After attending the ELFA Executive Roundtable this year there is definitely some exciting trends we are seeing in this industry that I would like to share. The pulse from the ELFA Executive Roundtable held in Florida in mid-March 2022 was palpable, as this year is the first time this meeting has been held since the beginning of the COVID pandemic. Over 115 industry executives from all over the US and a few foreign countries attended.
The following is based on my perspective as well as observations throughout the executive roundtable.
A LOT OF DRY POWDER
The US Banking Systems today is sitting on the largest amount of unused capital in the history of the US Banking system. All of this “dry powder” is not something banks like to be sitting on as unused capital makes little or no return for them. Banks make money when they are lending money not sitting on it.
Equipment finance historically produces great returns on investment for banks that have equipment finance businesses. So what we are seeing is banks that want to lend more money to equipment finance companies and allow them to grow their business. As we have come out of COVID, the US economy has been very resilient and is growing faster than almost any economy in the world. Banks are in great shape, and our customers have one thing in mind. Growth… Growth and more Growth.
Many of our clients have had record years during COVID and now are looking to expand and grow further in the markets they serve and also in new markets and financial channels they are beginning to get into. This excess capital is not only in the banking sector and we have lots of our client’s partners that are part of banks, but it’s also in the private equity sector.
PRIVATE EQUITY FLUSH WITH CASH
Private equity companies are also flush with cash and are looking for ways to grow their revenue. Large private equity companies like to invest into the equipment finance business as well. Through these dry powder investments, many new De Novo LTi equipment finance partners have received 30-40-50 million dollar initial investments and the equity ownership of these firms. Having hired very experienced and seasoned talent who have started many new equipment finance companies and are beginning to really grow their businesses.
ACQUISITION MODE TO DRIVE GROWTH
Every single customer I spoke to at the executive roundtable is in either some sort of acquisition mode that is driving growth, or is actively growing their organic business. Most I spoke to have ambitions of doubling the size of their business over the next 2-3 years and are looking for additional capital and people to help them get there. What else goes along with well-funded systems is a solid software platform that becomes their technology eco-system and can help with growth, accounting and servicing those portfolios. That is where we come in at LTi.
OPTIMISM DESPITE INFLATION
The ELFA Executive Roundtable was full of optimism despite the escalated inflationary pressures in the US, the war in the Ukraine and escalating oil prices and escalating interest rates. You might be asking about how the executives of large ELFA companies in attendance view higher interest rate environment that we are currently experience and will likely be in over the next 12-24 months.
The consensus is that equipment finance companies do better in a higher interest rate environment historically than other asset classes. But why is that? Increasing interest rates pull borrowers in the market to make equipment acquisition decisions before more interest increases take place. The thought around this is, it’s better to acquire assets now before rates go up again.
Also equipment leasing, especially as true leases, can provide lower rates than straight financing and loans. Equipment leasing can provide 100% financing of total equipment cost vs having to put money down like a loan does. So it can save capital for other important funding needs like added head count, payroll and other overhead costs. There was not a large concern about increased interest rates.
SUPPLY CHAIN INTERUPTIONS
Supply chain issues were also something high on everyone’s list of things discussed. Certainly we have all heard and seen that cars, trucks and other asset classes are hard to acquire right now. During COVID many equipment manufacturing facilities were cut way back. They are trying to cycle back up, but there is a shortage of chips, and lots of other things that not only go into cars, but all kinds of trucks, agricultural equipment etc…
A shortage of assets were discussed, but our clients are financing not only new equipment that sometimes is in short supply, but also finance a lot of used equipment whose pricing is continuing to rise in value because of the supply and demand consideration.
Equipment lessors have shifted as much as possible to asset classifications that are more widely available. Or whose equipment components are manufactured mostly in the US. We have all seen the large container ships out on the west coast waiting to be unloaded. Many of them with tons of electronics and components used to complete equipment builds. It’s going to certainly take a while for the supply chain woes to end. There was talk that it could last until 2024.
What is important to note is many assets have been financed and are waiting for delivery to close. So while there is a large backlog of equipment to complete its manufacturing, it has also created a large number of financed backlog that will need to be cleared out. So it’s going to create some great months of financing going forward for our clients and also a high demand for US workers and great demand for equipment manufacturers. In essence that is all good for the US Economy, especially with such a large growth demand pushing it all.
So in my opinion, there are things to be concerned with in the equipment finance industry in the US, but it is still in high demand because of its history of providing great returns to bank and private equity companies.
Equipment finance teams are making adjustments with a focus on financial strength through their important bank funding and non-bank funding relationships. Making sure you have access to the abundance of dry powder in the funding side is extremely important for growth.
Securitizations especially for growing independents is back in vogue. As is the need to provide servicing and detailed servicer reporting.
The top companies are focusing on retention of key talent as well as acquisition of key talent for market growth opportunities. Human Capital and the growth and training of that key capital is on everyone’s mind in this era of limited supply of such, and goes hand in hand with diversity and inclusion initiatives.
There is a very active merger and acquisition market today, mainly driven by the above mentioned industry push initiatives. Additionally, asset classifications and diversification are also very important. Having the right mix of asset types that hold value as market conditions change will create opportunities for those industry participants that are financially strong, well prepared and opportunistic.
As our friend Warren Buffett says…do not bet against the strength of the US economy.