Interview with Toby Franklin: Climbing the Tower


Tower Leasing Ltd has been acquired by Acutiy Investments. Toby Franklin, partner at Acuity, talks about the deal and what drove Acuity to get into the market.

What attracted you to invest in the market?

We preferred Tower because of its long and incredibly stable history. Prior to our acquisition, Tower had been owned by the same individual (John Keevill) for 25 years, and the managing team is staying on. We really like the stability and consistency of both the performance and the management team. We didn’t feel like we were buying into some rapid growth story that is going to have lots of potential surprises.

As an investor with high growth credit businesses there is always a concern that underwriting quality might be poor, but that was not the case with Tower. They are underwriting well and that was definitely an attraction to us. The firm has benefited from strong growth in the last couple of years and we are keen to maintain that, but our strategy is not going to be about doing anything erratic. I think all the leasing businesses are benefiting from the upswing of the economy and there is an element of following that trend.

How did you go about approaching John?

We heard about the opportunity on a couple of channels: a bank in the marketplace that mentioned it, as well as a corporate finance advisor. We were introduced to John on two occasions. I think the first time which was about a year ago, the timing wasn’t quite right, we were reintroduced to John just before Christmas.

Is this part of a long-term strategy for Acuity?

Yes it is. This isn’t a quick ‘we are going to buy this and sell it a few years later’ case, absolutely not. Acuity is a private equity firm, but we represent patient family money as opposed to an opportunistic fund. So we have a slightly longer-term investment horizon than a lot of other private equity firms. We are in this for the long-run; if the business is performing well then we will carry on holding it. We do not have any particular time scale involved.

What do you want to do with the investment?

We have desires to increase the of the loan book, which at the moment is in the single digit millions. Credit risk is absolutely vital in these businesses, and Tower has an incredibly clean default performance. Their introducers and dealers are sending them all the right business and also they have a proven ability to pick good credit. We will look to grow the book steadily and sensibly whilst continuing to maintain and support our lessor relationships.

What is it about the leasing and asset finance market? How did it stand out as a good place to invest?

The attraction of this market is that we feel that lending to SMEs has rebounded from the credit crisis; supply funding to this market hasn’t rebounded as well as other markets. Mortgages are more freely available than they were before, consumer loans, second charge loans, all sorts of consumer based finance are available, and loans to really big companies have always been available and continue to be, but SMEs is the tricky part to crack.

The UK economy is getting better; we felt that it is good timing to join the market. We think there is still a shortfall of funding available and we like the credit performance of the sector. Looking at the losses that the SME leasing market experienced during the crisis, while they don’t make for very pleasant reading, the story is not as bad as many other lending markets. From our analysis, the SME market went through a more “classic downturn” rather than a crisis. The losses in 2008 – 2010 were what you might expect to happen to small businesses when there is a worldwide recession. They weren’t exaggerated by ridiculous lending; it just felt that it was normal credit cycle rather than an extreme one.

It comes back to the point of consistency and performance. The market has performed in a fairly predictable fashion rather than having been deeply volatile in comparison to say mortgage lending, where pricing was incredibly cheap in 2007 and then became incredibly expensive, you could get a mortgage with a negative margin. After the crisis the same product was priced at base rate plus 4% or 5%, now we are back to base rate plus 2% or thereabouts. It went through big changes. If you look at pricing in this market it hardly did that. Pricing went up a bit and it is coming back down a bit, it is much more stable. SME lending feels like a safer place to be, though new money is coming into the sector, we are not seeing the same massive rush of capital in and out and back in again.

Is it a sore point when it comes to investment about the lack of market data and the way lease books can often be generalised and not very granular?

I would agree with you, compared to other markets we have looked at the data availability, the data for leasing forms is moderate to poor, but actually within that to have deeply differentiated segments. We are looking at soft assets and small ticket sizes; this is very different to assets for hundreds of thousands of pounds, so industry data from the FLA is not relevant and is not sufficiently granular about the particular part of the market you are working in. So I came to this market having no idea what really to expect for loss ratios, bad debts and pricing. I would agree that does represent an obstacle to the free flow of capital because it is not transparent as to what you are getting into and what the performance of that particular asset is over the cycle.

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