When Tarun Mistry created Grant Thornton’s Financial Services’ corporate finance practice in 2007, the firm had only a small presence in the consumer finance space in terms of audit clients. In the years that followed, however, Mistry’s advisory practice gained a reputation around the finance industry, and the relationships built by the team developed into a number of audit engagements.
A large part of the team’s job centres around due diligence work as part of merger and acquisition (M&A) transactions. These involve a thorough review of the business, including its finances (such as historic finances and forecasts), organisational structures, IT structures and compliance frameworks. As a result, Grant Thornton is ideally placed to conduct an audit of a company if it has already done some due diligence.
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According to Mistry, the past two years have seen a substantial uptake in the market in corporate and debt transactions and the people he speaks to are all focused on growth.
He says: "What we’ve seen in the last two years is predominantly a growth in M&A activity. We’ve seen new entrants coming into the market or certain transactions happening where an existing lender decides to enter into a new space in the sector. Specifically on motor finance this has included the Moneybarn transaction and, more recently, Pinebrook’s acquisition of subprime motor finance business The Car Finance Company. Also in the intermediary space we’ve seen Investec’s acquisition of Mann Island, a motor finance broker."
Mistry says there’s been a lot of activity in the area of broker acquisitions. This is seen as potentially a good way to enter the market, as acquiring a broker allows an external company to take immediate control of distribution volume.
The thought process roughly goes: "If we can buy an intermediary who’s originating £Xm of volume a year then, one, we’ve got access to that volume, and two, we know roughly how it performs because there might be some statistics around performance criteria and off the back of it, if we can create a lending platform.
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By GlobalData"Therefore relatively quickly we can get up to some sort of scale of lending activity," he says.
Aside from the Investec acquisition of Mann Island, another example offered is Target Group’s acquisition of Freedom Finance, an intermediary which focuses on secured and unsecured loans. The move will give Target Group and its investors the ability to create a lending book, should they choose to do so, thanks to now having access to distribution, as well as a servicing platform which already exists in Target Group.
There have also been a number of examples of banks buying their way into the motor industry specifically, and the asset finance world more generally. For example, Bank of London and the Middle East effectively backed Renaissance, which provides finance for a range of prestige products, including prestige cars, to originate transactions. Although Renaissance was a new company at the time, it’s core staff had a long history in the industry, and came with industry knowledge and contacts.
Then there are private equity houses, and Mistry mentions a number of recent examples: "Cabot’s acquisition of Henry Howard, STAR’s acquisition of Kennet, Cabot’s acquisition of Lease Direct Finance from Investec. More recently STAR’s acquisition of Ignition Credit and Acuity’s purchase of Tower Leasing."
Cabot has also moved for prestige lender JBR and independent lender Blue Motor Finance in the past 12 months.
In a lot of these cases, the company was actively looking for a buyer. In the case of brokers, a possible reason for this might be to move from being an intermediary and to become a lender themselves. Mistry explains that lenders are inherently worth more than a broker because brokers are involved in individual transactions, and gets a payment once the transaction is completed. Therefore there’s usually minimal portfolio income. A lessor, on the other hand, will generally be receiving income from its lending portfolio, which will generate value for the business going forward. So for the owners of brokers, moving from the intermediary space to the lending space will make their business more valuable.
This requires capital, so Mistry explains that it’s not uncommon to see owners willing to sell a stake in the business to an investor with deeper pockets, who will in theory have the resources to push the intermediary into the lending space, which is inherently more valuable.
According to Mistry, there are a number of other reasons why people may wish to sell at the moment: "The vendor may be getting to an age where they wish to exit, or they have a view that in a few years they may wish to retire. Another reason may be that there’s an investment required in the business to take it to the next level. Or there may be the view that it’s the right time to sell, because there’s a lot of demand for that particular business in the market."
The Financial Conduct Authority (FCA) is another reason he suggests some companies are looking to sell: "Some vendors are experiencing the increasing level of regulatory burden being imposed on their business. Therefore, some of these businesses are questioning whether they are best suited to be owner-managed businesses, or are they better suited to be associated with a larger entity which has that regulatory governance framework and can afford that governance framework?
"Certainly that’s part of the thinking of some of the vendors we talk to. The regulatory burden that will come over time may impact the value of their business as it stands now. So it may be better to sell now and work with another investor to make that business compliant for the long-term future and its success."
Shareholder consensus
For companies looking to sell, Mistry says the process starts with just getting consensus among the shareholders as to what the company’s strategy should be for the sale. So there needs to be a sense of agreement as to what’s going to happen, and a sense of agreement to see the process through. This is important, as the sales process is likely to be draining on management resources. "If you don’t have commitment to that process on day one, then it can show later," Mistry says.
After this a realistic valuation is in order. Shareholders will need to understand broadly the range of prices the business might realistically fetch, and in so doing decide what price would be acceptable to them.
Shareholders will also need to have a real understanding of why they want to sell the business.
Once these have all been discussed and agreed, Mistry says it’s then time to talk to your advisor. In order to make sure the vendor’s business is ready for a sale, advisors like Grant Thornton will probably challenge the vendor on a number of issues.
Some these include:
- If, for example, the managing director or a key member of the management team, is coming up for retirement in the next 12-24 months, what has the business done to find a successor and to transition-in that person?
- What customer contracts or relationships does the vendor have? If there’s a key customer contract that lasts for, for example, three years, and it’s in the last six months before coming up to maturity, it’s probably not the best time to sell until that contract is renewed. This may not always be the case as the shareholders may have strong reasons to be confident of renewal.
- What has the business done with regards to regulatory compliance? It should have got its interim permission, but where is it with regards to attaining the full licence? Has it prepared for that, and so on? The more advanced a business is on this point, the better the chances of a sale at a higher price.
- Taxation: are there any outstanding tax issues with HMRC?
- Does the business have documented procedures and policies around the key aspects of the business?
Mistry adds: "Then there are things like: what is the appropriateness of certain provisioning policies you’ve adopted? Have you prepared a forecast of the business for the next three-to-five years, as this will certainly be required by a potential acquirer?"
Once a sales process is started, a vendor will need to begin going through a diligence process, which will cover operational procedures, financials and certain legal aspects, including contracts and property leases. So Mistry recommends making sure this documentation is easily accessible and in one place. Also, he says, if there are any unusual trends in your performance in the past three years or so, it will be worth making sure you are able to explain why this is the case.
He adds: "Either the business can prepare all this documentation or your advisor can assist the business through a preparation for sale process."
FCA impact
While the FCA has driven some owners to look for outside investment, or to sell their businesses, the application process is also notoriously arduous and time-consuming. However Mistry says it doesn’t necessarily mean it makes sense to wait for the dust to settle with the FCA before looking for a buyer: "It shouldn’t stop the process, but I accept the point that both these processes can be quite resource-demanding. However, you have to balance this with the demand for these businesses in the market, which at the moment is reasonably high."
It also depends on the level of resources available and how well the business is managed. Speaking of Grant Thornton’s clients, Mistry says some have the relevant information and accounting records up to date, and the legal documentation ready to be reviewed. In these cases, it’s possible for a business to be sold ‘very quickly’ and in these cases, a sale could go ahead.
As well as this, sometimes having submitted an application can be sufficient in order to progress a sale. Mistry says: "One of the businesses we’ve sold recently had submitted its documentation to the FCA for its full licence but not had received a response. Generally the purchasers we approached have taken a view of what they think of that submission document and concluded on the likelihood of obtaining a full FCA licence.
The companies looking to enter the industry are coming into it at both a time of relatively rapid growth, but also at a time when the market has seen a lot of new players enter the market, and some companies return to it.
Over the past 18 months or so, registrations of new car sales have been buoyant. According to the Society of Motor Manufacturers and Traders Association’s figures, registrations were up 7% in the first half of 2015, compared to the same period in 2014, which were in turn 10.6% above the first half of 2013. At the same time, finance penetration has continued to rise to record levels. This has largely been driven by a growth in PCP. More or less, this has helped the market cope with the new players.
However Mistry suggests that companies may need to start competing in a more imaginative manner in the future. He says: "Going forward, some of the more established players in the market are now saying if we wish to continue to grow our lending book in line with how we’ve grown in the recent past, we need to be coming to the market with slightly different products, a slightly different credit profile acceptance and so forth.
"So we will see some existing players flexing their products and presence in the market just to maintain their growth rates and book sizes."
The opportunities for entrants may now be in some of the more niche spaces in the market, such as non-conforming credit spaces or specific products and specific routes to market. As a result, he says, there’s still scope for entry.
So there’s space for new entrants in the market, however Mistry says the competition in the general marketplace will start to show in the ways the existing players operate over the next two years or so.
Looking ahead, aside from growing competition, Mistry says: "The interesting thing will be to see how access to debt funding moves over the coming period, and whether funding lines can be maintained at cost-effective rates which will allow for some movement in end-customer price competition.
"It’ll be interesting to see how some of the subprime players in the market can grow their books, especially with the challenge coming in from guarantor and direct lenders operating through online platforms."
