One private equity firm’s attraction to independent auction space

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CARY, N.C. – 

Peter Mogk has strong feelings in favor of the independent auto auction business.

“It’s extraordinarily exciting to be on the ground on auction days when vehicles are rolling, and guys are bidding,” said Mogk, who is senior partner for private equity firm Huron Capital.

In his early days out of college, Mogk was a trader on the Board of Trade in the Chicago Mercantile Exchange, “and there’s nothing more exciting than participating in an auction,” he said.

Several reasons factor in to his company’s interest in the auto auction space.

First, “two large players,” Manheim and ADESA, dominate the market, he said.

“And then below those two large players, it’s a highly fragmented market,” Mogk said.

He added, “And it’s an area that is ripe for continued consolidation, driven by a number of things, including an emergence of technology.”

That technology is expensive, and seeking out private equity funding is an option for independent auctions.

But private equity funding for an independent auction has been a fairly rare occurrence.

One of those collaborations is between Huron Capital and XLerate Group. In 2014, Huron Capital Partners acquired American Auto Auction Group, which is now known as XLerate Group. The XLerate Group includes 21 auctions, 15 of which are physical and six of which are private-label remote sites.

Why the interest in independents?

In addition to the fragmentation of the independent auto auction market, several factors have boosted Huron’s interest in that space. Mogk said one factor is the “vacuum of quality providers” in the arena other than Manheim and ADESA.

The large consignors are looking for an alternative to their existing suppliers, he said.

“And so, there’s an entire white space that is waiting to be filled,” Mogk said.

Yet another area attracting Huron’s interest to the space is that “investment dynamics” are strong. He describes the auction space as a “high free cash flow industry,” with decent margins for auctions that run their operations efficiently.

It has relatively low capital expenditure versus other industries, he said.

“The financial dynamics, the financial drivers, are very positive from a private equity financial modeling perspective,” Mogk said.

He mentioned an additional factor that has attracted Huron’s interest: The experienced XLerate management team.

Mogk praised the strong market experience of XLerate leaders like chief executive officer Cam Hitchcock, executive vice president Chuck Tapp and chief financial officer Charles Kunkel, describing them as “extraordinary operators.”

Having XLerate in its portfolio is a situation where, “you’ve got the ability to consolidate a fragmented market, you have the ability to attract new customers because they’re looking for alternative suppliers, you have favorable financial dynamics in the industry that lead to good investment returns, and extraordinary management,” Mogk said.

He added, “So those are four pretty strong reasons that made us interested in investing in this space.”

Huron involvement: Not ‘obtrusive’

Leading the management team at XLerate is Hitchcock, who said Huron has been “very involved” with XLerate in a positive way.

Huron has visited all of XLerate’s auctions and sent representatives to the CAR conference and Used Car Week.

“But I would say their involvement has been constructive and not obtrusive,” Hitchcock said.

He added that the two companies came up with a clear strategy, and “We try to stick very closely to that strategy.”

Because both companies bought into the strategy, that means not many big debates take place on the direction of the business.

Mogk expanded on Hitchcock’s explanation of Huron’s non-obtrusiveness. “We do not take an operating role within the company,” Mogk said.

He added that Huron serves as a sounding board for the company’s overall growth and strategy.

“One of our major roles is to be a resource for the management team in terms of providing strategic direction, market entry plans, and those type things,” Mogk said.

Huron also assesses acquisition opportunities, performing analytical work in that area and acting as a board member.

Providing more detail on Huron’s function, Mogk said making financial and analytical resources available is another of its top roles.

Mogk also noted that a business needs financial resources toward executing a strategy and buying other companies.

Mogk mentioned Huron’s more than $1.8 billion of committed capital over six investment funds, and he said, “we have an abundance of investment capital available to support XLerate Group and its expansion plans.”

“So with the expertise of the management team, operating the business, our help at the board level, and our help doing add-on acquisitions and making sure that the company is abundantly supplied with capital resources or financial resources, it’s been a really dynamic and a very, very strong model, connecting the strengths of Huron Capital with the strengths of the XLerate management team and our underlying assets that are at our companies,” Mogk said.

He added, “It’s been great, it’s been dynamic, and we have established ourselves clearly as a leader in the market below the Manheims and ADESAs.”

Purchasing strategy: Much about culture

XLerate purchased Columbus Fair Auto Auction in October, its third purchase of the year after buying Morton Auto Auction and Southeastern Auto Auction in January 2019, according to a timeline posted to the company’s website. 

That followed the purchase of Corry Auto Dealer’s Exchange, along with the launch of XL Funding, in 2017. The prior year was also busy, with XLerate acquiring Grand Rapids Auto Auction, EPI El Paso and Texas Lone Star Auto Auction Lubbock in 2016.

It bought Greater Kalamazoo Auto Auction in 2015.

When the XLerate group looks to acquire an auction, the company takes various factors into consideration to see if the auction is the right fit.

“I would say, first and foremost is culture,” Hitchcock said.

Other questions the group considers when looking at an auction: What is the quality of its management team? What does its customer base look like?

“And what I mean by that is how are their dealer relationships? Obviously in the case of [Columbus Fair Auto Auction], they’re excellent,” he said, referring to XLerate’s October purchase.

Other considerations, according to Hitchcock: How are the auction’s commercial relationships, and can XLerate use those relationships to get business for other XLerate auctions?

Another factor: “We look at the overall condition of the facilities,” Hitchcock said.

He continued, “Clearly, we want somebody who’s got a good reputation. I don’t know if that’s before culture or after culture, but it’s sort of right there.”

‘Wide open space for more capital’

Mogk describes the auto auction market as “a little bit under the radar screen.” But his passion for the sector is evident.

“It’s an extraordinarily important, if not critical part, of the entire ecosystem of car sales,” he said.

He added, “If you can’t reposition inventory, as a dealer, and you can’t reposition the inventory that is delivered to you in the form of trade-in to get somebody else to buy another car, the wheels of the retail automotive industry are going to stop. The auction business is absolutely critical. I refer to it as grease under the skids of the entire retail automotive industry.”

But the independent auction is having an increasingly difficult time staying independent, he said.

“The costs of business are just rising for them,” he said.

He added, “So there is a huge, wide open space for more capital to come into this market. And in the meantime, we’re going to take great advantage of that.”

 

 



Source : AutoFinanceNews