Private equity houses reveal to
Leasing Life that they have earmarked tens of
millions of pounds for investment in asset finance.
Asset finance companies are
particularly appealing to private equity investors, thanks largely
to the fact they are cash flow-rich companies.
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Tony Mallin, formerly chairman of
Leaseurope and of the Finance & Leasing Association, knows
exactly how profitable lessors can be, having spent 20 years at
Hambros Bank before successfully founding Star Capital Partners, a
private equity firm with more than €1 billion of equity under
management.
For Mallin, private equity funds’
increased interest in asset finance is largely due to the nature of
the beast.
He says: “Private equity firms like
predictable cashflow businesses where the assets that create the
cashflow have intrinsic value – this applies to most leased
assets.”
He believes that because the shortage
of capital is causing leasing rates to increase, equity in leasing
activities should become more valuable over time, in parallel with
the rise in the cost of capital.
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By GlobalDataAdditionally, lessors’ wide
distribution of clients means that risk is less concentrated on any
one particular sector or asset, he believes.
“Leasing gives you distribution of
risk, so as long as the underwriting is of a reasonable quality,
the cashflow you’re getting is a high credit quality – probably a
higher credit quality than the leasing company itself.”
This factor is thus pushing private
equity firms into wanting to buy into lessors, a view shared by
John Cole, private equity partner at Ernst & Young’s
transactions team.
“Private equity firms are generally
much more interested and engaged in the financial services sector
than two or three years ago,” Cole says. “Firms are quite busy
looking at their options at the moment, looking to invest in safer
businesses than before.”
But for Jon Moulton, managing partner
at Alchemy Partners, the increased interest is because of the
parent companies which have no better option than to sell off their
asset finance companies, thereby increasing the supply on the
market.
“We’re getting more offers of
asset-based financing businesses of all kinds because their parent
companies can no longer continue to hold them due to a shortage of
capital, or because of their inability to raise or securitise the
debt that enabled them to run their businesses in the past,” he
says. “There really are quite a lot of relatively distressed
sellers of such assets.”
The British Venture Capital
Association (BVCA), which represents the private equity industry in
the UK, also believes that there are more troubled sellers in the
market, as Nathan Williams, a spokesperson for the association,
explains.
“Private equity firms are best at
turning around struggling companies or re-energising those that
have lost their way. The recession creates more of these
opportunities and private equity firms are one of the few sources
of capital with the risk appetite to take such a situation on,” he
says.
The focus is therefore on companies
that are equipped to weather the crisis in the short-term, but that
can then take advantage of the upturn, when it finally arrives,
Williams adds.
Indeed, Star Capital Partners is
actively looking for investment opportunities with companies that
can grow once the economy recovers.
Mallin says that his business is ready
to invest “around £100 million” (€113 million) into one or two
companies in the asset finance industry, although lessors should
not hope to receive £50 million upfront.
“We have to reserve capital to invest
in their growth,” Mallin explains. “It’s pointless just putting a
load of cash in just to bridge a gap, and then watch it get into
trouble when it can’t grow. To create value, the business needs to
grow, so you need to have some reserve capital set aside for
this.”
Alchemy Partners is also in
discussions, looking to invest anywhere between £20 million and
£100 million into several medium-ticket asset finance
companies.
But why should lessors consider
selling a stake to a private equity company – what’s in it for
them?
Mallin argues that private equity can
help companies grow and take more market share, as well as address
shortages of capital. With banks reducing funding lines, he
believes lessors can quite easily “get into a crunch”.
“Private equity can deal with that by
injecting capital, giving them a bridge to get through and allow
them to continue to grow.”
He emphasises that he does not just
buy into a company and see what happens. Rather, he says “we run
the business together – although we don’t micromanage, we do become
part of the strategic management”.
Such investments come at a price,
however: both Mallin and Moulton say that they would expect a
return on equity of between 20 percent and 30 percent on their
asset finance investments.
But, according to data from the BCVA,
as a whole, over the past 10 years private equity funds have
generated more realistic internal rates of return of between 13
percent and 17.3 percent.
In any case, to generate such returns,
private equity firms will usually invest capital as is necessary
for the company to achieve growth.
Moulton adds even after the initial
investment, if the company needs to grow, he would happily put in
another £20 million or £30 million if needed.
Cash-strapped lessors really should
consider private equity as one of their main options, points out
the BCVA’s Williams.
“Private equity firms really are one
of the few sources of liquidity for businesses seeking capital in a
credit-starved environment,” he says.
Moulton couldn’t agree more. “Look,
the private equity boys are still sitting on a reasonable amount of
capital, probably exceeding £100 billion across Europe,” he says.
“If a lessor needs capital, and can afford it, they should approach
private equity firms. Even if you get a tiny fraction of that, it’s
still a meaningful amount of capital.”
Jason T Hesse
Syscap: went with PE rather
than CIT
