4 minute read 1 Oct 2018
How strong mergers and acquisitions can reshape specialty finance - person walking down a street with a distinctively yellow umbrella

Why specialty finance M&A continues to thrive


Devashish Jain

Ernst & Young LLP Financial Services Transactions Diligence Partner

More than 14 years of experience in advising private equity and strategic clients on their M&A strategies. Advisor to both sell- and buy-side clients.

4 minute read 1 Oct 2018

Specialty finance M&A has remained strong and we expect both PE and strategic acquirers remain attracted to high-yield opportunities.

Specialty finance is defined by EY as any financing activity that takes place outside of the traditional banking system. Our analysis focuses on two distinct subsectors: consumer finance and commercial finance.

Although high valuations make it difficult for PEs to compete with strategic acquirers, their appetite to acquire specialty finance businesses remains strong and is expected to increase as quality assets are identified and valuations normalize.

The relative strength of the US economy, low interest rates in foreign countries, continued uncertainty in Europe (e.g., 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 from foreign investors.

Banks are expected to become strong buyers of finance companies due to their advantage of a lower cost of capital. Recently, however, very few equipment finance deals were completed by banks.

Specialty finance M&A


of total disclosed deal value in H1 2018

Consumer finance

Auto finance

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.

Marketplace lending

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.

Bar chart showing 23% of specialty finance M&A deals involve private equity

Source: EY analysis of data from SNL, Mergermarket and Thomson.

Commercial and equipment finance

The positive outlook for capital spending in equipment finance is underpinned by the strength of the US economy, lower taxes and a credit market that is enabling businesses to make capital expenditure investments to fund future growth.

The passing of the Tax Cuts and Jobs Act in December 2017 could have a significant impact on the underlying products of equipment finance companies (lessors) and lessees. Tax reform may also encourage corporations to increase capital expenditures as a result of lower corporate tax liabilities and rules around repatriation of foreign cash to the US.

As banks are becoming more active in the space, there is increased competition with specialty finance lenders. Previously, many banks only targeted super-prime and prime customers, but are now moving into lower credit segments typically served by nonbank lenders. Increased M&A activity could arise from banks looking to gain greater market share through acquiring established specialty finance lenders.

The US market will continue to attract inbound investments as foreign institutions look for a less regulated point of entry.

Construction equipment

Spending on construction equipment hit an all-time high in 2017, primarily as a result of increased spending in the private residential construction space. We expect spending to increase into 2019 as billions of dollars in aid are allocated to rebuild infrastructure and housing in areas of the country that were affected by natural disasters, such as Hurricane Harvey in Texas.

If the discussions regarding a multibillion-dollar infrastructure bill are successful, this could lead to a significant increase in demand for equipment financing in the near term and drive M&A in the sector.


The railcar equipment leasing industry experienced headwinds during 2017 with demand remaining below replacement levels, resulting in an oversupply of railcar equipment. M&A is expected to remain muted until the cyclical downturn passes. Opportunities exist, but only if sellers are willing to be opportunistic and patient.


We expect to see an active M&A market within specialty finance as strategic and PE acquirers compete in a high valuation environment for high-yield opportunities.

About this article


Devashish Jain

Ernst & Young LLP Financial Services Transactions Diligence Partner

More than 14 years of experience in advising private equity and strategic clients on their M&A strategies. Advisor to both sell- and buy-side clients.