Equipment risk management strategies help minimize financial losses and operational disruptions related to the use and management of financed equipment. They may also help maximize returns on residual value positions and remarketing of repossessed assets. By implementing robust equipment risk management practices, your business can reduce downtime and better manage your equipment portfolio.
The Alta Group leverages its extensive experience managing multi-billion-dollar portfolios to guide clients in building top-tier risk management methodologies and controls. Alta’s advisors have decades of experience in asset management. Our expertise spans a diverse range of equipment classes, ticket sizes and global regions, incorporating advanced analytical modeling and monitoring techniques.
Alta’s advisors help clients exploit IoT data from equipment, fostering a more proactive approach to equipment risk management and enhancing commercial offerings. Alta’s comprehensive services ensure that your assets remain reliable and compliant with industry standards, providing tailored risk assessments and support to maintain business resilience in a dynamic market.
“Alta understands that robust equipment risk management strategies are a crucial underpinning for a successful equipment financing business. By leveraging our deep industry expertise and best-in-class solutions, our tested approach to equipment management mitigates risk and optimizes financial outcomes by maintaining the long-term value and productivity of the financed equipment.”
Valerie Gerard Co-CEO, The Alta Group
Understanding Equipment Risks in Equipment Financing
Equipment risk management is multi-dimensional. Different economic cycles bring varying levels of risk to different equipment categories. As technology continues to evolve and new classes and types of equipment emerge, asset managers must continually adapt to protect the portfolio from the risk of obsolescence and fluctuating secondary market conditions. Here are some of the sources of risk that asset managers should consider when building an equipment risk management strategy.
Age of equipment
Is your equipment portfolio sufficiently diversified in terms of the age of equipment? This can be important not only from an operational and maintenance standpoint, but also from a regulatory perspective. Regulations within specific industries change over time, and those changes can sometimes render older equipment obsolete. A robust portfolio can be more responsive to regulations as they change.
Alta Group Client Success Story
Alta assisted a major bank leasing company in financing a jumbo commercial jet freighter. By leveraging advanced analytical modeling and extensive market insights, Alta helped the client accurately set residual values, ensuring the transaction’s financial viability.
Vendor mix
Monitoring the evolution of the spectrum of vendors within a particular sector is an effective component of managing equipment risk. Cultivating a portfolio with a diverse set of vendors can shield you from the risks that can come from over-concentration with one or two vendors with declining market relevance.
Geography
Equipment risk can sometimes be impacted by geography. Location also impacts the seasonality, or limitations on what times of year specific types of equipment can be used. For example, landscaping equipment has a shorter productive season in colder climates than in more temperate zones. This can impact actual usage, risk of delinquency and the demand for services in certain seasons. Exploring different global secondary markets can also maximize your marketing returns.
Documentation
Deal documentation is often overlooked. Without strong maintenance and return provisions, lessors can open themselves to increased risk and potentially lower secondary market value of assets.
Residual value risk
The residual value is the value of a piece of equipment at the end of a lease or financing term. Setting precise residual value predictions at the outset is essential to a profitable equipment leasing and finance business, as is understanding the secondary market value for the equipment. The age of an asset, the frequency and aggregate time of its use, and how it has been maintained all impact residual value. Increasingly, tech-enabled sensors on equipment can provide asset managers with data to track these factors, enabling you to better anticipate when a client may need to replace or upgrade equipment.
Alta Group Client Success Story
A major bank equipment leasing company came to Alta seeking an auditable residual value matrix to assist its sales and equipment management staff. Alta brought its extensive experience creating RV matrices to the challenge of building a matrix that was auditable with cost data records. The final product encompassed more than 200 equipment types in 24 categories and is still in successful use. Since its creation, Alta’s RV matrix has been updated and expanded, and is available for purchase.
Market risk
It’s important to understand the economic conditions that can affect the demand and value of financed equipment. The Alta Group has decades of experience as a leading authority on the economic health of a diverse array of equipment market categories. Alta’s Carl Chrappa has authored the Equipment Leasing & Finance Association’s “What’s Hot/What’s Not” equipment market forecast for more than 30 years.
The Alta Group’s expert valuation consultants regularly provide tailored analysis and equipment value curves, essential information for both individual transactions and portfolio assessments.
Evolving risk tied to emerging equipment categories
Equipment risk management continues to evolve, as the global energy transition drives the development and demand for new types of equipment that will power a more sustainable global economy in the years to come. This has serious implications for asset managers, as growing interest in equipment-as-a-service models demands a greater focus on equipment management. In addition, increased focus on the circular economy—which prioritizes extending assets’ life cycles through reuse—requires greater knowledge of secondary and tertiary markets.
By attending to all aspects of equipment risk management, The Alta Group’s advisors can help you navigate the diverse categories of equipment risk and implement effective mitigation solutions.
Importance of Equipment Risk Management
Equipment risk assessment is an essential practice to successful equipment financing. Thorough risk assessment is important to identify potential risks, such as those listed above, evaluate their potential impact and implement appropriate risk mitigation strategies.
Alta’s advisors have experience across all components of equipment risk management.
Risk identification
The risk identification process looks at all of the potential risks that could impact equipment financing or an equipment lease. This includes risks related to equipment failure, obsolescence, maintenance and operational disruptions, and the underlying equipment’s residual value. Legal and regulatory risks are also part of the picture. Identifying these risks early on is critically important.
Risk assessment and analysis
Alta can advise you in capturing the right level of data as well as providing the analytics and tools to evaluate the potential impact of identified risks. This involves analyzing historical data, market trends, and using advanced analytical tools to quantify risks. All of this informs the risk mitigation strategy.
Risk mitigation planning
The Alta Group can help you take a holistic approach to risk mitigation across all facets of an equipment financing deal or equipment lease. Alta can help you build effective equipment risk management into every aspect of your deal documentation. Alta’s team can provide you with maintenance and return provision recommendations to be included in your documentation to reduce your risk and increase the expected secondary market value of your assets.
Mitigating Risks in Equipment Financing
Effective risk mitigation in equipment financing involves a series of strategies and actions designed to target identified potential risks. With decades of hands-on experience building best-in-class risk management methodologies and controls, Alta’s team of advisors draws from a breadth of real-world scenarios in helping clients to craft targeted equipment risk mitigation strategies.
Alta can help you use IoT data from equipment to drive a more proactive approach to risk management and mitigation, and to help you develop improved commercial offerings.
Effective equipment risk management can bring your business a number of benefits related to its operations and profitability. Clients of The Alta Group have seen benefits including:
Improved risk analysis and insight for sharper residual setting
By using advanced analytical models and historical data, businesses can forecast the future value of equipment more precisely, leading to better financial planning, reduced chances of financial loss due to incorrect valuation of assets and sounder residual realization ratios at lease end. Alta’s use of state-of-the-art analytical modeling ensures that clients can set sharper, more accurate residual values, enhancing their financial stability and planning.
Better leasing portfolio management and incremental profit opportunities identification
Robust equipment risk management can help your company enhance portfolio management through regular monitoring of asset performance, timely maintenance and effective remarketing strategies. Alta’s advisory services have helped clients streamline their portfolio management, leading to improved asset utilization and profitability.
Enhanced control over mid- and end-of-lease management, positively impacting your P&L
Alta’s expertise in lease management can help you maintain control over critical end-of-lease stages, ensuring equipment is returned in optimal condition, and maximizing the resale value of assets through improved remarketing strategies. All of this ensures that assets generate the maximum value throughout their lifecycle. This directly impacts the profit and loss (P&L) statement positively by minimizing unexpected costs and maximizing revenue from asset sales and redeployment.
Choose The Alta Group for Comprehensive Equipment Risk Management Solutions
By working with an advisory as experienced as The Alta Group, your business can reap immense benefits through implementing an equipment risk management strategy informed by decades of experience across all equipment types in regions throughout the world. The Alta Group can help you understand the types of equipment risk that could negatively impact your equipment financing business, assess the potential impact of those risks, and build a customized strategy for risk mitigation based on the latest tech-enabled analytical methodologies.
Equipment risk management is a strategic approach that enables you to identify, assess and mitigate risks associated with financing and leasing equipment. Implementing effective equipment risk management practices enables you to enhance operational efficiency, reduce downtime and improve the profitability of your equipment financing business. The components of equipment risk management are risk identification, evaluation and mitigation.
Residual value in equipment financing refers to the estimated value of a piece of equipment at the end of a lease or financing term. Residual value is important to the overall profitability of any equipment financing transaction. By helping you to set precise residual value projections, The Alta Group’s advisors can enable you to realize greater profitability through end-of-lease negotiations, and/or resale or lease renewal.
Effective risk management in equipment financing is built on a combination of strategies that need to be tailored to the specific market and equipment type in which your business is operating. Foundational strategies to minimize risk include precise residual value projections, effective equipment management through appropriate maintenance requirements, and cultivation of a diversity of vendors and ages of equipment across the portfolio.
The specific types of equipment risk that need to be examined in any equipment finance transaction vary greatly depending on the industry in which you are operating. For example, in the manufacturing industry, equipment risk management focuses heavily on maintaining operations and minimizing downtime. In healthcare, a primary concern is ensuring that medical equipment is reliable, safe and compliant with strict regulatory standards. By understanding the specific equipment risks associated with each industry and implementing tailored risk management strategies, your business can ensure the reliability, safety and profitability related to equipment assets. Partnering with experienced advisors like The Alta Group can provide the expertise needed to navigate the complexities of equipment risk management across various sectors.
Technology is playing an increasing role in equipment risk management. From predictive analytics enhanced by machine learning to the use of IoT sensors to predict equipment failures before they occur, technology can play a role across all aspects of equipment risk management. The Alta Group’s advisors bring the latest techniques in machine learning to help detect trends across equipment portfolios, helping in residual setting, portfolio management, end-of-lease management and remarketing. Alta can also help you exploit IoT data from equipment to build a more proactive approach to risk management and inform improved commercial offerings.
Alta has the track record and hands-on experience of having run and valued multi-billion-dollar equipment finance portfolios. We have used this experience to guide clients in building best-in-class risk management methodologies and controls. Our experience extends across multiple equipment classes, customer segments and geographies and includes state-of-the-art analytical modeling and monitoring techniques. Our team of advisors can help you with risk identification, evaluation and mitigation. We can build tailored tools to help you predict residual values, evaluate credit risk and structure effective transactions. Contact us today to start building your customized solution.
Expected Benefits
Improved risk analysis and insight for sharper residual setting
Better leasing portfolio management and incremental profit opportunities identification
Enhanced control over mid and end of lease management, positively impacting your P&L
FowardFocus a prime place to find and share valuable equipment finance industry guidance, perspectives, and our latest insights. This includes original content produced by Alta advisors and contributions from reliable sources worldwide.
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Alta assisted a major bank leasing company in financing a jumbo commercial jet freighter. By leveraging advanced analytical modeling and extensive market insights, Alta helped the client accurately set residual values, ensuring the transaction’s financial viability.
Alta assisted a major bank leasing company in financing a jumbo commercial jet freighter. By leveraging advanced analytical modeling and extensive market insights, Alta helped the client accurately set residual values, ensuring the transaction’s financial viability.
