Now’s the time to source investment, although
private equity has risks.
Asset finance companies that require
additional funding will probably be considering the desirability
and feasibility of attracting external investment. If so, they will
have to decide whether it is better to own a smaller slice of a
potentially larger pie, or lack funds and slow down their business
while continuing to own a large share of the business.
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The asset finance industry appeals to
investors because of its regular and predictable cash flows, strong
cash generation, and the availability of assets to serve as
collateral. There is often also, of course, the opportunity to
leverage the customer base by offering additional value-added
products and services.
Many equipment-related companies are cyclical,
and this is an important consideration for opportunistic investors.
They may look to make their investment at the bottom of a cycle and
hope to exit near the top. This should be borne in mind in the
context of the economic climate and new business trends in the
asset finance industry.
Smaller asset finance companies provide the
opportunity for investors to consider a strategy of expansion and
possible consolidation. However, it has to be perceived by the
investor that there are considerable opportunities for the company
to grow.
The possibility of residual value exposure
might be a concern, but investors are likely to be reassured if the
company has in-depth asset knowledge and risk management expertise,
or has acquired it by means of a quality outsourcing
arrangement.
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By GlobalDataThe private equity and venture capital
industries have a proven track record of contributing to economic
growth and job creation. The industry provides a vital source of
investment to companies at all stages of development.
Funding can be sought for a variety of
reasons: to fund start-ups and companies at an early stage of
development that have perceived long-term growth potential;
to develop new products, services and technologies; to expand
working capital; to make acquisitions; or to strengthen a balance
sheet.
An important part of investors’ strategy might
be to leverage investments by supplementing the equity investment
with debt which can be repaid over time. Debt providers will be
looking for strong asset backing, or significant opportunities to
generate cash. An asset finance company will have to show that it
has a strong, or potentially strong, competitive ranking in the
market.
Management
In order to attract investment the asset
finance company must have high-quality management. It must offer
the investor the possibility of a high return on its financial
outlay, and the investor must be able to see a clear exit
strategy.
Investors invest in people – people who have
run, or are likely to run, successful businesses. They look for a
high-quality, experienced and ambitious management team with a
realistic plan to grow the business. A capable, committed and
balanced management team brings significant credibility to the
company.
The prospects for decent returns, and the
risks associated with achieving the investor’s goal, are critical
factors. In common with the company’s management, investors have a
vested interest in the company’s success – growth, profitability
and increased value. Investors must be assured that the company
will generate sustainable and predictable cash flow and, if not
already profitable, will be in
the black in the short
term.
The non-financial input by investors is also
very important, such as guidance on strategy and operations, and
the ability to tap into their specialist experience of assisting
companies at a time of rapid development and growth. The level of
support may be ‘hands-on’ or ‘hands-off’, or somewhere between
these two extremes. The investor almost certainly will
require a seat on the board, usually as a non-executive director,
or even as chairman.
Investors focus on the prospect of a
significant financial gain. The potential exit value of a company
is a vital part of the investors’ thinking. They will be keen to
know where the probable exit route will lie even before the
investment has been made. The company’s management should not
assume that their exit will coincide with that of their
investor.
Most exits are realised through a trade sale
to another company, which often brings a higher valuation than a
full stock market quotation. This is because the acquirer needs the
company to supplement its business activities. The exit may be by
re-financing the investment by another institution. It could be by
seeking a listing of the shares on an exchange. Or, it could be by
a management buyout.
The exit strategy must be underpinned by a
quality book, and the company must be professionally managed with
efficient systems. An investor will want an ongoing sustainable
source of funding to be available in the immediate post-exit
years.
Raising equity finance is demanding, costly
and time-consuming. The company’s business may suffer because
significant time will need to be devoted to securing the deal.
Potential investors will closely scrutinise the company’s past,
current and prospective performance and its management. It may be
beneficial to approach potential investors through a professional
adviser who has previously worked with the firms, and often, more
importantly, with some or all of the management team.
Investment deals can fall at the last hurdle.
This may be because there is a failure to agree a price or other
important terms. Or, the company’s trading performance may have
declined markedly during the negotiating process. Or, in recent
times, due to the lack of confidence in the market.
The rewards for the asset finance company and
the investor are directly linked to the value that is created. It
is in the interests of both parties to work in partnership to
strive for mutual success.
