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April 7, 2017updated 15 Nov 2022 2:51am

US focus on UK equipment finance

Roy Royer, Somerset Equipment Finance’s head of business development in the UK, talks to Brian Cantwell about the move of funding capital towards the UK, the effects of Brexit and the uncertainty surrounding it, and where his business is finding its niche in a wary market.

By Brian Cantwell

Roy Royer, Somerset Equipment Finance head of business development in the UK, talks to Brian Cantwell about the move of funding capital towards the UK, the effects of Brexit and the uncertainty surrounding it, and where his business is finding its niche in a wary market.

“There is a lot of capital that seems to be directing its way into the UK,” says Roy Royer, Somerset Equipment Finance, head of business development in the UK. “I think there was a Brexit fear that really has turned on its head and people have started to look at the UK, and where there is uncertainty, there is opportunity.”

Royer says recent announcements from businesses like Dyson, which said in February that it would open a second campus for research and development in the UK, and from the UK government, including chancellor Philip Hammond’s desire to set up a £2.5bn research and development fund for robotics and other tech developments, are good indications of potential.

Some have speculated that the UK’s lack of productivity as compared to other countries may be down to its inability to adopt robotics in the way that a number of other countries have done.

“Initiatives like this are going to need a whole financial support structure,” says Royer. “For example, I think the main reason for the way that people have not been advancing robotic tech has not advanced in industry is that you can downsize your workforce, but it is very difficult to downsize a robotics line. So people tend to be a bit wary of making an investment in that space.

“That’s where Somerset can differentiate itself from its competitors, in terms of being collaborative in the way we take risk. “We can take some of the capital risk away from businesses [looking to adopt robotics] by investing in equipment residual positions that others would be shy of due to the perception that there is a limited secondary market for these assets,” says Royer.

Operating leasing company Somerset Equipment Finance has been active for over 30 years in the US, where it is present in a broad spectrum of sectors including materials handling, aircraft, ground support, IT, oil and gas, and semiconductor manufacturing and testing equipment, which leads it to have operations in the Far East. It also has transactional capability in Europe, and operations in Canada.

With a relatively recent UK office opening in 2012, to support some US clients with UK transactions, it then focused on new business in the country, which Royer heads up. The funder specialises in leasing transactions where it will offer a “junior position” to a bank asset finance transaction, in order to secure the residual value in the equipment being supplied. It has a “sweet spot” for transactions between £500,000 and £5m, although it can be flexible, depending on the transaction.

“Our offering in the UK thus far has been more of a niche product that we ally with banks and financial institutions to provide residual investments into transactions,” Royer explains. “If we are working with a bank, our position, if you like, is junior to that of the funding bank. We also add an element of credit enhancement to the transaction,” Royer continues.

“We tend to work with banks in the UK more collaboratively than we do in the US. US banks are both funding sources for us and our direct competitors, whereas in the UK banks are not a direct competitor to us. “When we look at residual positions, we take that residual piece and we treat it as equity. It’s the riskier part of the transaction, and so we price it differently.”

Royer says the business considers its residual value positions in collaborative funding as equity, and that will extend to the way it enters transactions with banks. “When we are working with a bank, we pay cash when we put equity into the transaction, as opposed to a guarantee or a residual value guarantee-type product, where there is still a balance-sheet risk on the counterparty at the end of the period,” Royer explains.

Royer believes future growth in the market is open to more courageous risk evaluation and arbitrage. “We are keen to write business in the UK; we are not seeing any limits on it. We live in an entirely dynamic world at the moment; uncertainty tends to breed opportunity, so it comes down to risk arbitrage.”

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