A number of banks have recently reduced their exposure to auto finance, creating opportunities for specialty finance auto lenders to gain scale through organic growth and M&A.
After seven years of growth, automakers experienced their first decline in annual US sales in 2017, and rising interest rates could worsen the situation. The decline was likely a result of shifting consumer preferences while the introduction of tariffs on imported steel is likely to result in higher prices for new cars. In this scenario, we could see an increase in demand for used cars and used car financing from specialty finance lenders.
A number of PE firms have been looking to exit this segment by way of an IPO; however, the downward pressure on profits from increasing levels of subprime auto loan delinquencies is making this very challenging. Together, these auto finance sector trends are expected to lead to a re-emergence of the M&A appetite in this sector.
There has been limited consolidation in the sector, yet investment opportunities remain as buyers look to further expand their customer base as their existing lending operations (i.e., regulatory and underwriting functions) mature.
We expect to see new investors move into the sector as platforms continue the trend of securitizing loans in-house. Lenders are looking to focus on “emerging prime markets,” which will likely increase the default rates of such products. If the sector is able to achieve an increase in yields that compensates for the increase in defaults, we expect this trend will drive an increase in M&A interest from PEs.