On today's episode of the Dig, I am joined by three members of the altar group and I will let the three of them introduce themselves. Well, if you'd start us. Sure. Thanks, Johnnie. I'm Valerie Gerard Co, CEO of the Alta Group and I lead the largest practice within Ulta that's focused on providing general consulting and advisory services. And you know it might make sense for me just to spend a second to introduce the Alta group, to your listeners who aren.
Familiar with us, we have been around for 30 years. We are the undisputed leader when it comes to providing advisory services. On a global basis to the equipment leasing and finance. Industry, we are exclusively focused on equipment finance and leasing. We're not distracted by mortgages or consumer autos. It's just the core equipment leasing business and anything that a client would have in terms of a need, we do it.
So that could be assisting them with some growth initiatives, entering new markets, becoming more efficient in what they do. We have a lot of competitive intelligence, market intelligence work we. We do. We assist in selecting leasing systems. We have a group that is focused on equipment management, so if you need some appraisals, valuations, some residual impairment analysis as well as remarketing, we have a team that does that. We offer mergers and acquisitions as a practice which
industry and buy a company and also supporting, you know, sellers in the industry who might be looking to sell their their property to to other financial institutions. So Rick, I'll turn it over to you.
Yeah. Thanks, Jim and Johnnie. I'm Rick remicar. I'm vice chairman with the Alta group and Prior to joining the Alta group nearly five years ago, I spent 40 years in commercial banking, specialty finance, and. Equipment, finance and equipment leasing and I provide support and consultation to all the members of the Alta group and clients predominantly in the bank equipment finance space.
Benja will thank all three of you for joining us here today and I think the best place to start now that we have the introduction and as well as kind of the background of who you guys are covered, the 10,000 foot view part of the reason why. We are having a discussion today is the release of the Alta Group's report on sort of the state of the equipment finance industry and when we're talking about the state of the industry, I think the best place to start is like I said, that 10,000 foot.
View and we get some of the specific areas. So going into 2025, as we look at the rest of this year, what is the state of the equipment finance industry? Well, why don't I kick it off and tell you that I I think Mm hmm. there's a lot of opportunity for the industry in 2025. You know, we're coming off a really rough 18 month patched where you had the bank failures at Silicon Valley Bank and Signature Bank.
And that really caused a liquidity crisis that's put put the industry a little bit on pause, if not in a backward step or two. And what we're seeing now is we're looking into 2025. There are a lot of signs that seem to suggest that it's going to be a good year for us when you're looking at certain variables in the economy, when you're looking at signals in the industry itself like industry confidence and then you have a new administration that's coming. In with some probusiness.
Policies that certainly would help bolster our industry and would result in a very positive experience for equipment, finance and leasing companies. There are many different avenues that we see in terms of growth for the industry in terms of, you know, climate finance and financing, data centers, equipment as a service, you know, all of those things will certainly bolster the industry in terms of its growth. I would say, however. One cautionary note in that is there are a lot of wild cards
out there. And so while we think that there's a lot of opportunity for the industry, management teams really need to be thinking about, you know, we're not going to coast. To growth throughout 2025, there might be some speed bumps along the way.
And let me you know, let me jump in Valerie and just encourage all the all the listeners to pull down the the 2025 Alta Group Insights report. It's a great read. It covers a lot of different segments and a lot of different areas that some of them will touch on during this podcast. But. You know, if I could, if I could summarize what sort of one overarching theme, I think it's net net positive outlook for 2025. But certainly with high degree of element of uncertainty.
Maybe the advice to listeners would be expect the unexpected. You know if you go back to if we were recording this podcast exactly two years ago in mid January of 20/20/20 of 2023, I think that we would have been positive. Maybe not as positive as today, but we would have been net positive at that point in two. And just think what happened six or seven weeks later with the collapse of several. Regional banks that created a complete.
Completely different industry dynamic for the next year and a half or two years.
Yeah, I think. I think that's a great point, Rick. You know we we sort of get lulled into a false sense of comfort sometimes. You know, Johnny, I'd follow that up.
Mm hmm.
You know specifically on the M and a market similar to Valerie's comments. You know the last couple of years in terms of M and a activity, things have been pretty quiet in the industry. But I think 2025 where we're pretty well suited. From an economic standpoint, to have a pretty strong M and a market. This year, you know, the market does not like uncertainty.
And there's there's a fair amount of certainty around a number of factors, including the fact that the uncertainty election you know is now behind us. We have an administration in place. Who's committed to reducing regulation and and discussing a reduction in the corporate tax rates? The stock market continues to perform well. Unemployment levels are low. Those traditionally a factors that generally contribute to a pretty strong M and a market.
The one factor that that's still a little bit of a you know, an uncertainty at this point and it's just you know reared its head not too long ago when we had a super strong jobs report. You know the interest rate cut has has kind of been sidelined,
Mm hmm.
if you will, by the Fed and they're they're kind of backpedaling a bit on that. And I think some of the Fed members are even thinking a hike might be in order. That, of course, will. Will quell some M and a activity if rates indeed rise. I think if I think you know the other factors in the environment should keep us pretty steady, but I'd caution keep an eye on interest rates cause those do impact the the the level of M and a activity.
Gotcha. Fantastic. And you know one thing I wanted to get into, especially on the the M and a side and we can talk about how this sort of plays into the wider equipment finance space as well as are there any particular segments in terms of you know, bank owned versus. Independent or you know, specific asset types where you're seeing lenders that are focused on these asset types
more attractive in the M and a space. Is there anything like that that's standing out as we start to look at the rest of this year?
Well, I think I think a couple of factors. You know. Let let's talk about a couple things that are going on in the marketplace. One area I think is is the lift out teams that we're seeing. So certain strategics and others are investing not not only in focused on complete companies, if you will, but are focused on potentially lift out teams where senior executives are brought over. That might help a strateg. To expand its market offerings or gain some additional relationships.
Think of the folks from Madison Capital going over to Oakmont recently. Think again about the folks from Honor Capital moving over to Dex. And I think we'll continue to see those opportunistic lift outs going on throughout the course of 2025. You know, I'd, I'd say the real winners. For for.
For the past year and I've seen a lot of private equity investment in there, are these, you know, middle market structured firms where the private equity companies feel there's still a good return to be made.
With those businesses basically picking up the slack for the banks as they sort of exited those, those that tranche of assets and that tranche of lending and those private equity firms that went out and actually built teams or acquired teams that were versed in bringing over structured cred. And potentially, you know, structuring those in such a way that they provide a strong return. Similar to the Stonebriar model, if you will. Where they can actually make a decent return on their investment.
Yeah, Jim and I would just echo that. I think that one of the big questions hanging over all of the private equity investment in the industry, which has been significant and in some of the most significant private equity investment I've seen in in many decades is when the banks get back into the market if and.
When they get back into the market, will, will, will pricing compression margin compression Dr. pricing down across the industry or will it really be constrained to that bank credit quality? Sector. And you know, I think the early signs are hopeful that the banks are the bank equipment finance companies are having greater pricing discipline, focusing on risk adjusted return, focusing on customer relationships and total relationship return. But as they say, time will tell.
That's an excellent point, Rick. Agreed.
Gotcha. OK. And as we talk about sort of the potential turn of the the banks, I know that's a potential risk factor. One of the other ones I want to touch on specifically and then we can talk about any other risk factors that are worth discussing. Is the potential risk factor of tariffs. And that's been kind of the the buzz word that's been thrown around since the election as one.
Of the things that can potentially limit what's happening in the economy as a whole, but it it transits into equipment finance with so much of our industry having international firms. From where you guys said how much of A role is that going to play? From how much of A concern should that be as we start kind of forecasting the equipment finance sector for 2025?
Well, I think it could be. It could be wide-ranging and as we sit here today on in mid January. We don't know what we don't know and no one does, to be honest, at this point, I think what you have to be concerned with is not only, you know, the Trump administration tariffs, that they potentially could impose, but then what's the cause and effect, what are the? Retaliatory tariffs that might be imposed. By an EU country. Or another country that could impact somebody that needs machinery.
That's manufactured in Germany or wherever it might be. So you know, the one thing that I think we can be certain of in in the tariff environment is there will be winners and losers, but it's a bit difficult to exactly predict who's going to be the winner and who's going to be the loser at this point. In time.
And and I would say from my standpoint, Johnny, you know the thing to be, you know crystal clear about and careful of is you know during you know 2020 we came off a supply chain shortage due to the fact that you know everyone was homesick with COV. And factory workers weren't working. You know, these tariffs could have a similar impact with supply chain shortages if if indeed we don't have. Companies here in the states that are building equivalent products.
Or, you know, it could even be from a parts perspective that it's more difficult to get parts and parts are more expensive to maintain existing pieces of equipment which will obviously impact the industry and impact. You know our ability to, you know, hit the higher volumes through those. Equipment finance companies, if, if the supply chain is again disrupted.
You know, we touch on it in the insights report and again, I'd encourage listeners to pull that report down. But the one trend that we can definitely speak to is there's been for US manufacturers. There has been a definite trend to diversify their supplier base, so they're not dependent only on China or only on one particular country and then where possible, and where feasible and practical. To bring. Some manufacturing back into the United States.
States. So I think you'll see that continued trend towards re shoring to the United States were practical but also diversifying and not relying strictly on China and having manufacturing capabilities in several countries. So that you know significant tariffs or geopolitical activities in a particular country don't create a. Complete shutdown in their supply chain.
Got you know that makes a ton of sense. And you know, as we start looking at the the rest of the year, we've talked about kind of two of the the key challenges I would just you know ask is there is there any other thing that we should be watching from a challenging side and then we? Can get into some of the the wider activity in the space.
Well, I think we've touched a little bit on trade policy with tariffs. We talked briefly about monetary policy as it relates to interest rates and, you know, uncertainty around if rates will fall if they fall, how much will they fall or could rates remain flat or could they rise the other part of monetary policy to be mindful of is stren. Of the US dollar and how that impacts both imports and exports. And then I think the third leg of the stool. So trade policy.
Monetary policy. And then I think we need to be mindful of tax policy, probably a net net positive for most customers, but something to be mindful of heading into 2025.
Patrick, OK, that makes a ton of sense.
I I think the other thing I would add to that, Rick, if if I could, you know we and not that they'll have us you know direct impact but but certainly something to keep an eye on as the geopolitical conflicts that are going on in the world right. Now we, you know, we still have issues in Europe. We still have issues in the Middle East.
Who knows what's going to, you know, take place with Taiwan and China, but you know, certainly things to consider along the way as these tend to take a little bit of focus off. You know the US economy and and put it squarely in the rest of the world which you know can obviously impact our ability to continue to do business and and be successful. So something else to consider.
Gotcha. No, that that is also something that I yeah, I don't think it's mentioned enough. I've heard a lot more mentioned over the past, maybe six months or so that you know, the geopolitical aspect is something that even for the US firms, they have to account for. And so I I think you for mentioning that one other thing I want to touch on and this can be a a positive or a negative. And I I say it that way, just because you mentioned as well earlier Rick, the the Madison capital aspect.
One of the things they mentioned in their. You know, closing was technology cost being a factor in their survival, ability in the equipment finance space. With that in mind, what is technology sort of look like especially as we start getting into the rest of this year? I know AI is kind of the buzzword, but there's so much happening in the technology side to account for what should we look at as it continues to affect the industry in 2025?
Well, I think that there's a market shift that's happening when we're talking about technology within organizations. The technology team is just not necessarily a function anymore. It's becoming an integral strategic partner in delivering. A. Businesses go to market. And value proposition. And So what we're seeing right now is a confluence of things. One, a lot of companies. Now are upgrading their existing lease systems and see you seeing
a lot of that working on. You're seeing also a lot of work around AI and I don't believe that it is a buzzword. The there is a lot of activity about bringing AI into companies and becoming a partner, helping work get done better, faster, more efficiently. And I think we're only going to see that grow as different forms. Of AI starts to be developed so Gen. AI was the big thing when November 2023. Right when that first came out, ChatGPT.
Now people are using those tools everyday, whether or not they're crafting letters to a client or what have you. Now the new part about AI is a gentic AI, and this is a gentic AI basically is artificial intelligence, which has the ability to make decisions. And so you're going to see that start to take off.
And improve, I believe different processes around the leasing cycle as that technology is deployed and AI is just gonna build on itself and there's gonna be a next generation and a next generation. So I think it's very transformative and the function in of itself is becoming much more strategic.
You know, Johnny, I think the other, the other area that that scale really becomes a big factor in is you know you'll see mergers and acquisitions within the banking space and that's driven by technology and the need to spend those technology dollars over a larger customer base and. A larger deposit base, so you know the regulatory environment is probably ripe for increased bank mergers and acquisitions and again. Driven by the need for scale.
That's it. I was. I was actually gonna gonna ask Jim around something similar, you know, with that we're bringing up, you know, there's gonna be generations of AI usage. Is that something that is being accounted for in the M and a space? You know, some companies being very far along in some companies being at very base levels. Does that change maybe how those M and a conversations start to happen?
Yeah, I haven't seen much of that yet. Obviously, AI still in sort of the the infancy infancy stage. So you know most of the M and a activity now continues to focus on what it always has strength of the management team, the profitability of the company, the ability, the company to grow their business etcetera, etcetera. So I'm sure it's just a matter of time. Obviously the the correct AI applications will serve not only to help companies grow their businesses, but.
Also, do it more efficiently and more effectively with likely fewer full time employees. And do it more accurately. So I would imagine that's that's going to be another leg in the stool that people will consider as we go forward. It's just still a bit at the infancy stage right now, so it's it's it's a consideration, but I wouldn't say it's a major factor just yet.
Hey, understood. And as we we sort of get into the end of this, I know this report is so comprehensive and touches on so many different things that we could discuss. But I want to be valuable with with your time and obviously the listeners time if we could. Go through and kind of some some key takeaways, distillation, maybe one or two from each of you of things that you know sections in the report.
Key things that you learn while putting it together that the reader should be aware of and you know they can. They can go in and look at the the report themselves. Of them trying to get the the more macro view of it. Wait a few would start.
Well, I would start with, you know, watch for the continued reemergence of Banks re entering the space. More than likely with a little more pricing discipline and probably a little more measured balance sheet growth focused predominantly on customers. So I don't think that it's an end to the glory days of of independence and captives, but I think you'll see 2025. The banks will come back, particularly the regional banks will come back. Back in a much stronger fashion.
Yeah, Johnny, I'd say from my standpoint on the M and a market, you know we're expecting a strong M and a market. I think there's a lot of things in our favor. The caution again is keep an eye on the interest rates. Let's see what the Fed does. Let's hope we can continue on our course to have a soft landing and the interest rates behave so that we can continue to see some progress in the M and a front in 25. And I would just throw in one cautionary note.
You know the industry has benefited from some very strong credit quality over the last handful of years and I think it's just time now where we're starting to see potentially some stress on portfolio. So keep a watchful eye. We're not concerned that there's going to be any big credit crunch or crisis out there, but just start to just start to pay a little more attention on the credit book.
Caviano that that all makes a bunch of sense. And you have so much of it is, you know, you can do the due diligence on the front end. It's less problems on the back end.
Absolutely. There you go.
Alright. Well, with that all in mind, I would just say if is there anything else that our listeners should know about the report or the Alta group and then obviously they can read the the reporting itself and but anything else in particular that stands out that we should. Discuss at this moment.
Again, go to thealtagroup.com and pull down the 2025 Alta Group Insights report. I think it'll be a excellent 5-10 minute read.
Alright, well, I thank all three of you for Jim. Are you gonna add something? Sorry.
No, I was just going to also say and once once you go to the
Hmm.
website and pull down the report and read it, obviously if you have questions about the report, you know, I'd encourage everyone. Our contact information is out on the website. Feel free to call Valerie or Rick or myself. We'll be happy to explain anything that maybe isn't quite clear or expand on any of the discussion items in there as as the reader would see fit. So we're happy to help. And Johnnie thanks for having us. As your guests on the dig.
We really appreciate the opportunity to connect with you and your listeners.
Of course. Yes, I appreciate having all three of you on. I thank you so much for your time today.
Thank you.