In the sometimes complex and multi-layered world of holding companies, private equity investors and operating companies, it was refreshing to speak openly with Colford Capital’s President and CEO David Lee and North Mill Equipment Finance’s President and CEO Gary Silverhardt. As Equipment Finance Advisor readers will no doubt remember, Colford Capital came on the equipment finance scene in late 2012 when the New York-based holding company announced its acquisition of Equilease Financial Services. In effect, it was that acquisition that created Colford’s newest subsidiary, North Mill Equipment Finance.
We thought it was time to find out more about Colford Capital, its history and overall strategy and to find out where the Equilease acquisition fit into the picture. Lee explains, “We came into existence a little over a year ago in January of 2012 with the intention to build a diversified specialty financing business. By utilizing our equity capital along with our industry knowledge, we’re looking to build companies that provide an attractive, risk-adjusted return while keeping a successful culture and operating platform and operational autonomy.” In short, Lee says, Colford provides access to capital and strategic guidance while leaving the day-to-day operations of the individual businesses in place.
Today, Colford Capital is comprised of three distinct businesses: North Mill Capital, a Princeton, NJ-based asset based lender serving small-to-medium-size businesses unable to obtain traditional bank financing in the northeastern U.S.; PrinSource Capital in Minneapolis, MN, an asset-based lender and factor serving the upper Midwest; and now, North Mill Equipment Finance.
While certain synergies between the subsidiaries may exist, Lee reiterates that leveraging these synergies at the operational level is not Colford’s ultimate aim. “Frankly the synergies we are seeking are centered more on the financial allocation of capital. Permanently capitalized finance companies tend to go through cycles that are either over-equitized or under-equitized. By having a consolidated balance sheet, we can dynamically allocate capital toward the best risk-adjusted return and maximize financial leverage to maximize equity returns. By allocating capital in this way, we find that we can provide the best return for our investors.”
As with the asset-based lending subsidiaries, North Mill Equipment Finance also targets small businesses with limited access to financing. He explains, “Today, lower credit quality small-to-medium size businesses have a very difficult time accessing capital. We’re finding that commercial banks are not willing or don’t have the regulatory authority to provide capital to customers that in turn could become criticized assets on their balance sheets. And these aren’t necessarily uncreditworthy businesses,” he notes. “In fact, many of them are quite creditworthy. But when you see businesses where the guarantor has a FICO score of 660, and if the balance sheet is not pristine, most commercial banks cannot or will not provide capital.”
But Lee and his team at Colford see things differently. “Because we‘re not dependent on what I’ll call regulatory supported depositor-based capital, we’re able to garner attractive returns in which we believe the risk premium far exceeds the incremental risk.”
Lee continues, “We noticed a very large supply and demand imbalance in the small-ticket equipment leasing space for the C-credit companies. And looking at things historically, we found that the asset yields in that space are at an all-time high. At the same time, due to the low interest rate environment, borrowing costs are at an all-time low. So net interest margin is at an all-time high ... we believe we can generate very attractive returns with modest amounts of leverage by providing capital to these small-ticket lessees.”
It’s no surprise that Silverhardt agrees and he is quick to add, “I think another thing that the equipment side makes available comes from the fact that from 2007 to about 2011, equipment values dropped precipitously. This caused a glut in many asset classes. So, in addition to the yields being right and the risk-adjusted pricing being right, collateral values are the right levels as well since we’re now seeing a slow uptick of the values.”
Lee explains that as the holding company came into existence in 2012, its management team quickly identified the small-ticket leasing space as the right space to be in. “The question became one of finding the right acquisition opportunity or the right management team to restart a business,” Lee says.
Enter the Equilease team. Lee recalls, “Once we met Gary and his team of 40-plus professionals, we quickly seized on that opportunity. What we liked about Equilease in particular was that they had a very long and well-established operating history. They actually have an SSAE-16 certification for their operating procedures and controls. That’s rare in a company of this size. Equilease’s only weakness was a lack of access to significant equity capital. Together, we can build a strong equipment finance origination capability.”
From Silverhardt’s perspective, the opportunity to join forces with Colford Capital and in turn launch North Mill Equipment Finance offered several advantages. “For one,” he notes, “it’s always good to have a larger group of individuals to work with who bring varying experience in the debt capital markets and other areas to help you look at your business differently. I think that’s always healthy.”
And there’s, of course, the access to capital. “As the individual who owned the company, I had to wear many hats and the capital-raise function of the business took an enormous amount of time. It’s not only the ‘dog and pony shows’ to have to conduct … but at the same time, you have to prepare all of the pertinent information for the investors. To have David and his team have that be their main focus allows me and my management team to work primarily on the business. That gives us a jump on everyone else from a focus perspective.”
As Equilease’s former owner, Silverhardt notes, “There was a plus on the personal side as well. It’s always good to not have all your eggs in one basket – so bringing in someone else’s capital alongside mine was a good thing for me as well.”
Therefore, the time was right for Equilease to be acquired by Colford Capital. Silverhardt notes that during its long history, the former company had maintained its systems and paid careful attention to creating a great culture. “Today, with the capital to do so, we can create a scalable environment. That gives us the ability to grow while keeping our overall costs down. All this allows our people to work smarter too. The tools today are significantly more advanced than when we were originating paper between 2005 and 2008. It’s in the software as well as in the hardware. Between PayNet and Experian and the access to LexisNexis … not only is all of the information there, but we’re able to access it in a non-manual environment. These and similar technologies will allow us to fully leverage our platform.”
Setting aside Equilease’s strong operational controls, longevity and corporate culture, Silverhardt explains the North Mill Equipment Finance team brings other core competencies that will bring about competitive advantages for Colford Capital and its investors. He cites the team’s expertise in the transportation sector as an example. “We have a tremendous amount of experience there. As a result, we can be more exacting in what we do with our dealers, our vendors and manufacturers as well as our end users. We understand what they are looking to buy and we understand their needs.
“On the servicing side we know how to manage the issues. Whether they are small-equipment issues or environmental issues, we understand how they impact the equipment and what we need to do to service it. Without that understanding, it’s easy for things to go awry.” And Silverhardt notes, North Mill’s servicing capabilities extend to other institutions with special situations. He explains, “We are currently servicing a middle-ticket portfolio for a large European bank. It was originally a $260 million portfolio, and today, we are providing all of the servicing from soup to nuts.”
He says it ultimately boils down to having a firm grip on the asset classes the firm chooses to finance. “That understanding helps us pick our niche. We don’t have to be all things to all people and we can go after what we like and we know who to go after it with. We have a tremendous database with dealers, vendors and customers that we’ve worked with in the past.”
In closing, Lee sums up how the former Equilease team fit the bill when Colford Capital identified the small-ticket equipment finance space as its next venture in specialty finance last year. “During the financial tsunami of 2008, many independent finance companies and titled equipment leasing companies went under. And while Equilease had its challenges, every lender we spoke with that had worked with Gary and his team had nothing but positive things to say. So, having debt capital in addition to equity capital is obviously critical in growing one's business and we became even more comfortable working with Gary because we knew that banks would be more than willing to lend to him.”
In the end, Lee explains the acquisition of sister subsidiaries under the Colford Capital umbrella is less about cross-sell opportunities and more about providing successful management teams with the capital to expand their reach in their respective fields of expertise. And that suits Silverhardt and his team at North Mill Equipment Finance just fine.