Inform

Who will fill the SME financing gap?

Authored by Peter Hunt

As economic activity recovers and investment increases, there is a significant risk that supply-side weaknesses will restrict the asset finance market for SMEs in the UK.

This should be a material concern for policy makers – notably, March’s budget included a requirement on RBS and Lloyds to provide £41bn of business loans (gross lending) over the next year for SMEs. At the same time, it creates commercial opportunity for a major new player to enter the market.

5 questions a new entrant may ask are:-

1. Is there a competitive space?

Yes – large funders came to rely heavily on broker introductions for the SME market. The exit of a number of those funders has resulted in huge capacity taken out of the market that cannot be filled by the smaller, entrepreneurial funders now dipping their toes back into the market.

With capital rationing, a strategic focus on existing bank customers and a material distrust of the broker market, potential for expansion of the big UK banks in this space seems limited. The capacity gap looks set to remain.

2. Are the returns acceptable?

Yes – spreads have increased and are much more attractive than a couple of years ago. Limited funding supply has and will continue to offer strong margin performance. Bad debt will continue to improve, potentially creating a very positive scenario for portfolio profits in 2011/12.

3. Can competitive advantage be achieved?

Yes - the industry model involving funders and brokers became fairly dysfunctional with poor co-ordination and realisation of sustainable value for all parties. A funder seeking to enter the broker market should develop a new business model (for more detail, I’m happy to provide a copy of a presentation I gave at a recent Executive Briefing). The good news is a growing recognition amongst the broker community that change is essential.

Targeting SMEs via the broker market is not the only route to market, and currently there is no brand-led “people’s champion” providing the implicit guarantee of simplified, fair, good value products to SMEs. The potential for such an organisation to operate by phone and internet (assuming risks can be managed) could be a game-changer.

4. Are the risks acceptable and can they be mitigated?

Yes – many of the risks currently associated with the SME market are wrapped up in the broker sector where through-life risks were managed poorly and in an unco-ordinated manner. These can be mitigated by good business design and effective process management. Going direct materially simplifies the risk picture further.

5. Is it achievable?

Yes – assuming the new entrant has access to funding to grow a significant portfolio, combined with the foresight, business design and commercial skills to make it happen. We’d be delighted to help!

If you would like to discuss this subject further,please contact Peter Hunt on +44 (0)845 003 1000 or e-mail peter.hunt@invigors.com.

Crisis in the German leasing market

Authored by Ludwig Fischer, Invigors Germany

After an all-time high in 2008, the German Leasing Association (BDL) recently reported a record decline in results for 2009. Although the BDL includes only 10% of asset finance companies in Germany, these represent approximately 90% of new business volumes so it's reasonable to assume that their data is very representative of the leasing market as a whole.

Overall the BDL is forecasting new business volumes to fall by 22.6% in 2009 to Euro 42.1bn, the most dramatic drop in its history. The majority of this is equipment leasing (defined as moveable capital goods) which is forecast to shrink by 22.7% to Euro 39.3bn compared to 2008. The decline is mirrored in overall capital equipment investment levels which are projected to fall by 20% this year, according to the latest forecasts from the Munich-based ifo institute. What is also notable is that, in previous economic downturns, the asset finance industry played a stabilising role in maintaining lending levels but in the current recession the reverse has been true as, even with reduced levels of investment, the leasing penetration rate has decreased slightly to 21.1%

The reasons for this steep decline in asset finance new business are not hard to find. A collapse in demand for capital equipment, partly caused by the sudden and rapid fall in German exports as a result of the global recession, has been combined with severe restrictions on capital availability from the financial sector plus the consequences of tax reform in 2008 which hit the asset finance industry quite hard. A recent survey amongst BDL members revealed that two-thirds of independent asset finance businesses claim to have restricted access to liquidity which is significantly impacting their ability to write new business.

A more worrying fact is the increasingly negative year-on-year growth trend over the past four quarters. The decline in Q1/2009 was 11.8%, this accelerated to 18.1% in Q2, and 25.5% in Q3. A decrease of 27.5% is projected for Q4. Moreover this trend has been evident across the board, for the first time ever all asset categories in the equipment leasing sector are showing an accelerating decline.

Will the German asset finance market turn round in 2010? The ifo institute are forecasting that GDP growth will recover to 1.7% next year while investment in machinery and equipment will grow by a sluggish 1%. Normally this would imply that asset finance volumes would return to growth levels of 5-7% but with the current restrictions on capital availability that remains highly uncertain. The latest ifo survey shows that business confidence is returning to Germany but, given the current shape of the leasing industry, will there be the funding available to support it?

If you're interested in learning more about the opportunities offered in German asset finance market then contact Ludwig Fischer on +49 7073 913 265 or e-mail ludwig.fischer@invigors.com.

Italy - has the market now turned the corner?

Authored by Alessandro Iacono, Invigors Italy

Italy is the third largest country in Europe in terms of leasing volumes generating 38.8bn Euro of new business in 2008, somewhat less than the UK and Germany but slightly ahead of France.

Following four years of continuous growth, the leasing industry in Italy experienced its first real reversal in 2008 with a fall in new business volumes of 20.8% compared to the previous year. All asset categories were affected but to a differing degree, worst hit was the real estate sector which contracted by 32.4% in that year. This has always been the largest segment of the leasing industry in Italy, unlike Germany and the UK accounting for 15bn Euro of new business in 2008.

The large drop in the leasing market outpaced the much smaller fall of 3.0% in gross fixed investments which occurred in 2008 which resulted in an overall decline in the lease penetration rate to 11.8%, back down to 2001 levels. The reason for this decline is clear, a combination of reduced capital investment and the credit crunch in financial services.

These changes also brought about some structural changes to the industry. The leasing sector in Italy has always been very polarised, with the major funders accounting for over half of new business volumes and a large number of much smaller players accounting for the remainder. In 2008 the top ten largest funders increased their share of new lending to 68% of the total market, up from 63% in 2007. It was clear that the larger, better capitalised funders, typically with their origins in banking, were much better placed to ride out the crisis than their small-medium competitors, many of which have experienced significant difficulty causing some to virtually cease new lending activities.

So, the Italian asset finance market was declining in 2008 even before the storm hit other European countries. What's happened in 2009? The downturn in lending accelerated dramatically in the fourth quarter of 2008 and continued in the first two quarters of 2009. However there were some weak signs of recovery in Q3/2009 and anecdotal evidence suggests that this has continued into Q4. Perhaps we can tentatively conclude that the most acute phase of the downturn has now passed, especially as recent estimates of new orders, inventories and also industrial production levels are showing weak but significant signs of recovery.

Moreover, general availability of credit appears to be improving although it remains tight. Recent surveys show that the number of companies unable to obtain funding from various credit institutions has remained stable and is no longer worsening. As we have seen previously, with the level of new leasing business closely correlated to fixed capital investment, as the latter improves in 2010 then we can expect an ongoing, though difficult, recovery in the leasing market.

If you're interested in exploring opportunities in the Italian leasing market, contact Alessandro Iacono on +39 (06) 955 57 317 or e-mail: alessandro.iacono@invigors.com.

Now is the time to demonstrate leadership

The top jobs in our industry are tough – we need to demonstrate we are on top of the game and able to think and lead our teams towards a competitive future. I am sure that by now everyone is fed up with the saying "We are really lucky to be witnessing such dramatic events ……etc." Undoubtedly,this is history in the making but whilst the global crisis may be out of our hands local solutions are definitely within reach.

Is it difficult to do good business? Yes. Are we see any shortage of demand? No. Are funders making money? Well, if they are not making strong margins now then there really is a problem - but the bottom line may be a different story!

Never before have banks or leasing operations been forced to take such a good look at themselves. Some are horrified at what they see – and some are even more horrified at what they don’t know. For example, current cost income ratios: what should they be – what’s the plan? Which are the most efficient costs – internal/external sales, marketing, customer support, Collections?

These ‘live wire’ costs play havoc with your bottom line and ratios – but do you know all there is to know about them? They should now be your specialist subject.

To start thinking about getting the business into better shape here are some practical actions discussed at the Invigors Executive Briefing last month:

1. Maximise the return from existing customers – use intelligent applications with pre-underwritten credit lines and offers of help to customers not sure of where to go for funding. This is as much about recalibration of risk as marketing. Focus on what is best for today – and tomorrow; and then look again the day after.
2. Don’t give customers surprises – other than good ones, e.g. "We have been thinking about you – many of our customers are worried about their finance contracts – you shouldn’t be. Here are your current commitments – this is what else we can do for you."
3. Critically review your business sources – which ones are too hot to handle / not profitable? Now is the time to jettison your unwanted baggage.
4. This is no time for order takers – a practical application of knowledge and experience is now very much required. Undertake a skills audit; focus on three key things to improve your finance sales. Make sure everyone is up to speed and competent.
5. Who are the top performing sales people and why? Don’t just measure volume; customer quality is critical; what are their territories and customer concentration; is their success built on solid foundations or luck?
6. Refresh the gene pool – there is available talent in the market through no fault of their own. Grab them but make sure you know what you are getting and how you can develop them further.
7. How many steps from customer to CEO? Is it two, three, four…. Anything more than three needs more thought in today’s market. How fast can you actually react to changes in demand; what are your customers trying to tell you – are you to far away to hear them?
8. How much of the back office is automated – are you satisfied with the cost savings – how do you know? Customer access to systems i.e. self serve, is the most efficient way of reducing resource costs providing the customer experience is excellent. When did you last take a customer journey – and when did you do the last competitor comparison?
9. Communicate, communicate, communicate – with everyone! Customers, staff – and their families, shareholders – your local business community. There are many people in our companies and in our communities who don’t know which way to go.

We have to restructure our businesses – now, today - when it is exactly the right time to do it, not tomorrow when it may be too late. To discuss how this approach could be applied to your business contact Chris Boobyer on +44 (0)845 003 1000 or e-mail chris.boobyer@invigors.com

Authored by Chris Boobyer

Smaller leasing companies – a question of survival?

After the seismic shifts in the banking world over the last few weeks the aftershocks continue to be felt across the leasing industry, not least amongst the smaller leasing companies, many of whom rely on continued market liquidity in order to be able to operate.

For many, the year started well enough with many achieving strong volumes in the first half of 2008. But the short-term outlook is bleak, either because experiments in non-core areas like venture leasing or property have left them with significant write-offs or because the supply of funding from lenders and block discounters of receivables has been capped or frozen.

There is certainly no shortage of transactions coming from brokers, some of whom are struggling to place decent “mid-range” transactions at high margins, which only months ago would have been snapped up by smaller lessors. One small lessor commented to me that he sees brokers working twice as hard to generate the same income – some would view this as no bad thing and a long-awaited shift of power away from the brokers to the lessors. But when brokers CVs start appearing in the market, it’s likely that customers and lessors will be suffering just as much.

Indeed most of the quoted smaller lessors have seen their share prices drop significantly in the last 12 months. The outlook for 2009 is not expected to improve as SME failures drive increased write-offs for those who have pushed the credit boundaries.

Selling either the business or the portfolio at anything close to book value is viewed as almost impossible at the moment, so what can smaller companies do to survive? The answer lies in looking at the current environment as an opportunity and applying a series of straightforward but effective tests to every part of the business – from basic overheads to future strategy – to determine the optimal outcome for both survival and future growth.

Invigors has unrivalled experience and a unique understanding of the way in which smaller leasing companies operate. Consequently we can deliver a fast, cost-effective review and action plan to enable the best possible advantage to be taken from today’s difficult circumstances. To learn more contact Richard Guilbert on +44 (0)845 003 1000 or e-mail richard.guilbert@invigors.com.

Make this year’s plan a success

Many finance companies are just about to enter their annual planning process.  With pressure on internal resources, now may be a good time to use skilled external resource to make your plan a success.

Working closely with clients, planning support we have undertaken in the past include:-

• Design and management of a multi-business and multi-country planning round, ensuring quality, consistency and timeliness of plans across all business units
• Structured market information, analysis and research to drive robust medium term strategic decisions
• High quality, detailed financial planning, including what-if analyses, where appropriate  following a standard planning model or tailored to unique business unit and market conditions
• Skilled facilitation of planning workshops and strategic dialogues for executives and internal thought leaders, allowing the planning leader to become fully involved in the debate
• Scenario planning to establish breakthrough strategies, identify key strategy drivers and challenge the validity of current and planned business direction
• Establish performance measures, including balance scorecards and cascades to business unit and departmental objectives
• Prioritisation of market and business opportunities to shape next year’s growth agenda; budget estimates for activities required to deliver on that agenda

The requirements of each business will be different but many of our clients have found that external expertise can make a real difference, not least when time pressures on internal resources are intense. 

To discuss further, please call Peter Hunt on +44 (0)845 003 1000, or e-mail him at peter.hunt@invigors.com

Strategic alliance with Challenge Consulting – driving multi-million pound client benefits

We’re delighted to announce the formation of a strategic alliance between Invigors and change management specialists Challenge Consulting.  Both firms will retain existing corporate structures.  The new working relationship comes in response to growing demand from senior management teams for advice on both expansion and dealing with the changed market dynamics.  The scope of their services starts at strategy and covers everything from commercial modelling through business design to change.

The two firms are already working together to drive major transformation projects with multi-million bottom line benefits in areas such as:-

• Operational and corporate restructuring
• Efficient operating platforms for flow and non-flow businesses
• Geographic expansion
• Development of new business units
• M&A strategy, implementation and integration

As specialists in asset finance and related sectors, Invigors provide advisory services across a range of business disciplines, including strategy and commercial development, geographic expansion, mergers, acquisitions and strategic alliances, research and intelligence, accounting, tax, training and professional development.

Challenge Consulting are change management specialists with an enviable track record in leading medium to large companies through major operational change programmes, design and implementation of new target operating models and  post implementation performance management.  They have expertise in several industry sectors, including Asset Finance and Car Leasing.  Previous work includes the design and development of new business models for both ING Lease and ING Car Lease, including integration of major acquisitions

With the combination of deep domain knowledge, leading edge business architecture and change management, we believe the relationship can offer unique value for clients seeking higher operating efficiencies and competitive advantage.  Why not give us a call?

For further information please contact either Peter Hunt or Chris Cooper
Peter Hunt, Partner, Invigors LLP, +44 (0)845 003 1000, e-mail peter.hunt@invigors.com
Chris Cooper, Managing Director, Challenge Consulting Ltd, +44 (0)1923 270001, e-mail chris.cooper@challenge-consulting.co.uk

Is your business killing your business?

Over the last couple of years, a wave of capital investment has meant that by simply holding their own in rising market, finance companies have enjoyed strong growth.  With capital investment forecasts around 2% for 2008, on top of market liquidity and cost of funds issues, finance companies will need to work a lot harder this year to hit shareholder expectations.

For many, M&A is a closed door.  Fortunately another profit growth opportunity – with lower corporate risk - is much closer at hand.

We’ve all heard the adage 80% of your profit comes from 20% of your customers.  Then ask the question, how many of the remaining 80% of customers are generating less revenue than it costs to serve them (i.e. losing you money)?  Only some of these will be necessary for scale economy reasons, or to maintain an important relationship. 

The questions to ask are deceptively straightforward.  How much revenue are you generating from each transaction?  What does it cost to win the business, get it through credit and put it on the books?  How does that vary by route to market and means of proposal capture?  What about process hand-offs and workarounds?   What effect does bad debt have on each type of business?

With the right analysis, you’ll be armed with a clear picture of where to focus your business for the greatest profit.  Herein lies the rub.  Vested interests and sacred cows will abound.  Following this path requires strong leadership and a business analysis capability removed from the politics of day-to-day operations, able to make recommendations based on profit and insight, not fiefdoms.

Loaded with this knowledge you’ll have two choices – either re-direct resources to operate within the new profit-centric business model, or downsize to focus on those areas that make you real money (remaining conscious of the step-down impact of reducing scale economies).  Obviously some actions will take time to have their full impact but equally, there will be quick wins that bring near-immediate bottom line results.

From working with clients we know this is not always an easy route, but it’s a very tangible way to improve profitability in 2008. To learn more about how Invigors can add insight to your business e-mail Peter at peter.hunt@invigors.com or call +44 845 003 1000.

Now is the time to think about expansion – or exit !

Grow

Given the current market turmoil this might seem a strange or an overly ambitious time to be thinking about expansion when there sometimes appears to be barely enough liquidity to keep going leave alone grow. As for exit; why do it when the market chatter is all about caution and big discounts to value?

The reason is that real money - or at least the foundation ideas to make real money – is laid down in times just like these. Market shocks are a great reminder to all of us of that great line – the future ain’t what it used to be! But, the smart money is on those who use this prompt to think the unthinkable – where are we really going; can I really deliver the promised plan; is my business really sound? Unless you are getting a resounding “Yes!” from your own conscience and immediate nodding heads from your senior management colleagues you have got some thinking to do.

Consider the following strategic challenges – they should be very familiar to you:-

• I want to grow in my region or country and have greater scale and presence in selected industry categories.
• I want to make initial acquisition(s) in Q1 2008 and have a target list by mid November.
• I enjoy success in my current verticals but want to access new or adjacent ones or acquire in my existing niches

How would you rather spend your days? Fighting in the trenches and arguing over 25 basis points in the run up to the quarter end or being brave and fighting on a different level? There are so many distractions for your competitors who will be focused on day to day issues. These are the people who are always surprised when a merger or acquisition is announced - how did they do that, where did that come from, how did they identify that, where did they find the time?

The answer is of course getting organised, being brave and just for once, finishing something you started! The key strengths of Invigors advisory team is being ready and able to guide you through all of these things. The actual negotiation of an acquisition is relatively straightforward but always gets the glamour. The secret to success is to make sure you and your company is organised for success – curiously this applies in equal measure whether you are the acquirer or the acquired.

The answer isn’t to set up a project team!  Generally the optimal organisation framework has 5 basic elements: Strategy, Operations, HR, IT and Financial. They are all interlinked but all must follow Strategy. If you get that right the rest is straightforward. A tactical initiative dressed up as strategy usually costs money!

There are numerous issues to consider under each pillar. These include:-

Strategy

• Do you know what you need rather than what you want?
• Are current threats to your business best answered by acquisition/alliances?
• What threats remain unanswered?
• Are current targets appropriate, do they expand existing presence or open new areas?
• Are current targets a good fit for your current operational model?

Operations

• Can the target be absorbed within your existing management structure or are additional skills required?
• Will the target’s existing management be retained?
• Is site consolidation mandatory for an acquisition; what experience do you have of split site management?
• Where will the acquisition fit within your company; who will it report to, does additional management capacity exist or are new senior resources required?
• Can the existing site cope with material expansion of staff?
• Has the acquisition project manager been identified, what size project team will be required, what reporting framework and steering group will be constructed and by when?

IT

• How flexible is your existing IT framework; does the target have better systems; can they run independently or need integration – which way?
• Does your IT management have sufficient experience or bandwidth to support parallel or integrated operations?

Financial

• What financial disciplines or parameters must be met or have been included within the medium term plan: minimum returns (ROE, ROEC, ROI, others), what C/I ratios need to be maintained?
• In addition to the Capital acquisition budget, are appropriate Revenue budgets in place to cover related acquisition costs for year and 2008?
• What flexibility is acceptable in initial post acquisition phase, which integration or investment costs can be included or excluded?
• What timetable exists for medium term planning – are the planned M&A operations budgeted for 2008 and what assumptions are built in for 2009-11?

HR

• Are there any Union recognition constraints?
• TUPE provisions can be expected to apply; will there be any harmonization of terms difficulties with existing staff?
• What provisions are needed for pension plan valuation and integration arrangements?
• Are relevant professionals available within the necessary timetable to perform these tasks?
• Will the current HR framework require support during the acquisition process – how will that be achieved?
• Do the identified project team participants have the available capacity or have ‘backfill’ resources been identified to cover their current roles?
• Have these additional costs been included within the current budget?
• What has the gap analysis between required and available internal skills revealed?
• What are the plans and costs for additional resources and skills?

Sell

If on the other hand, your view is that now is the time to think about the golf course or the distant mountains of Machu Picchu, this is also the right time to plan the exit. Current market turmoil should not affect your medium or long term plans. Obviously you need to maintain the correct growth shape and demonstrate that the business is durable – but the planning stage is just as important for you as the acquirer – except that you might need to be even more prepared!

Preparing for a potential acquirer’s due diligence is one of the best corporate makeovers available to any CEO. If you don’t have the appetite for searching questions – or even worse, don’t know have the answers, then put it off for while BUT use the time to discover how your business works – it is probably different from how you imagine! There is plenty of additional profit in understanding the basics of any business – if a sale doesn’t look likely because of what you find it should still make you a better business.

An acquisition process is lengthy, time consuming, all absorbing and totally distracting. To endure it you must be certain of success – and for that you need to be fit and ready for the long haul.  Taking an external view of your company will sharpen up the management team. It should prompt serious and searching questions about where the company is going.

If you can’t see a clear way forward and aren’t able to present the detailed financial and necessary operating procedures in a simple and straightforward way, then nor will an acquirer. Your aspirations for price, available equity stake, retention as a non executive will all turn to dust if your review is not robust and you don’t follow up on the ‘fix’ list.

The asset finance sector retains the same attractions as it did before the current crisis – and it will do so again. We have a good mix of well run mature business with proven scope for expansion and new companies with the BIG IDEA. If you don’t fit these criteria now then work towards it – the market will return so be ready for it.

These are exciting and opportunistic times. All of the above are of course challenging for any management team but they are eminently doable – without too much effort on your part.  Specialist advisors such as Invigors have completed this task many times – from both sides of the fence. Now is the time to talk to us about moving your business up where it belongs.

Invigors has the insight, the ideas and the impact to make a difference.  To contact Chris about this topic e-mail him at chris.boobyer@invigors.com or call +44 (0) 845 003 1000.

Not more strategic planning!

As part of their annual planning round, many readers will currently be involved in a strategic planning process – and feeling quite dissatisfied with the whole affair! 

Compare aims against reality.  Let’s say the aims of strategic planning are to develop a winning business model over the medium-long term while responding to changing market conditions, prepare executives to deal with future uncertainties, generate a common executive ownership and stimulate new areas for innovation.  Unfortunately reality often revolves around existing notions of surviving the next twelve months, not looking foolish in front of the CEO during group sessions or the challenge process and not spending too long on the strategy when there’s proper work to do.  Clearly a mismatch.

Time is at a premium and all the reasons for minimising the strategic planning process are extremely valid.  However, creating durable competitive advantage takes some thinking and investment, whether it’s based on operational excellence and a new IT system, up-skilling your workforce or M&A activity. 

It should be possible to create a “light-touch” planning process that provides results that are somewhat more compelling than will be served up in many businesses over the coming weeks and months.  This is best shaped around the individual needs of the company and can also be done as a stand-alone exercise outside the planning round, for example in response to a sudden change in market conditions. Here’s my starter for what the process should look like:-

• Build the basic data pack for today’s business – financials, market and competitor positioning, KPIs.  Don’t spend too long on this.
• Strategic conversations with key stakeholders in the business – the board, rising stars, customers, sales people, etc. Identify the key themes, competitor initiatives, issues and risks underpinning the medium-term competitive environment and how your business might succeed.  Take into consideration broad issues like technology developments, social behaviours, regulation, and so on.
• Qualify and quantify the key themes, issues and risks.  Understand how individually they might play out, their impact and interdependencies. 
• Scenario planning.  Pull together the key themes to generate a vivid picture of future market conditions - this will help executives make sense of the wide range of drivers they are experiencing, against which they can now start to plan.  Bring your key stakeholders together to identify a future vision for the business, how it will be profitable and beat competition.  Establish development milestones to get there.
• Generate the financial plan and where appropriate, the investment case for new development.  Develop a timescaled roadmap to manage implementation.
• Communicate the vision, implement, communicate, implement some more, communicate some more.  Make sure everyone stays aligned to your winning future.

The result of this approach is a clear, practical, shared corporate vision of how to succeed, with milestones and a business case against which the business can map its progress.  Having identified key, future-changing themes, an ongoing market intelligence process can be developed to ensure executives have early warning of any changes to their business assumptions. 

Because the process is not steeped in “here and now” operational issues of the business, it can be outsourced to a skilled facilitator to manage.  The investigation of market trends and development of a sensitivity-rich financial model can also be outsourced.  Invigors already provide all these services to clients.

As well as giving executives more time to stay on top of day-to-day issues, this generates more thinking time for business leaders and greater independence while considering key issues. If you would like to learn more about how Invigors can add value to your strategic planning process, contact Peter at peter.hunt@invigors.com or call +44 (0) 845 003 1000.