Colin Tourick
looks at at how interested investors are funding deals in
the vehicle leasing sector
One
of the joys of being an independent consultant in the contract
hire/fleet/asset finance space is that my work is so varied. I’ve
been doing this for a decade and during that time I don’t think
there is any part of a lessor’s balance sheet or profit and loss
account I haven’t worked on.
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In the last six
months, however, things have changed. I have been approached nine
times by hedge funds or corporate financiers looking to buy (or
arrange the purchase of) contract hire companies.
I’m only one
person, so this is by no means a scientifically-surveyed
cross-section of activity in this market but it does seem there is
more interest in this sector now than at any time since I joined it
32 years ago.
I’ve asked them all
why they’re so interested in this market and by and large they all
tell the same story.
They are attracted
to the returns in the sector, though they realise these are
cyclical.
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By GlobalDataThey also like the
fact that some of the leasing companies are huge, requiring large
amounts of capital and debt. Big deals mean commensurately big
returns for any corporate finance house that can close one of these
deals, and it seems that hedge funds are attracted to big deals
too.
They have been
interested in three topics: residual value risk (RVs make up more
than half a leasing company’s balance sheet so they’ve wanted to
understand how this risk is managed); the volatility of earnings
(in downturns clients order fewer cars, used vehicle prices tend to
fall and lessors have to provide for RV losses on their existing
book) and the scope for cross-selling opportunities where they plan
to merge the business with a different type of business (tricky –
past experience has shown that it is mightily difficult to reap
these benefits).
This is a niche
market within a niche market, so how did they discover this sector?
Almost without exception they’ve said they saw their competitors
doing deals in this space and decided to check it out for
themselves.
And, of course,
they have discovered there are some very willing sellers around at
the moment.
Funding an
acquisition seems to be the number one problem at the moment, and a
lot of very clever people are working hard to solve it. They are
looking at securitisation with some enthusiasm as it could offer
near-unlimited funding if made sufficiently flexible to accommodate
real-life events such as vehicle write-offs, early terminations and
lease extensions.
They are also
discussing forming syndicates of investors and funders with deep
pockets to buy and fund the largest of these businesses, or several
large players at once.
I’m sure we will
see more deals done in this market. The UK contract hire market is
never a dull place. Over the next year or two I suspect it’s going
to be even more interesting.
Professor Colin Tourick is the author of
the Managing your company car
series
