The entrepreneurial endeavors of seasoned veterans Steve Hudson and Bradley Nullmeyer have captured the equipment finance industry’s attention for nearly three decades. In 2007, the industry took notice as the pair reunited to form Element Financial. As Nullmeyer, Element’s president notes, things started to “heat up” in late 2011 when the two witnessed a growing demand for equipment as North America began to re-tool itself post-recession.

In the following exclusive interview, Nullmeyer explains the reasoning behind Element’s acquisitions, its rational and durable platform powered by a steady stream of pre-committed funding from its partnerships with insurance companies, and the company’s holistic approach to the North American marketplace. As importantly, Nullmeyer makes the point that Element Financial is not a replay of Newcourt Credit Group.

Equipment Finance Advisor:  While Element Financial is based in Canada, we note that many of the companies acquired have been based in the United States. Can you explain the rationale behind this?

Bradley Nullmeyer:  We saw an opportunity that was occurring in the re-equipping of North America and at the same time, we were aware of  what was happening with certain competitors. GE was experiencing a downsizing of its capital group and CIT had been through bankruptcy and had taken TARP money, which meant they couldn’t lend in Canada. Here in Canada, we ended up with a marketplace that was dominated by the banks … there wasn’t an independent equipment leasing company here and we took that opportunity to enter the market.

Prior to 2007 and since I had left CIT and Tyco, I was running some venture capital businesses but was never really having any fun … it was the right time for me to join Steve as president of Element Financial, that he and others had founded in 2007and we began to formulate what we wanted the company to be.  Quite simply, what we wanted was to be in partnership with manufacturers as they took advantage of the new equipment market boom.

The strategy of attaching oneself to a manufacturer and that seeks life cycle management and total end-customer management can be a very successful one for a finance company. As a case in point, one of our startup ventures at CIT was Snap-On Credit and it’s still a $1.2 billion finance within  its parent. What that means for Element today is we don’t have a branch network or an 800 number, but if you go into a Bobcat dealer and acquire a Bobcat, we’ll be there as Bobcat Finance. From that point to the very end of the relationship with the end customer, which can be a number of multiple cycles, we will be in complete partnership with our manufacturer. That means you won’t see Element selling things at auction. It’s a strategy that has withstood the test of time as an efficient way to finance equipment acquisitions.

In the end, we have two partners: the manufacturer and the insurance companies that seek investment opportunities. I can go to those companies and say, “Here’s Bobcat, here are their credit parameters, the interest rate, the loss profile” and so forth. It allows me to “prefund” all of those programs through our life insurance partners with long term funding commitments. And we do this very specifically, because if you get into the commercial market and commercial paper dries up as it did during the Russian Crisis, your costs go up and you get into trouble. That’s what happened at Newcourt and why we ultimately wound up being acquired by CIT.

Equipment Finance Advisor:  What are the key differences between today’s Element Financial and Newcourt Credit?

Nullmeyer: There are two major differences. For one, we were 23 years old then and today we’re 53 ... older but wiser with more maturity and experience. The other difference is we are focused on only four business units. They are: fleet management operations, vendor finance, aviation finance and our most recently announced unit, railcar finance, which we announced late last year. This partnership opportunity arose from a relationship we had in our past life with Trinity Industries that manufactures railcars.

In our previous life we had 14 business units. Today, those four business units are what we are all about and we won’t be in any others. Each of our acquisitions has been strategic to build a solid platform in those business verticals.  If you look at fleet management as an example, we began with acquiring TLSI, a 35-year old company and then we added GE Fleet to it last year. Most recently, we just closed on PHH Arval, a company founded in 1946 and the first fleet company in the world

If you look at PHH Arval acquisition, we have a company that has been in business over 60 years that has a great system for forward-facing customer support. This is a true North American fleet management acquisition and we love this business because for one, it’s very sticky with over 98% retention rates. It’s a business with high fee-based income, which we also like. There isn’t just the financing component, there’s a fee-based service component as well. More and more customers like this because we can provide things like tax reporting or telematics that tell them when their driver is driving too fast and the like. And, as they look at green cars, we can take a client through the steps in determining the total cost of ownership over a long period of time through our consulting expertise.

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It’s an endeavor we had been chasing for nearly two years and it gives us $4.5 billion in assets … it’s  a steady stream of cornerstone business from which we can build our other units in the other verticals I mentioned.

Equipment Finance Advisor:  How do you respond to those who hold the view that Element’s growth since 2011 has been too rapid?

Nullmeyer:  When people look at our growth rate and say that rapid growth spells disaster for a finance company, I certainly agree if you just have an 800 line that says “Bring us your transactions and we’ll try to give you the best deal out there and we’ll approve all of your credits.” One the other hand, it doesn’t when you’ve acquired a company that’s been around since 1946 and you’ve taken on their policies, their procedures, their governance and in essence, their customer base. PHH is a business that’s experience less than three basis points loss over the last three cycles.

Our CoActiv acquisition in the U.S. that we bought from Marubeni in late 2012 was specifically acquired to give Element a North American vendor platform. It was a company that originated about $220 million in volume with well-established vendors when we acquired it. We took that platform and took the  vendor business up to $380 million last year and we’re looking something in the neighborhood of $750 million this year. All of this has been accomplished with the same people, the same processes and the same manufacturer relationships.

We don’t just buy assets or acquisitions and let them wind down … that doesn’t do anything for the business. We buy them for the platform and the ongoing relationships. That has been an absolute priority in each of those verticals. You will never see us do an acquisition that isn’t accretive to our shareholders or that our funding partners don’t like. They will all fit into one of the four verticals and will bring strong management expertise with them. 

Equipment Finance Advisor:  What is Element’s outlook for the equipment leasing and finance marketplace going forward for both Canada and the United States?

Nullmeyer: To begin with, we view North America as one marketplace and we consider an asset to be exactly the same whether it’s in Wisconsin, Saskatchewan, Montreal or Atlanta. Steve and I wanted a North American platform and that’s exactly what we have. Given the difference in the size of our two countries, we factor in that there will always be a 10:1 ratio in financing. Using Bobcat as an example, we will just naturally have ten times more business in the U.S. as we do in Canada, but we are indifferent to that as long as we service our partners. Today our asset base is about 50/50 and it will start to move up a little more in the U.S., but only because of the relative sizes of the two marketplaces.

When all is said and done, for us it’s a very homogeneous market and manufacturers will do business across North America seamlessly and that’s exactly what we offer them.

Equipment Finance Advisor:  In closing, is there anything else you would like our readers to know?

Nullmeyer:  I think the whole story is we saw an opportunity in the marketplace to re-equip and retool North America and at the same time, build a very solid steady company that brings good long term value to our shareholders. We’ve done it before with the management team and with our narrow focus and skilled management ability; I’m more than confident that we can do it again.

Whether its life insurance companies, banks or pension funds, there continues to be a very substantial need for yield-enhanced paper. At Element, we can meet that need by packaging the transactions for any of our businesses … we can give them some yield enhancement because we are out on the street originating the deals.

Our single biggest risk as an independent company is capital market disruption, which we have mitigated by having one, two and three-year commitments in pre-committed funding from our life insurers and bank partners.  We don’t take currency risks across countries and as I said earlier, we’re very focused on only four verticals.

We feel really good about our flight path, we think the platform is built and we have equity in place … now we’re looking for substantial growth in North America.