TSL TRENDING STORY
Adapting to Change in Equipment Finance: An Interview with Capital One and 36th Street Capital
By Matt Tallo, Managing Director, Capital One
Capital One believes in connecting with clients on a regular basis about the trends affecting specific industries and the overall economy. Recently we had a conversation with Kiran Kapur, Co-Founder and Chief Executive Officer at 36th Street Capital Partners LLC on the many variables that are shaping the equipment finance sector—from M&A to the regulatory environment and tax reform. Below is an overview of that conversation.
Matt: Thanks so much for joining us, Kiran. 36th Street Capital is a relatively young company, established in 2014. Can you share how you came up with the idea for 36th Street Capital and some background on the company?
Kiran: 36th Street Capital’s genesis stems from our team’s years of experience in the vendor finance sector structuring middle-market transactions to help partners drive revenue growth. Our goal was, and still is, to maximize approval rates, while ensuring outstanding portfolio performance, through disciplined underwriting, pricing, and structuring.
Due to systemic shifts in the way equipment finance portfolios were being built and managed after the financial crisis, the appetite for risk and the ability to underwrite in this manner had been materially altered. Our theory was that bringing alternative capital to the market, combined with our risk management expertise, would be an attractive offering to both lessors and prospective investors.
Early on, our focus was on testing the opportunity and gauging interest from both the demand and money supply sides of the market. We then shifted our efforts to finding an equity partner whose approach to portfolio management was well aligned with ours, and who had interest in building the company. After a lengthy search, we were excited to launch our joint venture partnership with Tennenbaum Capital Partners in 2015.
Matt: We recently worked with you on establishing a senior credit facility to assist 36th Street Capital. Can you tell us a little bit about how the credit facility has impacted 36th Capital’s business strategy?
Kiran: Our business plan has always been to build a performing portfolio with equity capital first. From there, we intended to add a senior credit facility to both increase available liquidity and lower our average cost of capital. As we looked for a senior debt partner, we were very focused on how flexible that partner could be in designing a facility that fits the nuances of our business and portfolio. A significant amount of time and effort was required from both parties in creating a facility that hits the sweet spot of our market. This has allowed us to expand into a broader basket of deals across a wider set of customers. In short, it allows us to be competitive in our target markets and build a business with an attractive return profile.
Our business plan has always been to build a performing portfolio with equity capital first. From there, we intended to add a senior credit facility to both increase available liquidity and lower our average cost of capital. As we looked for a senior debt partner, we were very focused on how flexible that partner could be in designing a facility that fits the nuances of our business and portfolio.
Matt: Looking more broadly at the equipment finance industry as a whole, we’ve seen a lot of M&A activity over the past year with independent companies being acquired by banks and other platforms. What do you think is driving this activity and do you think it will continue? What is your overall view on the state of the industry?
Kiran: There certainly has been a lot of M&A activity of late. This seems to be part of the natural cycle with many firms seeking asset growth and betting on achieving this growth more expeditiously by acquiring platforms versus growing organically. We believe this is a reflection of both a more mature, slower growth, environment and firms seeking exit options after a long period of credit stability. It’s the perfect storm for M&A: willing sellers and eager buyers. As long as these two conditions exist, we think you will continue to see a fair amount of activity.
With respect to the state of the industry, there are so many new variables at play that we have not had to contend with in the past. This makes it difficult to know how things play out, but we think there will continue to be modest economic expansion and the industry should maintain its current activity levels. Firms will have to be wary of trying to push growth beyond said levels by taking on more risk. Now is probably a good time to “keep it in the fairway” as they say.
Matt: Absolutely—and speaking of the many new variables—there has been a lot of uncertainty around the regulatory environment and tax reform. What do you think the impact will be the equipment finance industry?
Kiran: That is a very tough question given how much change we are currently seeing and how much discussion there is around change. Ultimately, there will be an impact to the industry, but it is too early to tell whether we are talking about positive or negative outcomes. It is even less clear who is likely to benefit and who will be disadvantaged. Our view is that nimbleness is going to be the key component in successfully navigating a more volatile environment.
Matt: That’s a really good point, and I agree that the companies that are best at adapting will be the ultimate winners in this equation. In closing, what do you think are the biggest challenges facing the equipment finance industry today, and what is your outlook for the industry over the coming year?
Kiran: The biggest challenge would appear to be complacency. Buying into the belief that the favorable environment that we have enjoyed with respect to credit performance and asset valuations will continue without disruption is dangerous. There are disruptive currents on multiple levels across the US and global markets. Impact on industry sectors and individual companies will vary, but there is bound to be less stability in the near term than we have become accustomed to. We believe the next year looks to be a solid year for the equipment finance industry, but it will not be without its challenges. Cautious optimism is the best way to describe our sentiment.