Somerset also gives investors as much as 35 percent of any leftover proceeds from the sale of formerly leased equipment – so-called residual value – keeping the balance for itself.
For example, an investment fund might provide Somerset with $1 million, which the latter would then use to finance an exponentially greater pool of money – say $8 million – to purchase equipment it intends to lease. The lessee pays rent on said equipment, including interest on the $8 million Somerset used to finance it.
At the end of the lease, the equipment is sold, either on the open market or to the lessee, unless the latter opts for a lease extension. In the case of a sale, the proceeds are used to repay investors the amount of their original investment ($1 million) plus the agreed-upon interest. Leftover proceeds are split, with Somerset claiming as much as 75 percent and the rest going to investors. In the event the lease is extended, investors are reimbursed plus interest from funds resulting from a new round of financing.
To help safeguard investors, Somerset spreads its money over a portfolio of lease deals, says Mr. Wasmer, noting that residual value can vary greatly depending on the specifics of a given transaction. He says the average rate of return for investors, including their share of residuals, is 22 to 24 percent.
"It's a good deal for investors, but it is risky. After all, they have nothing to show for their investment until the transactions close. Our reputation is the principal reason investors come aboard," says Mr. Wasmer, whose company grossed $90.2 million in 2001 and was ranked number 54 on last year's Hispanic Business 500.
He says Somerset also uses the residual value of the company's leasing assets to reduce debt. Inven-tory costs are limited through the re-leasing or selling of equipment.
Case Study: MasTec Inc.
Elliot Abbott vividly recalls a conversation he had in the early 1990s with Jorge Mas Canosa, the man who gave MasTec Inc. its name. At the time, Mr. Mas Canosa was CEO of the construction firm Church & Tower, and he funded the company's tremendous growth with personally guaranteed bank loans. Mr. Abbott, an attorney with the firm Kluger, Peretz, Kaplan & Berlin, told his client to either cap his company's growth or find another type of financing. "The idea of being a public company, of reporting and scrutiny, didn't exactly make him jump up and down," Mr. Abbott admits. But he gave his attorney permission to explore the options.
|SBIC Minority Financing|
||No. of financings
||% of total
||% of total
|SBIC program total
|*At least 50 percent of ownership must be by the minority group listed.|
Source: SBA, "Demographics of SBIC Program–Financed Small Businesses Reported Between October 2001 and September 2002."
|© 2003 Hispanic Business Inc. Reprinting, copying, or transmitting all or part of this information requires written permission.|
Church & Tower, which was primarily a South Florida telecommunications contractor
at the time, saw opportunities to expand geographically in the United States and internationally, explains Hilary Candela, MasTec's director of finance. "To grow at the fast pace made possible by market opportunities, enormous amounts of capital were required. As a public company, MasTec was able to access not only equity capital, but publicly traded debt on much more favorable terms than from traditional bank sources."