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Private Equity Firms Exit Auto Finance Space

Private equity firms that have recently invested in the subprime auto sector are struggling to remain profitable and are exiting these markets in the face of growing challenges.


Private equity firms are trying to leave the auto finance space, but Bloomberg reports that they are having difficulty locating buyers for the loans. There has been more than $3 billion invested in non-bank auto loan originators by private equity since 2010, according to a report by investment bank Colonnade Advisors. Now that delinquencies are up in that sector, many of these concerns are struggling and looking to exit the market.

Private equity firms are beginning to exit the auto finance space.

The Growth of Auto Lending by Private Equity Firms

Once the economy recovered after this country's latest financial crisis, many private equity firms saw a unique opportunity in lending to subprime markets. Families who had suffered hardships during the Great Recession had recovered but came through the ordeal with damaged credit. 

Lending to subprime markets worked for a short period as our nation's appetite for new vehicles was being satisfied. However, delinquencies are up, and that's cause for concern for these lenders who now appear to be stuck.

Struggles Mount for Private Equity Firms in the Auto Finance Space

Private equity organizations borrow money from big banks and then compete for loan business from major car dealers and independents. A lender would set their margin according to the spread of the interest they could charge and their funding costs, minus operating expenses and estimated losses from delinquencies. Some loans were bundled into securities or sold back to banks to raise additional capital.

Now that delinquencies have risen above the estimates and auto sales have waned, margins have shrunk considerably, and these private equity firms are struggling. According to AutoFinanceNews, non-bank lenders are experiencing loan delinquency rates that are near pre-recession levels. As of September, delinquencies for these organizations are 9.7% versus an average rate of just 4.4% for banks and credit unions.

One example is Exeter, who is licensed in all 50 states and works with approximately 10,000 auto dealers. The firm was unprofitable through 2015 and was finally able to turn a profit over the past two years and looks to remain profitable in 2018.

Another example is the lender Flagship that has a $3 billion loan portfolio. The company's delinquencies and write-offs were so high last year that they reported a loss, have had to tighten their underwriting standards, and have cut back on originations and expect to be profitable this year.

A whole loan broker can help lenders and private equity firms exit markets and optimize portfolios.

Partner With a Loan Sale Advisor to Achieve the Best Results

Whether you are a private equity firm that is seeking to exit the auto finance space or are a bank or other lender looking to optimize your loan portfolio, Garnet Capital can help. Our loan sale advisory service assist your organization in achieving its goals. Buy and sell loans in different asset classes at the best possible price to minimize risk and maximize returns for optimized results over the short and long term. 

Register for our online portfolio auction system to get started using our valuable services now.