Finding Growth After COVID-19

A Guide to identifying, assessing and entering new markets

Few would deny that the pandemic claiming millions of lives has also cut deeply into the American economy. As the hospitality, retail and travel industries suffer, demand for equipment used in these and other affected sectors has plummeted, causing growth-oriented equipment finance companies to consider new markets. “The challenge is to identify potential new markets, choose the most suitable one and enter it successfully,” says Dave Wiener, Managing Director of The Alta Group. “But this calls for a practical market-entry strategy,” he adds, “and not all companies have one.”

To address the situation, Wiener and executives of three ELFA-member companies with successful and distinct market-entry experiences led “Finding Growth After COVID: A Search for New Green Pastures” at ELFA Business 2020 LIVE!, the association’s first virtual conference, held in October. Highlights of this dynamic and popular session follow.

Before the Fall

A look at ELFA’s annual Survey of Equipment Finance Activity (SEFA) reveals a 2009-2019 total industry-volume growth of 79%, or compounded annual growth of 6%. Not bad for recovery from the worst economic backslide since the Great Depression. Then came COVID-19, a black swan that tore apart the plans, procedures and budgetary goals for many an equipment finance company. Yet, ELFA’s MLFI-25 (Monthly Leasing and Finance Index of 25 companies representing a cross-section of the industry) volume for January through March of 2020 was down just 4% compared to the same period for 2019. “But this doesn’t tell the whole story,” warns Wiener. “MLFI new-business volume from April through September 2020 was down a full 16% compared to the same time last year.” He sees three outcomes that could result from such a fall:

1. Equipment finance companies are forced to compete for more modest transactions, thereby missing budget goals;
2. Companies go down-market in rate, credit quality or ticket size to meet budget goals; or
3. Companies find new products, expand into new origination delivery channels, or enter new markets to pursue greener pastures.

Acknowledging the third outcome as most desirable, Wiener then presented a roadmap for achieving it.

A Strategy for Optimal Market Entry

Of the $900-billion equipment finance market, leasing is used to acquire much of it, but not all. Thus, growth opportunities exist and are abundant in a number of equipment types and industry sectors. The challenge, says Wiener, is finding the time and in-house expertise to develop and deploy a sound strategy to identify and assess potential markets, then enter the one chosen, with the best possible results. Says Wiener, “Optimal entry occurs when proficiency meets profitability while also intersecting with procurement and passion. When all four requirements are in place, optimized suitability results, and the company finds a great fit.”

Before developing an actionable plan, though, Wiener suggests using quantitative-based decisioning to assess growth aspirations, measure opportunities, evaluate market characteristics and provide guidance on market-entry paths. “There are significant benefits to this approach,” he says. “It simplifies the initial review of opportunities and enables the rejection of options that should be quickly disqualified. It also assesses sacred cows with a scoring model used for the comparative evaluation of each of a company’s current lines of business.”



Once a company is ready to develop an actionable plan, Wiener recommends they follow an eight-step, field-tested methodology for successful market entry, as follows:

1. Jettison out-of-scope products, industries and equipment. Says Wiener, “For some, this may be gaming or cannabis. Today, it might also include restaurants or airline ground-service equipment.”
2. Identify the “must-haves.” These are the absolutely non-negotiable characteristics a candidate market must possess in terms of products, industries and/or equipment types.
3. Do a first-pass assessment of starting product/industry/equipment market-entry candidates. The SEFA offers a basic set of equipment types and end-user industries, but Wiener advises parsing those of interest into specific sub-sets, since end-user buyer behavior in each one will be distinctive.
4. Design and calibrate a customized market entry tool. Ask all division leaders to list factors they think are important to the company, grouping them by suitability and market conditions and classifying each as must-have or nice-to-have, and quantitative or qualitative. Then assign a numerical weight of importance to each. “A lot of this is brainstorming,” says Wiener. “But you’ll probably end up with 20 to 40 factors in each group, customized according to the capabilities, values, guardrails and objectives of the organization.”
5. Apply the tool to candidate and current lines of business. “At some point in many companies, every line of business becomes a sacred cow,” says Wiener. “Maybe you started by financing copiers, but how is that business doing today? Look at your current markets and ask if you’re doing what you’re really good at. Maybe you need to step back and re-examine. Maybe you should exit some markets.”
6. Graphically plot each factor. Chart each factor on a coordinate plane, plotting Quantitative factors on the X axis and Qualitative on the Y axis. “This get interesting, because graphical depiction pinpoints a promising new-market candidate that warrants further research. It also reveals candidates that make no sense to pursue and should be dismissed,” says Wiener. But additional outcomes may be unexpected, because the chart will validate current lines of business that make sense and should be nurtured and grown, and reveal current lines that need attention to remain relevant. Finally, the chart may reveal current lines that aren’t working and should be exited. “These may well be legacy businesses that launched the company,” says Wiener. “But keeping them for sentimental reasons can hold your company back by siphoning off resources that could be better deployed.”
7. Conduct a market-entry scan of one or two top candidates. This step will demand the most time and concentration, because for each candidate it should answer questions such as:
8. Consider market-entry options (Organic vs. Lift-Out vs. Acquisition) for the selected candidate(s). To do this, Wiener suggests using a multi-factor “radar chart” that weighs each entry option. The option with the highest score, or largest percentage area in the chart, should be the most suitable entry option to pursue. Yet, scores will be dynamic and can change based on market conditions, the industry and its equipment, opportunities that develop, and the appearance of unique “black swans,” such as COVID-19.

Sharing examples of market-entry options were Adam Ramirez, Chief Risk Officer at Tokyo Century (USA) Inc.; Michael Fanger, President of Eastern Funding LLC; and Jonathan Fales, President of VAR Technology Finance.

Growth Through Acquisition: Tokyo Century (USA) Inc. (TCUSA)

“We are a Japanese-owned company, our parent a financial services leader publicly traded on the Tokyo Stock Exchange,” says Ramirez. Opening for business in 1985 and putting down roots in the New York City area, TCUSA studied the office-equipment and small-business equipment markets and built a portfolio over time, buying transactions from other companies throughout the U.S., Mexico, and Central and South America. “We had a particular appetite for Japanese customers doing business in these regions, because we are uniquely suited to serve their needs,” says Ramirez. “Our preferred collateral is manufacturing equipment, industrial equipment, office and other equipment, and the financing of aircraft and commercial real estate.”

Over the years, TCUSA built relationships with small-to-medium enterprises and large corporations growing its experience and knowledge base and buying portfolios and deals in hopes of generating revenue. “But we were also looking for joint ventures, partnerships that would generate expertise over the long term. For us, a medium-term plan is 10 years, and qualitative is just as important as quantitative. We believe any investment we make should benefit both parties.”

Twelve years after opening its doors, TCUSA entered a joint venture with Itochu Corporation to start Isuzu Finance of America, the dedicated finance company supporting the sale of Isuzu commercial trucks in the US. TCUSA entered a joint venture with Isuzu to finance its cars sold in the U.S. Then came a partnership with GA Telesis to finance its aircraft and engines for sale or lease. Next came the acquisition of CSI Leasing, bringing TCUSA into the IT space. Most recently, TCUSA acquired AP Equipment Financing, a specialist in material-handling equipment and trucking, and Aviation Capital Group, both in 2019.



“In each instance, we considered organic growth, portfolio purchase, acquisition and lift-out as market-entry options,” says Ramirez. “Each time, we decided to stay in the family footprint, but try on new shoes by acquiring companies in our areas of expertise.”

To find new green pastures during the pandemic, Ramirez suggests looking at industries experiencing compressed evolution. “Just as social isolation has turbo-charged on-line shopping and demand for immediate delivery, innovation in freight-hauling and package delivery is evolving faster than ever,” he says as an example. “There simply aren’t enough trucks and trailers to do the two-day delivery that consumers once enjoyed, and that’s an opportunity on many levels.”

Growth Through Lift-Out: Eastern Funding

Eastern Funding LLC needed a new niche market after the 2008-2009 recession softened dry cleaning, a specialty that had performed well for Eastern since 1997. Michael Fanger, President, says that Eastern had examined numerous markets over many years before serendipity struck. “One of our employees had worked for a team that financed specialty vehicles, and he suggested we talk with members of the team,” says Fanger. “We did, and it changed our future dramatically. The team leader had a history of success in the space and was credible. There was also a fit with our credit culture in that the niche had a small-business borrower profile, was mostly owner-operated, low-tech and had essential-use equipment.” What’s more, several senior managers at Eastern’s parent company, Brookline Bank, had worked at the same organization as the specialty vehicles team. “Be open to serendipity, because you never know how an opportunity will come,” Fanger suggests. “Be open and be widely networked.”

Because the market was new to Eastern, Fanger says much study was necessary. “We planned the market entry over a period of 18 months after learning about it,” he says. And because the opportunity came with expert personnel, Eastern hired the specialty-vehicle team leader to write the compensation plan. “He convinced the team to join us, and he was there for the launch and afterwards,” says Fanger. “We opened an office near where the team lived, we agreed to a credit box and pricing, and we set up a workflow on our system to accommodate the business. We adapted our business to them—not the other way around.”

Prior to launch, Eastern’s executive team met frequently to document the new line of business in a series of memos and produce a multi-year financial projection. The memos set out credit criteria, pricing, an organization chart, competition, servicing, collections and workout procedures. “From the start, we segmented the portfolio so that we can produce divisional financial statements, static pool, collection and work out information,” says Fanger. “We have clear divisional leadership that is accountable for performance.”

In the eight years since Eastern acquired the specialty vehicles team, the company’s portfolio has quadrupled in size and profits have risen significantly. “We respected and maintained intact the lift-out team’s well-functioning core-competencies,” says Fanger. “For them, it was a restart with little interruption. For us, it was a thoughtful decision made with a lot of documentation along the way, and my only regret is not growing this way more often.”

Growth Through Being Acquired: VAR Technology Finance

A provider of innovative financing solutions to end-users through close relationships with hardware and software manufacturers, captives, distributors, and resellers, VAR Technology Finance had grown successfully since its founding 30 years ago. “But the company had reached the point that its multi-funder business model still offered flexibility but came with a high cost of funds, restraining growth,” says Jonathan Fales, Divisional President. “We knew that future growth hinged on our ability to lock in more reliable funding at a lower cost, so our Founder, Gary Sutton, was looking for a buyer.” At the same time, LEAF Commercial Capital, Inc. was looking to grow through acquisition. Itself acquired by People’s United Bank in 2017, LEAF was seeking potential acquisition candidates to further develop its technology capability and experience accretive growth that would complement its organic portfolio growth. LEAF was also searching for intellectual property and risk mitigation through asset diversification.

“Through VAR, LEAF could accomplish all of these goals,” says Fales. “Through LEAF, VAR would gain a reliable, lower cost of funds and an infrastructure to support bigger expansion. VAR would also benefit from LEAF’s state-of-the-art marketing, and VAR clients would benefit from LEAF’s additional back-end services, online portal capabilities.”

No one rushed into the deal, however. Fales says the due diligence done by both parties was rigorous and key to the acquisition’s success. “You think about due diligence occurring from the top down, as LEAF would do to explore VAR,” he says. “But VAR was very concerned that the acquisition be a good fit for its people. So Sutton spent as much time learning about LEAF as LEAF spent learning about VAR. He wanted to make sure that LEAF’s culture wouldn’t change. And I think LEAF has benefited from the personnel that came with the transaction.”

Wiener waxes philosophical in conclusion, saying, “In the midst of unrest, during economic, political and health-related crises, new growth initiatives are too often moved to the back burner. But GE, IBM and Google are only a few of the well-known companies that debuted during some of the darkest economic points in U.S. history. New growth can happen now, and some companies will achieve it. The question is, will yours be one of them?”