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Welcome to Portfolio Perspective: Managing Risk & Seizing Opportunity, a podcast focused on the asset-based lending industry. Join Andrew Pace, Chief Client Experience Officer at Asset Compliant Solutions, as he interviews experts, shares insights, and explores strategies for managing risk, optimizing portfolio performance, and seizing opportunities in an ever-evolving financial landscape. From regulatory changes to technological advances, each episode provides actionable takeaways and deep dives into industry trends. Whether you’re a lender, servicer, or recovery expert, this podcast offers valuable perspectives to enhance your approach and improve outcomes.
It's very easy to send the money out the door. It's very hard to protect those investments, manage the portfolio, handle delinquencies and defaults, work through recoveries. The back end of the process is a lot more difficult than the front end of the process.
Andrew:Back to ACS Portfolio Perspective. I'm your host, Andrew Pace, Chief Client Experience Officer at ACS. Joined today by Sarin Shah, President at MidCap Equipment Finance. Sarin brings seventeen years of commercial finance experience spanning equipment leases, revolving loans, and cash flow lending to businesses, ranging from small enterprises to Fortune 500 companies. He successfully deployed over $1,000,000,000 in equipment backed transactions throughout his career.
Andrew:What makes Sarin's perspective especially valuable in his experience as both a builder and operator, he co founded and served as Executive Vice President for Nations Equipment Finance, where he and his team deployed approximately 1,000,000,000 in capital over seven years, before successfully selling the business in 2017 to Solar Capital. After his non compete period, Sarin founded MidCap Equipment Finance about four years ago, bringing many of his former colleagues with him to build on their proven success. With deep expertise in credit, risk management, and restructuring, along with an engineering degree from Purdue University, and an MBA from NYU Stern School of Business, Sarin offers unique insights into building and scaling equipment finance platforms in today's market. I first met Sarin earlier this year at the Stonebriar Investors Conference in Texas, and during our conversation, we discovered a fun connection. He lived in Buffalo for a few years, and as it turns out, our wives even worked together.
Andrew:It's a small world, and I'm excited to continue that conversation today. Surin, welcome to the show.
Saurin:Thank you, Andrew. Appreciate it.
Andrew:Well, thanks for joining us, Surin. Your journey from GE Capital to building and scaling two successful platforms is fascinating. Let's start with that entrepreneurial path. What motivated you to leave GE Capital and start Nations Equipment Finance back in 2010?
Saurin:Yeah. I mean, I think I've always wanted to be an entrepreneur from the very beginning. I grew up in a family business. My dad was an entrepreneur. He had a family business with his brothers in the manufacturing and distribution segment.
Saurin:And so I learned from a pretty young age what it was like to grow up in an entrepreneurial environment, in a small business. All of the challenges as well as the rewards associated with being in that experience. And so eventually, you know, I wanted that path for myself. But, you know, in achieving that kind of path, I knew that I had to go and learn from some of the best corporations out there. And, you know, after I graduated from Purdue, I, you know, I interned with GE, and then I started with GE in their leadership training program and started to just try to make a name for myself in the corporate world and learning like a sponge as much as I could from every opportunity, every manager that I worked with, every project and position that I was afforded the opportunity to participate in.
Saurin:And, you know, I spent ten years at GE, both on the industrial side as an engineer and then part of the corporate audit staff, and then ultimately with GE Capital where I was with the commercial equipment finance business. So that's really where I started to learn the ropes from the very bottom as an associate in the underwriting of commercial equipment deals, and then working my way up through sort of the chain of command on the credit side, and really solidified my business expertise. And then from there, you know, it was a good calling in 2007, where I had a GE company officer that left to start a cash flow lending business called First Light Financial. And it was a great opportunity to maybe take that first step away from big corporate into a startup financial services venture. And so that was that was my exit from GE and the start of my entrepreneurial track.
Saurin:First Life Financial was a a great organization with great talent and a lot of really smart people, a lot of them that I worked with, you know, at GE. And, you know, we had a great run. It was just very bad timing because, you know, a year later, we find ourselves in the middle of the financial crisis, and it was very, very tough to scale our business at that point. So that business unwound, and I I stayed on as credit to unwind that portfolio, but ultimately also exited in search for something new to do. That's right around the time when in 2,010 that I joined forces with some of my other GE colleagues, and we started Nations Equipment Finance.
Saurin:And so that was a business that, you know, we ran for seven years. We sold it to solar, and I exited at that point. I still wanted to stay in the industry, but wanted to do things a little bit differently. Wanted to try to find new equity partnerships and give it a go again, but, you know, under sort of my my direct leadership this time because there's definitely some things that I wanted to do differently. And so here we are.
Saurin:That's kind of the story in a nutshell. But, you know, it's always sort of been in my blood to do something entrepreneurial, and that's what I keep striving to do.
Andrew:So let's go back, if you don't mind. So when you were scaling nations to 1,000,000,000 deployed in that seven years, obviously very impressive, what were the biggest challenges during that growth phase?
Saurin:Well, I think the biggest challenge is just you know, finding the right opportunities to invest in. You know, you're coming out of the financial crisis. It was actually a good time to start that business. Like, there were plenty of opportunities to deploy capital, But at the same time, you know, a lot of the businesses were, you know, they were hurting. Financials were still under you know, they were still in a recovery mode.
Saurin:A lot of them were in need of purchasing capital to purchasing equipment so that they could grow and turn their businesses around. But, you know, from an underwriting perspective, a lot of these opportunities were difficult to underwrite. And so the biggest challenge, I think, in scaling the business was just making sure we were doing the right type of deals. And making sure that we were not only investing with one eye on what the collateral values are, but also, you know, taking a look at the cash flows of the business. And I think a lot of that is some of the GE discipline as well.
Saurin:You know, we leveraged a lot of what we used at GE to run that business from a credit perspective. And some of those skills I still use today in MidCap. You know, those are sort of invaluable, but that was probably the biggest challenge. And then once we got the ball rolling, we got our name out there, you know, we started at that time, I can't recall, but, like, the independent equipment finance space was, you know, not as robust as it is today. We have so many players in the marketplace today in the large ticket equipment finance space.
Saurin:Back then, there weren't that many. And so we had to sort of market, make a name for ourselves. You know, we had a fairly large direct sales force that was calling on customers, CFOs particularly, trying to generate business. And, you know, that's really was was also fairly challenging. But, again, you know, like, we we took as much as we could from our GE experience, leveraged it in a more of a independent equipment finance setting, and that's how we kind of grew that business.
Saurin:And then, you know, in terms of, like, funding our liquidity, you know, the asset based securitization market was, you know, becoming a more favorable source of liquidity for equipment finance companies. And, you know, more large ticket equipment finance companies are taking advantage of that vehicle as a funding source. And so we were able to use that to not only leverage our existing line of credit, but then, you know, continue to grow the balance sheet by doing these ABS transactions. And I think at Nations, we did a total of three. And so that was also a great way for us to have enough liquidity capital, to go out and deploy in the marketplace.
Andrew:Thank you. And if someone's listening, and they're thinking about starting an equipment finance platform today, what's the one piece of advice you'd give them?
Saurin:Find the right equity partner, an equity partner that's patient, that's willing to allow you to develop your market niche, allow you to very clearly articulate what type of deals are you chasing after and why. And then, you know, trying to just, you know, be patient. And I would also say that you have to focus on profitability. You know, there's definitely situations out there where a lot of equity investors want you to grow the business as fast as you possibly can. They want their, you know, they're full of liquidity, so they want you to deploy that capital, which is great.
Saurin:I mean, it's nice to see that there's plenty of liquidity available, but I think you have to be very disciplined in your approach of deploying that capital. And so it's it's very easy to send the money out the door. It's very hard to protect those investments, manage the portfolio, handle delinquencies and defaults, work through recoveries. You know, the back end of the process is a lot more difficult than the front end of the process. And so you have to be very careful on the front end so you're not creating problems on the back end.
Saurin:That's my 2¢.
Andrew:Thank you. Thank you. So let's shift gears. Let's talk about credit discipline and growth mode. So obviously growth is exciting.
Andrew:It comes with risk. You've managed to balance aggressive targets with strong credit discipline. Let's dig into that. How do you balance the pressure for growth with maintaining prudent risk management?
Saurin:Yeah. So I think, again, that goes back to what I was saying. If you have patient equity and you're not being forced to deploy capital, I I think you can be very selective in the type of transactions that you look at. And I think you also have to have a very standardized credit filter that is, you know, takes a little emotion out of the game. You know?
Saurin:We have a you know, a very clear cut methodology for taking a look at transactions all the way from the prescreen stage, you know, through underwriting. And a lot of that centers around, you know, a balance between cash flow underwriting and collateral valuation. We need both pieces. You know, there's some people out there that only focus on the collateral value, and that's fine. And then there's other people out there that only focus on the cash flow, but we focus on both, and we need both.
Saurin:And so sometimes not every transaction is gonna fit that box, but we have to be willing to not compromise on our underwriting methodology and just be patient and wait for the transactions that meets the criteria in order for us to get it through our underwriting process. And so that might mean we're not gonna grow as fast, but then, you know, the hope is is that the theory is that if you are managing both sides of the equation, you have the best options when things don't go the right way. You have options to potentially, you know, restructure the business and restructure the cash flows of the business and the balance sheet. But then, you know, if that's not possible, you could still take your equipment and do something with that and make a recovery. So we wanna keep all the options open, you know, to us, and that's, you know, kind of front and center in our credit discipline when we're evaluating transactions.
Andrew:And how do you approach the, you know, portfolio diversification, either by industry, deal size, or other factors?
Saurin:Yeah. So I think the way that we've done it at MidCap is, you know, I learned a lot from doing the the three securitizations at Nations and understanding, you know, what's the exposure limits, what are concentration buckets, what are geography diversification tests, all these different metrics that the rating agencies actually used on the portfolios that we built at Nations. I kind of had that in my mindset when we were building the portfolio at MidCap. Although there was no sort of intention to do securitization right out of the gates, I just wanted to make sure we were building a portfolio that was pretty well diversified that, you know, if and when we approach the securitization market, like, everything would qualify because it was built with the pretense that, you know, this is how it's gonna be measured or tested. And so, yeah, occasionally, we'll have something that's either exposure is a little too high or some maybe a concentration or something like that somewhere else or maybe a slightly higher residual position on a transaction, a little one offs here or there.
Saurin:But for the most part, like, 95% of our portfolio is well diversified. You know, if somebody took a look at all of our statistics on the portfolio, they would, you know, come to the same conclusion that, you know, this is fairly well diverse with no concentrations in a particular industry or a particular equipment type. And so that's been a pretty good approach, which we're sort of managing through, you know, this has all been a great economy so far. Like, industry and every equipment class seems to have done good, but we're hoping that, you know, this portfolio also performs well in a down cycle. And I think that's where the diversification is going to come in play, is when we hit the down cycle, you know, we definitely want to make sure that, you know, we can manage through our issues if they arise.
Andrew:Thank you. And how do you manage tension between originators pushing for approvals and risk teams enforcing discipline?
Saurin:Well, I think you know, we are a small organization, and you know, a lot of like the pricing, the structure, those decisions, you know, are very centralized between myself and, you know, my credit officers. And, you know, we try not to we try to tell the sales folks that, look, The job is to go out there and find these transactions. You really don't have any authority to price these deals. You know? You have to sort of allow us to come in, examine the situation, and put together the best solution.
Saurin:Now I will tell you that, like, we are very sort of customer focused when it comes to, like, delivering customized solutions. So we're gonna take the time to sort of evaluate whether or not, you know, we can provide financing. And if we can't provide it, we're just gonna tell you straight up front that we can't do it. You know, we're not gonna, you know, we're not we're not in the business of sort of, like, proposing on transactions or even having our salespeople, like, stick their neck out for something that we can't deliver on. So I think we're trying to build that good rapport with our salespeople that they trust us, that like, you know, we're gonna if they find a deal that's a good deal, we're gonna figure out how to get that deal done.
Saurin:But we also want to avoid the situation where, you know, our sales organization is, you know, finding a bunch of transactions and and trying to make things stick that we're we're not gonna get done. Because I think that creates a lot of frustration. And I'm just trying to just avoid that frustration upfront by teaching our originations people what works and what doesn't work, and go and find the deals that have the best shot of working and making it through our underwriting process.
Andrew:Thank you. And as you talk about your sales team, let's dive into building high performance teams. And behind every successful platform is a strong team. You've built two. What's your secret?
Saurin:I think salespeople are the hardest people to find. They and I think it's becoming tougher and tougher to find really, really good salespeople that bring together, like, two, like, very unique skill sets. It's figuring out a way to get your foot in the door in customers. How to call, how to, you know, engage and open the door, but at the same time, have, like, the technical competency to sell a somewhat complicated product, you know, and and being able to take in all the information, synthesize it, and think creatively about how, you know, we might be able to best serve the customer with our products. So I would say that, you know, at Nations, for example, we had this strategy to have a very strong direct originations presence, but I felt that it was very much of a revolving door type position.
Saurin:We would try someone, bring them into the organization, let them run for six months, eight months or so to try to call and generate business. Ultimately, like, it was it sometimes it just ended in failure, and we had to separate. It just felt like it was a very high turnover position. So now in what we're doing here at MidCap is we're being more thoughtful about bringing on originators that have sort of proven proven experience, that they've done it for other organizations. They're coming in with the book of business.
Saurin:They're coming in with a strategy of how they call. And then, of course, we're sort of supplementing them with the technical component if they don't have it. But, you know, most of our direct originators have been doing this for a very long time, and they have developed that technical competency. And and, you know, it's been, you know, it's been a hard position to fill, but I'm very happy with the people that we have right now. And I'm always looking for good originators because I think that they're they're becoming it's becoming the most difficult position to to fill, I feel, in an independent large ticket equipment finance organization.
Andrew:So what's if you don't mind, can share the approach to recruiting and retaining top talents as, you know, like some of the originators that you talked about in such a competitive market?
Saurin:You have to have a very wide network, and you have to work through those networks to try to find, you know, the talent. And there are some recruiters out there that are very good and that we have used to help us find, you know, potential candidates. But then once those names have been brought to our attention, you know, because of the experience that I have in the room, we can backchannel pretty much anybody and figure out whether or not they're good or, you know, not someone that's gonna be a good fit for our team. And so it's all the more important to just, you know, have a really strong network of of trusted people that you could call on to really have a good feel for whether or not an individual is gonna be successful in your culture. So they they they these people that I'm talking to in the network, they have to understand what is the mid cap culture.
Saurin:Like, what is what is it that you're looking for? So, you know, when when you talk to them, they can they can actually give you an honest opinion of whether or not they feel like this would be a good cultural fit, as well as a good technical fit.
Andrew:That's a great segue into the next question I had, is how do you create a culture that blends that entrepreneurial energy with institutional discipline?
Saurin:Well, there is no red tape. I think the one good thing is that everybody does everything, you know, and that's the mentality. Think that that empowers people to feel like they have a seat at the table. They're involved in the decision making. There is no real hierarchy.
Saurin:I try to remove as much of the layers as possible and give everybody an opportunity to lead and and be heard. And I really do think that that's the culture. I'll also say that, you know, a majority of our staff are people that I have worked with for many years, and it doesn't they don't require any micromanaging. They don't require any handholding. They are they are individually driven people to, you know, do the right thing in a culture that we are familiar with.
Saurin:So I I often think, like, each person picks up where the other person leaves off, and it just sort of is like a passing the baton kind of field in the organization. It doesn't feel like, oh, you know, some person can't talk to somebody or there's these, you know, procedures and whatnot. And we're a small organization, you know, and so we sort of want to preserve that culture that makes everyone feel like they're real, like a part of the team, and that they're all marching toward this common goal. And regardless of what the task is at hand, someone's picking up the baton and running with it.
Andrew:Yeah, no, that's great. Here, we talk a lot about, we're a relay team, right? So when we cross the finish line, we're all going to celebrate the win. It's not a sprint, and whoever finishes first gets all the glory. How important was it for you to bring former Nations colleagues to MidCap?
Saurin:Oh, that was probably the reason why I I started MidCap in the first place was like, you know, I was only gonna start another equipment finance platform if I could work with people that I actually wanted to work with, you know, and for the long term. You know. And so, like, the the folks that I recruited from Nations to come join me at MidCap are all who I thought were the best and the brightest that we had at Nations, and all folks that I really enjoyed working with, like truly enjoyed working with. And I was like, this is great. If I could get these guys back together and we can go at, you know, building a large ticket equipment finance platform, this is gonna be fun.
Saurin:And I think that it's gonna be you know, there's not many many organizations I've worked with in the past that I could say that, like, it it was fun. You know? I I had a lot of great experiences and a lot of good mentorship and a lot of whatnot, but, like, MidCap in this iteration is is really an enjoyable experience, and that is primarily because I just really like the the the the guys that we have. And, you know, the trust factor is very high and that is another reason why, you know, the culture is so good. It's just, you know, we know each other very well.
Saurin:We know our capabilities. We know, you know, who to call for what. It just there's just that familiarity, which I think is terrific. And, you know, it wasn't until this year that I had to actually hire somebody who wasn't part of nation's network or GE network, for that example. And I think that, you know, I had to sort of sit back and think like, wow, okay, well, what's my evaluation process?
Saurin:Like, all the hires up until this point were pretty easy. Right? I mean, I knew them so well. It was like a no brainer. But now, you know, I've exhausted all of that opportunity.
Saurin:Where do we go from here? What's going to be my evaluation criteria for, you know, the new resources that we need to keep funding our growth? We're not going to be able to just go back to that network and continue to build out our team. We have to go outside now. So again, we're just trying to find people that fit that culture, and trying to find people that will work well with our existing team.
Saurin:And so far, we've been pretty lucky with the folks that we've hired.
Andrew:That's great. And can you share what lessons you may have learned from GE Capital's leadership development programs that might have influenced your approach?
Saurin:Yeah, I think one of the big things is risk taking. You know, one of the things I think that GE did a pretty good job with these leadership programs is that they allowed young people to take risks and fail and be okay with that. And so I had, you know, opportunities to be a manager in a union shop. You know, that's mean, there are plenty of failures. I mean, every day was a failure almost.
Saurin:Every conversation I had could have been viewed as a failure. It's just one of those things where you learn very quickly, like, you know, how the world really works. And I learned a lot through failure. And I think that's one of the great things that I would say the other thing is like, you know, they supplemented you with a lot of leadership training. They put you together with cohorts of your peers throughout the company, which was really useful.
Saurin:You could always pick up the phone and call somebody about whatever you may have been experiencing in a particular business. There was a lot of, you know, case study presentations and a lot of best practice sharing and a lot of, you know, initiatives that, like Six Sigma Quality and things like that that I was involved with, that were great, like, you know, opportunities to get in front of management, get in front of senior leadership, do meaningful projects that deliver to the bottom line. You know, all of these things are, you know, they all contribute to good leadership, you know. And each and every opportunity since I left GE, I have relied on some of the things that I learned, you know, in my ten years at GE and probably still doing it to date today even though, like, you know, none of that exists anymore, which is sad. But, like, you know, it was terrific.
Andrew:Thank you. So let's shift to the big picture, how MidCap positions itself in today's market. What's MidCap's strategy for competing in the current equipment finance landscape?
Saurin:So, you know, look, we are we are a large ticket company, large ticket equipment finance company. We're focused on deals that are between, you know, call it, 5 and $15,000,000 on book. We could look at deals that are bigger than that. We have a capital markets team that can help us syndicate larger transactions. So we cover this gamut that I would say that, you know, a lot of other independent large ticket equipment finance companies cover as well.
Saurin:I think that some differences in in the way that we approach the market, a lot of our customers, they do not need to be backed by a private equity sponsor. Although I'd like to have companies that are, you know, multiple 100,000,000 in sales and 50 plus million in EBITDA and very stable companies, it's very hard for us to compete in directly in that marketplace because I think that those deals are too easy and too straightforward that everybody competes in those deals, and we are definitely not the lowest cost of of of financing out there, which is fine. Like I said, this all goes back to your equity base. Like, how are you funded? How patient are you?
Saurin:What type of opportunities are you looking for? Can you wait around and find a good one that meets, you know, all your criterias? And so I think we let some of the bigger guys compete against each other, and we sort of see what falls through the cracks, and we we like to be in that position. And we like to work on transactions that have some sort of uniqueness that make them fall out of some of our competitors' credit boxes. And then I would say the other thing is that, you know, MidCap Business Credit, our sister company, is a working capital lender.
Saurin:I think one of one of the the competitive advantages that we have is that we can go into some tougher credits, and we can pitch both working capital alongside equipment finance and take down, you know, a good chunk of a company's capital structure. And that's allowing us to do deals that might be smaller in size than we would if we were doing a solo equipment finance type transaction. That's been a pretty good competitive advantage for us, and and it's taken a while to develop. But I would say that we have, you know, a handful of those opportunities on our portfolio in a pretty meaningful manner. And so that's kind of how MidCap is positioned.
Saurin:We love to look at, you know, deals that start at 5,000,000 with the opportunity to potentially grow that exposure to 10,000,000 or more. You know? Again, like I said, when we go back to the underwriting discipline, we are taking a lot of time to dive into the company's financials. We're meeting with all of our clients face to face, really trying to understand what makes their business work, what their competitive positioning is in the marketplace, do they have a reason to exist, all those normal credit questions that you ask. But then also, like, you know, what what's the equipment that we're financing?
Saurin:Are we are we able to get into a structure that either protects us in bankruptcy or protects us, you know, in a liquidation situation? What do we do? So we have to find those opportunities. There it's not like, you know, I I would say that our business is not a very flow business. These opportunities, they come and they go.
Saurin:So that's kind of the way it's been for us since we started this business, and that's how I think it's going to continue. And hopefully, the end of the day, we build a high quality portfolio with relatively high yield for the amount of risk that's in the portfolio. So I would say that on a risk adjusted return perspective, the mid cap portfolio is definitely on the better end of the spectrum.
Andrew:Great, thank you. And what role does technology play in origination, underwriting, and portfolio management for you at MidCap?
Saurin:I think on the front end, we do leverage some technology like, you know, obviously Salesforce and ZoomInfo and Westlaw for UCC searches and stuff like that. So there are definitely some software tools that our our front end of the business uses to help them originate transactions and develop a little bit of a view of a customer while they're making a call and and to provide that sort of, like, you know, educated perspective when they're when they're making a call. In terms of underwriting, we I mean, outside of, you know you know, some some sort of third party softwares that we use for possibly asset valuation, possibly, you know, like, suits and judgments and, you know, looking at negative news and and and all that kind of stuff. We have some software tools that we use for that. Our operating system is a pretty robust leasing platform that's in the cloud, very straightforward, provides a lot of automation.
Saurin:So we had the opportunity to basically, you know, with a clean business that had no established business practices, we were actually able to do a reverse where we just took the off the shelf software, we and just designed our business practices around the software. So there was very little customization to the software utility, which is perfect because now we you know, that that's the most reliable, you know, software in terms of its testing and robustness. We're not really coming across any customized, you know, bugs or anything like that that we put into the system, you know. So that's worked out pretty well for us. But it's great.
Saurin:We have automated billing and collecting and, you know, a lot of portfolio reporting to our banks and things like that is all automated. So that's been that's been terrific. You know, we use one piece of technology for inspections called TruePic, which is kind of interesting. Maybe you're familiar with it. But it's like a digital inspection utility.
Saurin:It's kind of neat. You know, we we used to hire, you know, us, you know, firms to go out and physically do these inspections. But now, you know, we just send the text message over to our clients, and they they do their own inspections of the assets, and the technology does some fraud detection. They do some geolocation, you know, and they do they have some AI built into what they're doing to highlight, you know you know, any sort of nefarious activities with our inspections. So that all seems to work pretty good from a technology perspective.
Saurin:That's kind of what we're using in our business.
Andrew:Thank you. No, we're definitely familiar with TruePic, and just the authenticity of the photographs, the metadata, making sure that it's a real picture of your collateral. And the geo fencing, obviously you get the time, date, stamp, and the address, so it verifies where the collateral is located too. All great information to have. Looking ahead, what opportunities and challenges do you see for the industry over the next three to five years?
Saurin:Well, I think in the near term we're going to have some sort of declining cycle. And I think a lot of these newcomers, they're gonna need to manage through a down cycle. And I know that a lot of the leadership at these companies have been through cycles. It's just a matter of how do their portfolios hold up in cycles. And, you know, that goes for my portfolio too.
Saurin:So I think we're gonna have to manage that in the near term. I don't really know how much more rate compression we're gonna get. We'll we'll have to see. You know, I think we're sort of maybe sort of the end of end of end of interest rates declining. And, you know, now we're gonna have to probably really be even more careful on the credit side to make sure that we are investing in the right type of credits that can that can sort of withstand a downturn.
Saurin:That probably also means that we're not going to get very aggressive on our advances against the equipment valuations. You know? So that's what that's kind of where I see the near term going. And, you know, three to five years out, you know, I think that, you know, equipment finance is one of these industries that, you know, is always around in all cycles. And there's always a need for it.
Saurin:And, you know, I think more and more companies are figuring out how to leverage large ticket equipment finance in their capital structures, which is neat. You know? So I think that that'll also be more and more prevalent. I think the asset based securitization market is providing a lot of liquidity. I think a lot of private credit is coming into equipment finance, they're providing a lot of liquidity.
Saurin:So all in all, is just creating more awareness of how equipment finance can be deployed, you know, versus traditional sort of cash flow loans and term loans and all these sub debt mezzanine. It's kind of traditional methods that, you know, maybe private equity sponsors relied on to finance their businesses. Equipment finance now can be like a pretty meaningful piece of the equation. And so I see continued growth in that space.
Andrew:Great. Thank you. Is there anything that you want to talk about that we haven't already discussed?
Saurin:You know, maybe I'd like to get maybe a little bit of your perspective on the recovery side equipment. Know, I mean, although we have not had too many issues in our portfolio where we'd had to take equipment and get it back and then take it to auction and sort of liquidate it, I mean, I'm a little nervous that, you know, we went through this period where, you know, valuations of equipment was very high, supply and demand was all screwed up. And so we were having to finance into situations where I think everybody knew that the value of the equipment was artificially high. I think maybe I don't know. What's your perspective on, you know, are we sort of normalizing a bit now where people are becoming a little bit more real about what the true price is for used equipment in the marketplace?
Saurin:Where do you see things going from here in terms of delinquencies and defaults? Are you seeing more of that activity? You know? Because I think that would be kinda key insight for not only me, but other equipment finance lenders out there to know, you know, what's going on in that market, you know, right now.
Andrew:No. Thank you. I, you know, I can probably speak more to the what we're seeing on the default side in the various different industries, versus more of what the asset values are, because we're not in the remarketing side of the business. But we've seen things somewhat slow down on transportation over the road, transportation assets. Year over year, we've seen a slight drop off in the number of placements, but we've seen an increase in the number of assets.
Andrew:We're starting to see larger fleets, so that's impacted some of the volumes that we've seen. From the construction side, we've seen a slight uptick in some construction and ag recovery requests, And then everything associated with the recovery, the cost of transporting equipment is very expensive, based on the fact that during the pandemic, a lot of companies went out of business, they didn't survive. So there's only so many companies out there that either do recoveries, or they're hauling equipment, or doing logistics. Add increased cost of insurance, fuel, things like that, it's made it extremely expensive to move assets. So a lot of companies are trying to bake that stuff into their pricing when they're looking to finance equipment.
Andrew:I have conversations with clients all the time, especially if they're getting into a new industry that they're not familiar with, and they are just looking to try to get some perspective on what are some of the costs associated with If you've done these recoveries before, what are some of the costs associated with recovering these assets? We're hoping we don't have to ever use you, but in the event we do, can you give us some insights on that? Because we need to of bake that into our costs should something bad happen in the portfolio.
Saurin:That's interesting. I think that you know, we also have a heightened focus now on understanding sort of like net recovery. You know, I think that that's important for us is to make sure we have a full grasp of, you know, net recovery and then structuring deals that are more on a, like, a net orderly liquidation value basis as opposed to either, you know, a a gross OLV or even, you know, even like a fair market value. And so some of those, you know, I think that's also just, you know, when the market is very hot, I think I've seen more stretching in the in the advance rates and and actually, you know, changes or step ups in the valuation that you're willing to lend against, and then it works its way backwards when the cycle goes down. Everybody sort of tightens up, and then they're like, hey.
Saurin:We're not doing a 100% purchase price anymore. We need more cushion. We're not doing gross OLV anymore because the recovery costs are way too high. So, you know, this is sort of like the this is the ebbs and flows of kind of what I'm seeing in the marketplace.
Andrew:Yeah. You know, we just to go back, we even have some clients that are looking for estimates on costs before they'll even assign a large account over just to do a cost benefit analysis, just to even see if it even makes sense to pursue the equipment based on comps and things like that. I mean, you have all the platforms that are out there, so if it's a truck, trailer, piece of construction, or ag equipment, those are easy to find online. You can look at similar units that have sold, and look at hours and mileage, and kind of get an idea what you could get for that piece of equipment. But it's really the unique audiovideo, some medical, it's things that aren't normal assets that you see that are available where they report those sales online.
Andrew:So it's really hard to get a gauge what it's going to get at an auction. So sometimes just getting an understanding on what it's going to cost to pick it up, what it's going to cost to ship, or even to remove it. Some equipment, it's inside of a building, it's hardwired, it's HVAC, it's plumbing perhaps, and you've got to hire a tech specialist to come in there to remove that equipment. Sometimes they'll build walls around it, and then you've to bring in contractors, you've to take walls down. So it's very complex, so they're looking at just what's it going to cost to retrieve it, and is it even worth it?
Andrew:Sometimes it's not even worth pursuing, charge it off, and you just treat it like a collection account at that point, and try to get as much cash as you can from that specific customer.
Saurin:Yeah, very true. Very true. It's good to understand, like, don't know, think unless you've been in these situations where you've had to repossess something, and then you figure out like, wow, okay, there's a lot more involved in the process than what I thought originally. And, you know, you can't really appreciate, you know, just storage and security and insurance and, like, all these different things, you know, like, where where are you gonna take everything? Where are gonna house it?
Saurin:You know? How long are you gonna keep it there? You know? And and the clock keeps ticking on your recovery. And every day, your cushion, whatever cushion you might have, just eating into that cushion, you know.
Saurin:So, yeah, I agree. It's like this is a very interesting interesting perspective to have. And I think, you know, having been through a cycle where you've had to do some recoveries, you really don't gain, like, the full appreciation for nowadays, like, how expensive things could be with labor and all the material costs and everything higher than what they were, you know, in the last cycle. It's going to be tough. It's going be expensive.
Andrew:Yeah. Even insurance, you have wrongful repo, errors in admission. A company like us, we have an online system for our clients, so they can log in and check the status of their accounts in real time. With that ease and accessibility comes We have to protect that data, right? We're SOC two, So SOC two we go through annual compliance and risk assessment questionnaires just to ensure that our clients' data is safe and secure in our infrastructure, but it's just the cost of those things alone, and then like I said, the wrongful repo insurance, and all the other things that tie into it, the licensing requirements.
Andrew:A lot of clients don't know that there's over a dozen states in the country that you're required to use a licensed repossession agent, even if it's a voluntary. You can't just hire a transporter to go pick up the asset, otherwise you could be exposing yourself to a wrongful repo lawsuit. States like Florida, it's a first offense for doing a wrongful repo is a misdemeanor. Second offense is a felony. You lose your ability to collect a deficiency balance.
Andrew:You're also going to get fined. Anybody involved in that transaction can get fined. So there's state associates, there's states that are starting to take repossession that industry more seriously, and they're trying to clean it up, which is a great thing, but it comes with a much It's more expensive because you're limited to who you can use. Some states, there's only a half a dozen to a dozen agents throughout the whole state. So it's not like somebody's right next door, they roll out a bed, and they're going be able to go pick up a piece of equipment.
Andrew:They may have to drive 100 miles just to go check an address, and see if the asset's even there, just because of the licensing, the requirements. But yeah, it all factors into the costs associated with it. Again, time is money, so the sooner a client decides they want to get that asset back, obviously more you're going to save that asset from depreciating, right? It depreciates every It's not being paid for, right? So the quicker the banks can decide that they want it back, it improves their chances of A, getting it back quicker, and B, getting it back while it's still in decent condition.
Andrew:But no, those are great questions. Any other questions?
Saurin:No, I think this was great. You know, thanks for inviting me on your podcast. I like being able to sort of talk through these issues, and, you know, look forward to, you know, maybe listening to some of your other podcasts, and, you know, just learning from other people in our industry, how things are getting done, and, you know, so thanks again for the opportunity.
Andrew:You're welcome. This has been a fantastic conversation. Your insights on building platforms, managing credit, discipline, and leading teams in a competitive market are invaluable. I especially appreciate the perspective you shared on balancing entrepreneurial energy with institutional discipline. It's something every leader in this space can learn from.
Andrew:For our listeners, be sure to follow Surin and his team to keep up with their continued growth and market leadership. Thank you for being part of ACS Portfolio Perspective. I'm Andrew Pace. I appreciate everyone who tuned in today. Be sure to subscribe and catch future episodes as we explore the people and perspectives shaping the equipment finance industry.
Andrew:Until next time, thank you for listening.