Strong Industry Performance Makes Independents Attractive for Acquisition

Economic uncertainty and rising interest rates may hamper mergers and acquisitions in the equipment finance industry this year, according to James (Jim) Jackson, co-CEO of The Alta Group and leader of its M&A Advisory Practice. In a recent article in the Monitor, he provides an overview of activity in 2022, as well as an assessment of the current market.

While strong industry performance last year continues to make independents an attractive acquisition target for banks, there is concern about the lingering threat of a recession and decline in financial performance.

Current Challenges Affect M&A Activity Into 2023

“The current challenges, which likely will remain issues for 2023, are the persistent uncertainty of the economic environment and the lack of clarity of the timing and severity of a potential recession and when we might return to a more traditional interest rate and inflationary environment,” Jackson writes. “Once this can be determined, potential buyers will be able to lower their investment hurdle rates and more opportunities for profitable acquisitions will be available.”

More recently, after his article was printed, Jackson adds:

“While I believe the initial impact of the recent bank failures is largely behind us, it has left in its wake tightened credit standards and increased liquidity premiums which will, in turn, increase acquisition hurdle rates and lower acquisition values, further adding to the slowdown of M&A activity in 2023.”

Last year saw notable transactions by such companies as GreatAmerica Financial Services, TimePayment, Peoples Bank, Wingspire Capital, Gulf Coast Bank and Trust, Civista Banchares Inc., and Bain Capital.

“Despite the recent significant rise in interest rates, the equipment finance and leasing industry remains strong and many of the senior leaders reported record-high originations and profitability for 2022, which carried into early 2023,” Jackson says. “We continue to hear from qualified buyers that they have an interest in acquiring quality finance companies, but these buyers have become much more selective about the market segments and types of equipment finance organizations that would be of greatest interest to them.

Many of the economic factors that made the majority of 2022 a challenging year remain present.

Interest Rates Affect M&A Activity

“M&A activity and company valuations are driven in large part by levels of liquidity and access to credit, portfolio quality, stock market trends, unemployment rates, political and economic uncertainty and business confidence levels,” he notes. “One of the more influential factors in determining the level of M&A activity and company valuations is interest rates. When interest rates rise, potential acquirers also must increase their hurdle rates on acceptable investments, which generally results in lower acquisition values and fewer successful transactions. The current market seems to be sending mixed signals, which only serves to extend the likelihood that future uncertainty will depress the M&A market, at least in the short term.”

For the full Monitor article, click here to read “Economic Factors and Uncertainty Plague M&A Activity in 2022; 2023 Will Likely Have Its Share of Challenges.”

James (Jim) Jackson is co-CEO of The Alta Group and leader of its Merger and Acquisition Advisory Practice. The M&A practice provides buy-side and sell-side advisory services, locates debt and equity financing, provides valuations, and performs other related services to the equipment finance industry. Jackson has more than 30 years of experience in the equipment leasing and finance industry. He currently serves as immediate past president of the National Equipment Finance Association and can be reached at jjackson@thealtagroup.com.