2017 M&A outlook: Specialty finance

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Specialty finance companies continue to be attractive targets for strategic and private equity (PE) investors. We expect to see an active M&A market through 2017, which may result in more competitive M&A processes, potentially leading to increased pricing.

The US market will also continue to attract foreign investment through 2017 as a number of foreign institutions look for a less regulated entry point into the US market. The strength of the US economy, low or negative interest rates in foreign countries, uncertainty in Europe due to Brexit and overall trends in global monetary policies are all factors that we expect will lead to an increase in the demand for US specialty finance businesses by foreign inbound investors.

Key highlights from the report:

  • Growth of alternative finance providers – More equipment acquisitions are occurring through lease or secured loan financing (68% in 2016 vs 55% in 2011). This trend has caused market share of alternative / nonbank financing providers to increase over the years (primarily due to financing demand from smaller and lower credit borrowers). Despite this trend, banks continue to lead in market share.
  • PE interest in equipment leasing – PE buyers are expected to remain active in the specialty finance sector, as these businesses generate high-yields and are complementary to existing assets in their portfolios.
  • Recent exits open doors for smaller independents – New opportunities have been created from the recent exits from the securitization markets that may lead to more acquisitions by smaller independent equipment financing players.
  • Consumer finance – Recent transactions indicate that interest in the consumer finance space will remain strong from PE and strategic buyers through 2017. One note of caution for the sector comes from potential CFPB proposals for payday lenders and debt collectors that may adversely impact profitability of lenders focused on lower credit customer.
  • Rail-car leasing consolidation expected – Continued low oil prices, reduced congestion on rail tracks, and increased costs to meet regulatory changes may lead to further consolidation within the rail-car leasing industry.