A new, well-capitalized company is hoping to help general managers looking to break into ownership or dealers intent on growth catapult over automotive retail’s barriers to entry through a unique equity investment strategy.
Called Capital Automotive Financial (CAF), the firm is led by industry veteran Richard Kotzen in partnership with Capital Automotive Real Estate Services and anchored by Two Sigma Private Investments.
The goal is to deploy long-term equity capital solutions in the U.S. and Canada to allow dealers a chance to develop platforms or diversify groups while positioning CAF as a “one-stop-shop” for equity, debt and real estate financing solutions.
Kotzen, who boasts over 30 years in automotive and billions of dollars in mergers and acquisitions transactions, told Canadian AutoWorld CAF will be unique because of how it has structured its capital.
“We can be very long-term. This is not like private equity where we need to turn the capital over in a really short period of time. We can stay with our dealer partner for an extended period of time if they want,” he said.
Also adding to its value proposition is the fact CAF will give dealers the contractual right to buy them out at fair market value.
“They can begin to buy us out right from the beginning. Once they bring it down to a level where a traditional finance source makes sense for the remaining purchase, they’ll have the right to buy us out,” he added.
CAF said for younger car dealers, this is truly a “dealer development or platform development program.”
Though official numbers remain unknown, anecdotal evidence certainly suggests the mergers and acquisitions market in Canada and the U.S. is very active.
Ownership consolidation has accelerated thanks largely to a combination of factors including expensive factory demands, cost of ownership, record new car sales, an aging dealer network and the emergence of massive dealership groups.
With many dealers looking to get out ahead of changes in federal tax rules that take effect in 2017, CAF is hoping the timing is perfect for younger entrepreneurs to grow.
“The issue will be finding the right leadership that understands the partnership structure. They have to be OEM-approvable, have a track record of successful retail dealership management and also have to fundamentally buy into a partnership structure,” he explained.
“We are a partner; we are going to give them operating control. And while there will be some governance clauses that will protect the investor, we are still their partner.”
CAF is the latest outside player to turn its gaze to automotive retail as more information about the stability of the industry hits investor markets.
The growth of large public groups like AutoNation, Asbury and Sonic in the U.S. and AutoCanada in this country has helped shed light on the industry for Wall Street and Bay Street players alike.
Financial reporting of these groups revealed the profit at play in automotive retail, Kotzen said, noting the industry became especially attractive following the Great Recession.
“You would have thought it was scorched Earth,” he said. “But when you went through the recession and investors were able to see that while the public groups didn’t make their highest level of profitability and their stocks came down, they rebounded. Wall Street started to get an understanding that this industry had some real play in it and was able to, with good management, be successful in really good times and be sustainable in tough economic times.”
Auto retail in the U.S. was further legitimized in 2015 when Berkshire Hathaway bought the Van Tuyl Group. Berkshire Hathaway Automotive is now one of the largest groups in America with over $9 billion in revenue and over 100 franchises in 10 states.
And unlike some Wild West investment opportunities, automotive retail has the kind of barriers to entry that most investors love.
“The franchise rules and laws offer a lot of protection that provide significant ability to be profitable and maintain that earning stream and build enterprise value if you’re a successful entrepreneur in this business,” he said.
For more information, visit www.capautofinancial.com