Source: Company Profile Forms, 2002 Hispanic Business 500.
A key to the firm's growth, however, has been a novel form of capital infusion whereby investors receive a stake in Somerset's transactions as opposed to equity in the company itself.
"Venture capital usually involves giving up a piece of the business. In our case, we essentially enjoy the benefits of venture capital without having to surrender any equity in the company. We refer to our investment partners as operating lease equity investors," says Mr. Wasmer, whose Bridgeport, Connecticut–based firm employs 12.
Here's how the process works: Investors provide Somerset with capital, which the firm uses to secure financing to buy equipment for leasing to client companies. The latter pay rent on the equipment, including interest on the amount Somerset borrowed to purchase it.
At the end of the lease, the equipment is sold, unless the lease is extended. After it is sold, investors recoup their original investment plus interest – the rate having been pre-determined on the basis of prevailing premium commercial loan rates – from the proceeds. Somerset is currently paying a return of about 10 percent, but in the past has paid as much as 12 percent. If there is a lease extension, Somerset seeks additional financing, from which investors are repaid.
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.