Asset Alliance Group’s three-way deal against the backdrop of pandemic

According to some observers, Arbuthnot’s move into commercial vehicle financing – considered a departure from traditional private and commercial banking territory – is explained by their strategy of diversifying into specialist commercial finance, consistent with them starting an invoice discounting business, Arbuthnot Commercial Asset Based Lending and acquiring an asset finance business, Renaissance Asset Finance. 

In a statement, the bank said: “The third-party funding of Asset Alliance Group at completion, which is associated with the assets available for lease and includes a revolving credit facility of approximately £140m, is expected to be refinanced by Arbuthnot soon after the completion date. 

“Asset Alliance Group had adjusted net assets of £8.1m as at 31 August 2020.  

“The company reported an EBITDA of approximately £7.2m for 2019 and is expecting £3.2m for the same measure in 2020. This is anticipated to increase to £5.5m in 2021. 

“The [Arbuthnot Banking] Group anticipates Asset Alliance Group transaction costs of approximately £800,000 will be recognised in its 2020 trading results.” 

But what is AAG’s raison d'etre, how did this deal come about and what next for the company? 

Willie Paterson, who has almost 30 years’ experience working for UK banks and leasing businesses, set up the business as a specialist lessor for commercial vehicles in the wake of the 2008 banking crisis. 

He recalls that soon after setting up the business, the company noticed a growth in demand from customers for suitable funding due to the high cost of bank debt for SMEs as well as the increased collateral requirements, thanks to “the lingering effects of the credit crunch.” 

In 2011, with debt raising and investment advice from Deloitte, the company branched out as a truck and trailer finance provider.  

“We were about a year into that process when Cabot Square Capital came on as a willing investor,” he recalls.   

Cabot – a provider of investment capital for SMEs with a focus on businesses in financial services, property and infrastructure – backed AAG with a £25m fund, of which only £19m was drawn down. There was also a £4m investment by the AAG management board, including Paterson.  

“From about 2012, we pursued a five-year acquisition strategy that saw us buy five  different businesses,” he says. 

Pre-Covid-19, AAG was doing around £90m in turnover, with much of its net profit being reinvested back into the company, “as our model was based on profits at the first churn,” meaning profits were realised only when assets were sold at market value at the end of the leasing cycle, he says. 

In Cabot, Asset Alliance had a solid PE investor “but if there’s one thing you need with a PE investor, it is an exit strategy” which was bound to happen when Cabot reached its stated investment ceiling, “which we very quickly came to because we were very high growth for some time,” he says.   

The work on Cabot’s exit strategy, which began in Q3 2019 was largely completed by May 2020. At that point “we were ready to bring our agreed strategy to market when Covid-19 happened,” he recalls.  

Along with the rest of the country, Paterson believed the pandemic would be over in three or four months. “We, along with Cabot, decided to hold fire, waiting for a healthy market to return” but somewhere along the road the company directors had a change of heart about the kind of funding partnership it wanted going into the pandemic.  

As a former executive with FTSE100 bank Alliance & Leicester, Paterson says he’s fully aware of “the uncertainties” of dealing with traditional banks and bank-owned lessors “and what is an undoubted requirement for banks to retrench and regroup” during a crisis. 

“We rethought our plan and decided, rather than raise capital through the sale of shares, we would seek out challenger banks for discussions. From a short list of about five, we very quickly agreed on exclusivity with Arbuthnot Latham in about three months.” 

Before the acquisition by Arbuthnot, Paterson says the majority of AAG’s lending was residual value-led, meaning the company did very little hire purchase and finance lease business.  

“With Arbuthnot we will be doing a more blended business, and the challenge for me will be, how do I plan my residual value exposures and how to I hedge that position given the new uncertainties, new greener technologies?” Paterson asks rhetorically. 

AAG’s five-year growth strategy will see the company grow its fleet from just under 5,000 assets today to 8,000 in three years, accompanied by annual lending of between £350m (in three years) to £500m (in five years), Paterson said.   

“I believe there is an opportunity for us to flourish over the next few years now that we have certainty of funding that is far more competitive than what we had previously, so I think that puts Asset Alliance Group in an extremely strong position.”