In part one, we took a look at some of the reasons why now is a great time to get your Capital Markets Group in gear. Here, we’ll drill into buying vs. direct origination, and consider the advantages buying has to offer. 

No denying that buy shops have had a more difficult time getting capital allocation this past year. The natural reaction by most bank leasing companies earlier in the year was to de-emphasize buying 3rd party paper and allocate more capital to meeting existing customer needs. While this might have made sense at the time, I believe this strategy backfired somewhat because going in and out of the market leads to less productivity over the long haul from your Buy Desk. I also believe a professional Buy Desk plays a critical role in building a diversified pool of assets efficiently and helps maximize the earnings power of your portfolio. 

Direct origination is down across the board this year due to significantly lower levels of capital expenditures. Fewer deals available on the direct side for better credits put downward pressure on pricing as the year progressed as more dogs chase the fewer bones. A Buy Desk has the ability to see a lot of deals and often times generate higher weighted average spreads than Direct Origination. It seems counterintuitive that assets accumulated in the “wholesale” market can generate higher spreads than assets originated in “retail” market, but it’s true. I don’t believe this is because buyers are better salespeople than direct originators. No, this phenomenon is driven by three reasons: 

a) Buy Desks see exponentially more deals than Direct Originators and if you have a larger pool of deals to choose from, higher spreads will result

b) Buying aged deals out of a portfolio often times offer higher spreads than flow through deals

c) Larger deals requiring multiple syndication partners are often priced higher in order to clear the market compared to a one-off $3 million deal that several direct originators are pursuing. 

There are a several other important contributions an effective Buy Desk offers an organization. The first is diversification. How many banks have been negatively impacted because of too much concentration in certain geographic regions or types of collateral? Buying into credits located outside of your normal footprint utilizing the most objective underwriting standards, not subject to customer relationship pressures, offers the benefits of diversification. 

Another benefit is that you gain valuable market knowledge by having an active Buy Desk. There is no better way to assess current market conditions than to see what the market is offering for sale. This allows leasing company management to effectively communicate real life market knowledge to their team and their superiors. It’s also my experience that assets that are purchased are often the best candidates for syndication later. That’s because they are typically priced, structured, and documented in manner that makes them more “liquid.” Also, there is less attachment to those assets because there isn’t a strategic customer relationship involved. 

I mentioned earlier you don’t need to have both buy and sell capabilities, but I’m seeing more of an interest by the major players in our industry to establish a strong reciprocal buy/sell relationship with scorecards keeping the tally on buy and sell volume between the parties. Hopefully I’ve made a strong case for you to consider starting a Capital Markets Group, or to beef up your existing group, to effectively meet the challenges we face as an industry. The good news is that due to recent consolidations in our industry, there may be some great talent available right now.