The asset finance industry has been very attractive to various investors over the past few years, as liquidity improves. It has not always been that way. In the years after the global financial crash, investors around the globe were looking for safe markets to gain equity, and asset finance was extremely attractive because of the secured asset lending nature of asset finance portfolios.
"Distressed investors in the market were looking to buy asset finance loan portfolios at a discount price to gain returns by letting the loan book run off," says Mistry. "But unfortunately not many transactions happened during that period because there was a big price discrepancy between the purchase and the vendor."
After 2010, pricing on portfolios and corporate transactions started to narrow, and the completing transactions started to become more regular. The economy started to become more stable, and larger bank-owned lessors exited the market, giving an opportunity where there had been crisis.
"Equity investors saw an opportunity to establish equipment leasing businesses, and take some of that market share that the bank lessors had ignored," says Mistry.
There is definitely a trend of lessors growing their own market share, by acquiring new routes through accessing distribution networks.
Mistry draws attention to the Shawbrook acquisition of Singer Asset Finance, an example which set the tone.
"Singer had a reliable customer base and the ability to write a lot more volume, and Shawbrook Bank had the funding capacity through its retail deposits," says Mistry.
"Then we had some private equity houses, new start-ups, and other investors who were interested in entering the market, but there weren’t a huge number of leasing companies in the sweet spot of £50m-£100m portfolio size to buy.
"New entrants to the market were priced out, or were short on options to buy.
"What these equity investors have started to do is look at other ways of entering into the market, and typically what they have done is look to acquire businesses with distribution, i.e. through intermediaries and brokerage businesses."
Recent transactions in that space have included Cabot Square’s acquisition of Henry Howard Finance, Star Capital’s acquisition of Kennet last year, then more recently Ignition Credit, in April of this year.
These are examples of strategies which are growing. Private equity firms are particularly interested in motor finance, because of the quality of the underlying asset and the mature finance market.
Mann Island, a retail motor finance broker business, was acquired by Investec to give it an entry to that space; Target Group (based in Cardiff), owned by the Pollen Street Capital private equity house, acquired Freedom Finance, based outside Chester, which is a retail secured and unsecured broker business.
More recently a private equity house, ECI, bought Tuskerdirect, which is a vehicle contract hire business, and Secure Trust Bank entered the UK market with Haydock Finance as its asset finance partner.
And in the contract hire space, HG Capital bought Leasedrive, and Zenith.
"We’ve seen quite a lot of new entrants," adds Mistry. "The Bank of London and the Middle East did a deal with Renaissance Asset Finance. BLME is in asset finance but not in the small-ticket space, so the pair up with Renaissance gave it access to that part of the market.
"More recently, Secure Trust Bank decided it would like to enter the asset finance space, and it entered into a joint venture with Haydock, which Grant Thornton’s team advised on."
Access to debt is improving, so liquidity in the market is much easier, better priced, with better terms for lessors," said Mistry.
"Access to leverage up your own business, by borrowing more from banks, so you can lend it on, is getting easier. There’s a demand for SME asset finance which is not being satisfied – there’s an opportunity to fund that, and at a reasonable margin, and generally lease portfolios have been performing at exceptionally good rates, that is, the arrears rates are very low, as are the loss rates."
These healthy markets have attracted new investors.
"Therefore you effectively have healthy margins with low loss rates and improving liquidity that has attracted new players into the market," Mistry says.
"The other thing that has attracted new players is the impact of the FCA and regulation.
"Tightening regulation has identified a number of players who have concluded they don’t want to operate in this market at the moment, or they don’t feel as if they have the infrastructure to evolve into an appropriately regulated business.
"So what certain lending businesses have concluded is that they will get an investor along to help them through this, which has also driven some of the recent corporate transactions."
Mistry says small brokerage businesses or asset financiers with an element of regulated business, under the FCA rules, have to follow certain guidelines around lending, and treating customers fairly. For example, with lending, they have to apply certain procedures around an affordability assessment.
When you chase customers’ arrears, you have to do so in a customer-friendly fashion, under the correct protocols. All of these things require compliance areas to make some changes to business models, which may include better controls and documentation on lending, and different ways of recording credit decisions and income and expenditure assessments. And different protocols around the collections process requires investment to become a compliant business.
One of the issues affecting the speed of new acquisitions is a lack of public data.
"I don’t know why the industry doesn’t share more in the way of information about its own performance. That’s not just a UK thing, that’s a Europe thing, says Mistry.
"Only recently Leaseurope has started doing the Leaseurope Index, but I think the reason why there’s less sharing of information, even on a no-names basis, is the industry has historically based itself on a business model which is as efficient as possible, to minimise overheads, and as such their business models are about lending against assets, getting documentations signed, and then issuing 36 months worth of direct debits."
Conversation with customers is brief, unless they get into difficulty or arrears and as such these businesses have been run on an overall basis, averaging loss and yield, "rather than dissecting those things into sub-portfolios".
A part of the reason for that is their access to data is restricted, and some of the smaller players don’t know how to manipulate their data to get KPIs on performance.
"Generally what we’ve seen is very poor reporting in some of the smaller businesses, but also the quality and cleanliness of data that these leasing companies hold can be poor," adds Mistry.
"If there’s no consistency or cleanliness of data you can only analyse it at a very high level."
With better bookkeeping and analytical evidence the UK’s asset finance businesses could be courting investors more rapidly.