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  • Leasing industry consolidation isn’t flattening off: It might have only just begun Posted on 28 August 2018

    In a speech last week in the US, Andy Haldane, chief economist of the Bank of England, described how industry concentration ratios - the share of sales in a sector that’s taken by the largest suppliers - have increased over the past ten years in the US and (to a lesser extent) the UK, but have now flattened off.

    That’s the case across a broad range of sectors, Haldane showed, but is particularly marked in the banking sector, as shown in the chart below taken from speech.

    Source: Bank of England

    Haldene’s speech was about the global role of ‘superstar’ globally powerful firms such as Google and Amazon, but his speech raises the question of whether higher concentration levels are an inevitable outcome of the economies of scale and scope available to the largest, technology-enabled, firms.

    Concentration levels in the UK asset finance industry seem well-below those for general banking. According to the 2018 edition of the Asset Finance 50 (which I produce with Asset Finance International) the ten largest lessors held 58% of the UK business equipment and fleet leasing market, up from 57% in 2017 and 54% in 2016. Even with this increased in concentration, the top five firms held only 38% of total market volume last year, considerably lower than the corresponding figure for general banking of around 48%.

    There are currently 50 to 60 significant firms in the market, if we measure this by firms having book values of £50m or above. The number of active firms has increased in recent years, with a stream of new entrants in recent years competing for SME lending introductions from brokers, and just a few leavers.

    The asset finance broker channel itself remains highly diverse and unconcentrated. Notwithstanding some high-profile acquisitions of top-twenty firms, including by several investment firms with deep knowledge of the leasing sector, at least 80% of broker channel volume remains spread fairly evenly across over 500 smaller firms (see my website, www.assetfinance500.uk). Further consolidation seems be slowing as the firms are too small, and too reliant on one or two key people, to make them viable acquisitions targets.

    This diverse and competitive asset finance market might seem a good thing for customers. Reduced competition is generally associated with higher margins (and often prices) - although Haldene presented data showing that net interest margins for banks have actually remained broadly flat over the past ten years, suggesting this relationship might not be so clear-cut in financial services.

    On the other hand, higher concentration can deliver benefits to consumers. Larger firms find it easier to invest in technology to achieve operational efficiency, to attract and retain talented staff, and to attract external investment - all important factors in delivering the best value to lessees.  

    2018 hasn’t so far been a year of big industry consolidation announcements. Hitachi bought Franchise Finance, whilst LDF was sold to US investment firm White Oak. Construction Plant Finance was formed, a joint venture between SKM Asset Finance Ltd and Corporate Asset Solutions. Does this suggest the rate of increasing concentration is flattening off, as Haldane observed to be the case across many economic sectors? 

    That seems unlikely. Asset finance is still relatively unconcentrated, whilst growing use of increasingly-expensive technology together with the higher burden of regulatory compliance increases the attractiveness of consolidation. Whether that will come through growth of existing firms, more acquisitions, or the start of a round of mergers or joint ventures, it doesn’t feel like the leasing industry will look the same way in ten years’ time.

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