Private Equity Firms Look to Off-Load Auto Finance Companies

Private-equity firms are eager to cash out and exit the auto finance space, but there is “currently no market for such exits,” according to a report in Bloomberg.

More than $3 billion has been invested in non-bank auto lenders since 2010, according to Colonnade Advisors, a boutique investment bank. Yet, private-equity firms have struggled to make lenders such as Exeter Finance Corp. and Flagship Credit Acceptance profitable enough for an initial public offering.

A Perella Weinberg Partners fund has been waiting to offer an IPO for Flagship for two years as delinquencies and charge-offs have boomed, according to the report. Blackstone Group LP sunk $500 million into Exeter since 2011, and is reportedly looking to “unload” the lender in late 2018, according to anonymous sources cited by Bloomberg.

“The [private-equity] guys sailed into this thing with stars in their eyes,” Chris Gillock, managing director at Colonnade Advisors, told Bloomberg. “Some of the businesses have done fine and some haven’t, but right now it’s about as out-of-favor a sector as I can think of.”

Delinquencies among non-bank auto lenders have soared to near recessionary levels today since 2013. Those independent auto finance companies have an average delinquency rate of 9.7% as of September, compared with banks and credit unions that have an average rate of 4.4%, according to data from the New York Federal Reserve.

These independent finance companies have favored extending credit to people with subprime credit scores of 620 or lower, a segment that has increased 72% since 2011. Last year, about 20% of all new car loans went to subprime borrowers.