing market was a little over served so we thought we’d try and come in from that direction. We did okay, but not a huge amount of business."
In 2008 the company moved its European headquarters to London and increased staff before setting up its additional offices. The Dublin office handles its larger-ticket or "enterprise" business while London manages MEF’s SME, smaller-ticket "flow business". Average deal size in the London office is around £60,000 to £70,000, says Coons, with most of that generated from the UK.
However, business is coming in from elsewhere and Coons says MEF has the capacity to service leasing deals across most of Europe and adds some European business originates from Macquarie’s US multinational clients with finance needs in European countries.
European expansion
MEF does have its eye on real geographic expansion across Europe too.
"In terms of expansion we are looking to establish a beachhead within our SME business, because that’s what drives other opportunities for us," says Coons. "It enables us to offer a broader product suite to vendors and introducers, where we can do more of their transactions and do them on a real-time basis," he says.
Coons says there are no formalised plans as yet for Europe and the company is also looking at expansion into Canada to grow business in the North American region. However, he adds: "Somewhere in Europe is the priority, probably later this fiscal year."
The specific country is yet to be determined but Coons says Germany is the most likely candidate adding that it is a "well-run and competitive market".
MEF is also looking towards the Nordics he says: "We see some pretty good potential in the Nordics because we think it’s under-served and it’s relatively easy to do business there."
MEF’s route to market in Europe is largely through introducers and other leasing companies, as well as direct sales for its larger-ticket business, and Coons says the firm has somewhere between 10 and 15 introducers signed up in the UK.
What MEF doesn’t do (at the moment) is run traditional vendor programmes. "We are not a vendor lessor in the traditional sense – we don’t have contractual vendor programmes. We do have vendor relationships, but we are not set up like De Lage Landen or CIT with contractual relationships and white label programmes – that is not our business model."
The reason MEF doesn’t use vendor partnerships is because of the types of asset it finances. Coons defines MEF as a "technology asset-focused company" which he says encompasses, not just IT equipment, but any technological equipment which has some form of built-in obsolescence.
"In other words the asset is not going to stay the same for ten years – there is something happening to it, whether it is being upgraded or replaced," he says.
MEF’s list of typical assets it will finance is extensive, but also covers specific niche technologies from digital signage and broadcast equipment to digital mobile medical equipment and robotic manufacturing tools, as well as standard IT and telecoms equipment.
This means, says Coons: "The majority of vendors who sell [those assets] do not have a direct sales model; they sell through distributors and system integrators."
"So with a vendor programme you’ve got another layer and sometimes two layers between the manufacturer and the end-user which means it’s harder to do a vendor programme because the vendor is actually not controlling the sales process, the distributor is."
The distributor, he adds, may be selling a hundred different products which makes it difficult to get visibility for the manufacturer’s asset.
Nonetheless, Coons doesn’t rule out vendor programmes altogether, but says the only way MEF would set one up in Europe would be through acquisition rather than starting from the ground organically.
MEF’s choice of asset informs more than its sales model, however. "With the exception of traditional IT and data processing equipment, which we do in all forms and fashions, we really try and find niche markets," says Coons.
"To use a baseball analogy, instead of looking for home runs we are looking for doubles and singles where we feel there is at least a potential for US$100-200m a year.
"It doesn’t necessarily have to be a billion dollar market for us to do it."
What matters instead is that the assets share the characteristics of traditional IT equipment – that they are highly mobile and have a clear upgrade path which Coon says often means the end-user will require an asset management capability.
"For instance," he says, "in the health care market we look at the hospitals as one big data centre, so we are not focusing on large imaging equipment – the CAT scanners, and other heavy assets that last seven-to-ten years and are dominated by the captives – we look more for assets which have characteristics that are similar to IT assets."
Coons gives the example of the diffusion pump: "They are US$25,000 to $70,000 a piece. A hospital will probably have one for every two beds, so maybe 600 scattered throughout the hospital."
The hospital will want to know how many assets they have, where they are, where they are in the technology cycle, and when they are coming off lease, "and companies are willing to pay for that", he says.
Coons give further examples in the smartphone market where MEF is currently working on projects in Australia and Asia with mobile telcos which then sub-lease them to consumers.
"Once again it’s a technology asset which has characteristics in common with distributed IT assets; there is going to be an upgrade path, the asset is not going to stay in place for seven to ten years. There is going to be something that is going to change."
It’s the opposite of an end-user wanting a piece of yellow iron and looking for the cheapest financing they can get, he adds.
Coons says there is a trend towards this kind of asset tracking and management and also towards managed services in the leasing industry. The latter he says poses a challenge to MEF and the leasing industry generally.
The challenge with additional service deals, he says, is it’s hard to structure a traditional lease which can be sold on the secondary market because you don’t get the contractual terms, which means lessors have to pay each month regardless of the performance of the asset.
"A typical managed services agreement is not set up that way – it is ‘I want to pay as I use it’ and that’s hard for a lot of leasing companies to get their head around. But that is really where we are seeing a lot of the growth in the market and companies which figure that out will have a leg up on everybody else," he says.
MEF is offering managed service deals but says there is increased risk for the lessor because of the execution risk around the service provider.
"If it’s a smaller company [providing the service] you’ve got the risk of whether they are going to be around to provide that service," he says.
Because of this added risk, in addition to the fact that some of the niche equipment MEF deals with is from smaller companies, MEF is not rolling out a single additional services product but is creating bespoke deals on a case-by-case basis.
Looking across the business and ahead to the rest of the year, Coons says investment confidence is still higher in the US than in Europe, but says this is leading to some "crazy rates" being quoted in the market because of the amount of money, some coming from private equity and hedge funds, looking for a home.
Securitisation
One thing Coons would like to see more of in Europe which he says is currently helping spur the US market is securitisation.
"The securitisation market is much more mature in the US for leasing than it is in Europe.
"Companies are securitising lease portfolios of typically US$150m and up, and that market is not as robust in Europe and that limits growth.
"If I had my magic wand that would be something we’d like to see. Our portfolio is getting to the point where we’ve got the size where we would like to do it and that is something which comes to mind as a difference between the two markets."
Another issue is the fact that Europe contains several different economies. "In Europe, you still have some country issues," he says. "Companies are still reluctant to do business in Italy or Spain, so when you talk about Europe you really have to be more country-specific so far as where the opportunities are.
"It’s very hard to be a pan-European business if you are trying to operate out of a single country – I don’t care which country you pick. And that’s our biggest challenge, and it’s a challenge for a lot of US companies trying to establish a foothold in Europe.
"You really have to commit to a country and invest in people and systems to really grow the business as opposed to cherry picking deals from a single location.
Our biggest challenge to grow in Europe is to make that investment and establish beachheads in different countries.
For the meantime in the UK, Coons is confident of good year for MEF.
"From the demand we see from smaller leasing companies, the UK is still an underserved market," he says. "We probably have more originators than we can handle right now, so we are scrambling to build up our capabilities to handle business."
"From that we are fairly bullish on the growth of our SME business in the UK. We are still small but it is a big growth market for us."
