One of the joys of being an independent consultant in the contract hire/fleet/asset finance space is that my work 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 been engaged to work on.
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 if my experience is anything to go by it’s clear that there is more interest in this sector now than at any time since I joined it 32 years ago.
I have 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. (They find themselves talking to me because they want to understand the risks in the market, particularly maintenance budget and residual value risk).
They 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.
This is a niche market within a niche market, so I’ve wanted to find out how they were attracted to this sector, and almost without exception they’ve said they saw their competitors doing deals in this space and decided to check it out for themselves.
And it helps of course that they know 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, because it offers the potential of near-unlimited funding so long as the resultant product is sufficiently flexible to accommodate real-life issues such as vehicle write-offs, early terminations and lease extensions.
Syndication is also being discussed: putting together a syndicate of investors and funders who together would be able to acquire and finance the largest of these businesses, or several large players at once.
There is no question in my mind that there are going to be 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.
Colin Tourick
