Private equity’s growing interest in equipment finance is becoming increasingly apparent.
This interest has been building for years, manifesting in various forms. It includes traditional private equity investments, where firms acquire equity stakes in companies and then realize profits after a predetermined period. Other PE investments extend to longer, even open-ended timeframes. And, in addition to buying into the market, PE firms are building their own platforms.
“Every private equity deal is unique,” says Eli Sethre, CFO, Channel. “There’s not a template.”
The stage is set
Private equity’s growing interest can be attributed to multiple factors, with GE Capital’s gradual exit throughout the 2010s playing a pivotal role. This exit created a vacuum in the market, setting the stage for increased PE involvement later.
“They could get the A teams in the market that were otherwise unavailable,” says Rick Matte, CEO, Post Road Equipment Finance. “That’s a good recipe for private capital to get interested.”
Another factor is the attractiveness of equipment financing itself.
“Equipment finance has always been a strong performing industry through multiple economic cycles, with attractive returns and low losses,” says Eric Dusch, Capteris President and CEO. “It has proven to have consistent liquidity in the capital markets with significant investor appetite via the asset-backed securitization market, which adds to the segment’s favorability.”
“Every private equity deal is unique. There’s not a template.”
—Eli Sethre, Channel
The gap created by the GE Capital exit further attracted banks to equipment financing; by 2023, banks made up around 63% of new business volume in the equipment finance industry.
The landscape began shifting that same year, as the Silicon Valley Bank rescue triggered regulatory reforms and prompted banks to prioritize deposit stability over growth. This led many banks to reduce their equipment financing activities, signaling another shift in the market.
“This has created a significant opportunity for independents and non-bank providers, something we haven’t seen since the days of GE Capital and CIT,” Dusch says.
Money to invest
Another factor: PE firms have money to invest.
“There’s a lot of available capital in the market now,” Matte says. “The private credit world is raising capital from institutional and retail investors, and equipment finance yields are attractive.
“There’s a private equity attraction to our industry, more so than there’s ever been,” says Kyin Lok, President and CEO of Dext Capital. “The returns in our industry have increased, bringing them closer to what a private equity firm is looking for in terms of yield requirements.”
Different paths
PE money is entering the equipment finance industry using a variety of paths.
For example, Post Road experienced the private capital market on two separate occasions. Oaktree Capital Management provided the firm’s junior capital to start the business in 2017. Then in 2021, the firm became part of private credit asset manager Benefit Street Partners, a Franklin Templeton subsidiary.
“There’s a lot of available capital in the market now.”
—Rick Matte, Post Road Equipment Finance
“We were looking for a partner with a 10-year-plus strategy, a company with a long-term view and capital that matches their view of the world,” Matte says. Under the agreement with Benefit Street Partners, Post Road is managed separately as a standalone platform under Benefit Street’s business development company. This gives the BDC stable income and “we don’t have to worry about a change-in-control type of action down the road,” Matte says.
Channel, founded in 2009, started its business by originating and syndicating transactions, says Brad Peterson, CEO. “Over the years, we started holding paper and we grew to the point where we wanted to hold everything but didn’t have the right capital base. In 2015, Channel entered into a $50MM private debt facility and three years later raised private equity capital to support future growth and the addition of bank senior debt facilities.”
When Lok sought funding to form Dext Capital six years ago, he relied on his experience and extensive relationships in the private equity and mergers and acquisitions space. “I knew I wanted to build a billion-dollar-plus originations company,” he says.
Lok eventually chose to partner with Two Sigma Investments and its private equity company Sightway Capital. And because Two Sigma is structured as a family-office private equity firm, there is no immediate push to harvest investment gains in a typical 3-to-7-year timeline.
Dext Capital is building an equipment finance platform and infrastructure, hiring people and making long-term technology investments. “All of those are significant dollar spends, and our investors know the payoff can be far in the future,” Lok says.
“We are investing to generate returns over a longer time frame and realize consistent annual income,” Lok comments. “I want to grow Dext Capital to be a significant industry player and partner with our talented team to position Dext to be consistently profitable.”
Lok is also seeing private equity firms entering the equipment finance space to invest funds into various loan vehicles. “They’re basically looking for diversification and our industry offers many types of origination opportunities,” he says.
Capteris, backed by funds managed by Apollo Global Management, is an example of “build versus buy” strategy, launching their own equipment finance platform versus acquiring a competitor, Dusch says.
“There's a private equity attraction to our industry, more so than there's ever been.”
—Kyin Lok, Dext Capital
“Capteris launched as part of a broader strategy to build out private credit solutions,” Dusch says. “Apollo provided a longer-term approach to our segment, strong financial support, new originations channels and an appetite for growth, among many other positives.”
“Unlike some in our space, this is not a build-to-sell situation,” Dusch explains. “Instead, our strategy is to build a high quality, consistently performing platform over the long term.”
“We have strong financial support that helps us compete effectively and grow proactively,” Dusch says. “Our relationship will continue to evolve as Capteris itself expands and grows. We can also leverage our balance sheet to support other bank and non-bank equipment finance providers, helping them support their own clients but not tie up their capital.”
Private credit
Another aspect of private equity investment in equipment finance is the emergence of firms providing private credit. One example is Wingspire, owned by Blue Owl Capital, an alternative asset manager.
“Private credit is really what has been chasing the equipment finance industry recently,” says Eric Freeman, Wingspire CEO. “These are companies they want to own and lend money to and make returns that are higher than what banks receive.”
Wingspire seeks “bank-adjacent” clients, with perhaps too much leverage to interest banks, Freeman says. “We target private equity-owned business with mid-to-large ticket equipment financing for all collateral types in most industries,” Freeman adds.
“The reason private credit wants to get into equipment financing is because you’re lending to the same companies—the same credit profile—that the private credit firms are lending to,” Freeman explains. “Those companies need equipment financing to continue to grow their businesses.”
“Around 35% of our portfolio involves some sort of manufacturing.”
—Eric Freeman, Wingspire
Alternative asset managers are looking for ways to deploy capital, Freeman says, and using private credit subsidiaries to provide equipment financing makes sense. “It’s what’s attracting these companies into this space. When you’re constantly fighting to find the next deal, they can deploy capital in areas they know and like.”
Wingspire’s customers are typically capital-intensive firms. “Around 35% of our portfolio involves some sort of manufacturing, since every year they are going to need somewhere between $20 million to $70 million in equipment financing,” Freeman says. “We’re not only going to bring a client certainty of execution, we’re also going to be price competitive with the other debt on their balance sheet.”
Going on a lot of dates
Channel’s experience of gaining a private equity partner illustrates the process. Keep in mind, however, that every private equity deal has its own nuances.
Channel’s first step was hiring an investment bank, which would serve as their consultant throughout the process.
Channel asked investment bank candidates to outline how they would present the company to potential investors and to detail their vision for structuring a potential deal. “You’re going to be working with their team for a long time, so it comes down to having a comfort level because there are going to be bumps in the road,” Sethre says.
Once the investment bank was selected, the next step was to get ready to pitch to private equity investors. “There’s a lot of prep work,” Sethre says, “including creating marketing materials and a data room, because you’ll be getting a lot of data requests.”
Then it was time to pack their bags for the road show. “You’re out on the road, usually a week at a time trying to see as many investors as you can,” Sethre says, who compares the process to speed dating. “We had about 35 meetings, each lasting 45 minutes to an hour.”
Then the winnowing begins. Who are you interested in? Who’s interested in you?
“We do not believe this is a fad, but instead a transformational shift.”
—Eric Dusch, Capteris
Peterson says the process helped clarify what Channel wanted in a private equity partner. “We wanted an alignment of interest between our equity partner and our senior management,” he says. “It was also important that our equity partner had some specialty finance industry experience.”
Both points were realized in their private equity partner. “There was a comfort level between the teams,” Peterson says. “They were investing in us because of the management team and the business model.”
Another bonus: Channel’s equity partner was not tied to a specific fund timeline so there was no pressure to push growth and harvest returns. “It’s been a more calm, thoughtful, strategic growth process,” Peterson adds.
As a result, the company has grown exponentially: In 2018, the company sold one product through one channel, had around 30 employees and a $30 million portfolio. Today, it operates three different business units with more than 200 employees and has a $600-million-plus portfolio. “We’re a completely different organization,” Sethre says.
What’s the end game?
If venture capital investment comes knocking, it’s important to understand the end game, Matte says. What are the expectations three, four and five years down the road? What’s the operating rhythm you’re going to have with your owner? How engaged are they going to be? Do they understand the business?
“Just make sure your partner is up to speed on what you do and is aligned in the way in which you see transactions,” Matte says.
There also should be a level of comfort and chemistry, Lok says. “Make sure they have the right mentality, buy into your strategy and let you operate in a manner you feel comfortable with.
“We wanted an alignment of interest between our equity partner and our senior management.”
—Brad Peterson, Channel
“Your senior management team is responsible for developing and executing on the business model and strategy with guidance from your private equity partner in regard to what results should be achieved,” Peterson says. “We don’t ask for advice about how to run the business but count on their capital markets experience and global input on ‘events-to-economics’ impact.”
“You want somebody who’s really working on the business versus working in the business,” Sethre says.
Down the road
Our experts agree that private funding is becoming an increasingly vital channel in the equipment finance industry. It offers a unique opportunity for the industry to stay dynamic, forward-thinking and well capitalized to drive the next decade of innovation.
And its growing popularity will prompt a surge in mergers and acquisitions on the private equity side of equipment financing in the coming years. “We’re in full-on growth mode and looking for acquisitions,” said one insider.
“We do not believe this is a fad, but instead a transformational shift within the equipment finance industry,” Dusch says. “It’s a positive for the industry to see alternative funding capacity coming in. It provides customers with more options, drives innovation and collaboration, and makes our industry more attractive, including bringing in new talent.”
More on this Topic
- Attend the session "Unlocking Value: Strategies for Leveraging Private Equity in Equipment Financing” at the ELFA Annual Convention on Tuesday, Oct. 29 at 2pm in Austin, Texas.
- See "The Changing of the Guard: The Evolving Roles of Banks and Independents in Equipment Finance," a new report from the Equipment Leasing & Finance Foundation.