The UK motor finance market and the wider asset finance sector give cause for optimism and should attract investment capital, say Peter Landers and Christian Roelofs

The announcement earlier this year of Investec’s acquisition of Mann Island Finance and last week’s announcement by Provident Financial of its acquisition of Moneybarn was further proof – were it needed – of investors’ continued confidence in the UK auto finance market.

What’s interesting to us are the drivers of that confidence. Clearly the phenomenal recovery of the car sales market and the long-awaited growth in consumer confidence as the economy recovers, partly explains why many are riding the crest of a wave. However, as we talk to shareholders and keen investors, what’s also clear is their admiration for the robustness of the core of that market.

Ultimate stress-test

As we know, so many lending sectors saw the demise of some significant operators after the financial crisis and indeed many sub-sectors almost disappeared without trace. However, despite the most pessimistic bad debt forecast of some analysts during that period, when we saw lending businesses experience the ultimate stress test, we saw so many strong motor finance companies, lessors and brokers face up to the challenges.

Like us, investors have been impressed with operators adjusting pricing, introducing new products, revising strategies and terminating introductory relationships that didn’t meet profitability thresholds.

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But there’s something else of equal importance. Not only did the seismic consequences of the financial crisis cause companies to get businesses on a stronger financial footing, but it also revealed some weaknesses of the previous regulatory regime. And so while lenders and brokers have lamented the application process or the degree of scrutiny, one thing’s for sure – investors are far more reassured that businesses are not exposed to the risks and sudden cost of failing to deliver positive outcomes for the customer. So you might say the platform – the robustness of the whole business infrastructure – has a huge appeal to investors. And that’s true.

However it should be said that for those who are not ahead of the curve in relation to the new regulatory environment, business may prove tough over the coming years. A rigorous assessment of regulatory compliance is anticipated to remain front of mind for both debt and equity investors.

There are two key factors critical to investors, and in recent times both have returned to the automotive lending sector – margin and liquidity. The same can also be said for the wider leasing and asset finance market where we’ve seen the return of liquidity alongside continued higher margins and low bad debt performance. This has driven a wave of investor interest highlighted in the recent acquisitions of Henry Howard Finance by Cabot Square Capital and Kennet Equipment Finance by Star Capital Partners.

The visibility of the debt that drives the growth of any non-bank lender is vitally important to the private equity community, which is showing that the leasing and auto finance space is an increasingly profitable space to deploy capital. Others will follow.

The recent growth in the numbers of debt funds in the London market – often liquidity arms of the major hedge funds – with enormous levels of available capital will, in our view, see even greater appetite to invest in the higher-yielding lending sectors.

Peter Landers is head of consumer finance and Christian Roelofs a director at Grant Thornton