Steve Hudson pulls into the parking lot of the east Toronto strip mall in a gleaming black Dodge Ram truck.
His flowing blond hair and expensive white shirt, open at the neck, look out of place as he strides across the asphalt in the midst of this middle-class suburb. Yet for the man who founded Newcourt Credit Group, which had the chance to be remembered as one of Canada’s greatest corporate successes, this is home.
Mr. Hudson is building a new version of Newcourt, a company he turned into the world’s second-largest non-bank financial company in the 1990s before a not-so-storybook ending saw the company sold under a cloud to a bigger rival. His new venture, Toronto-based Element Financial Corp., is aiming to be one of the biggest independent competitors to the Canadian banks, providing financing for companies that need everything from dentist’s chairs to corporate jets and don’t want to pay up front.
The 2008 financial crisis blew a hole in the lending market that a company like Element can fill. Big players in equipment financing stepped back, or got out entirely. Element is growing incredibly quickly – going from $6-million in assets two years ago to about $1.2-billion. Eighteen months after going public, the stock is up 44 per cent and the market capitalization stands at $502-million.
This time, Mr. Hudson must avoid the mistakes of Newcourt: the hubris, the overreaching, the risk taking, the unbridled expansion.
Coming to the Scarborough area of Toronto, to Fish Joy, the modest fish and chips shop where his blue-collar parents took Mr. Hudson and his three brothers on Friday nights when they had a little spending money, provides a little perspective as he starts over in the business where he made his first fortune but where he also took a very public beating. He’s more than rich enough to retire, but the same hustle that took him away from Scarborough remains.
“It’s why I wanted to have lunch here,” he says as he slides into a chair, and recommends the halibut and chips special. “It’s all about your roots. I love it, it’s the competition, the challenge. And I also want to write – to finish this chapter up properly.”
Newcourt had all the trappings of a great entrepreneurial story. It grew from a dream of Mr. Hudson’s, an accountant, into a leasing company spanning 26 countries. It gobbled up competitors. It minted money, in profits and stock price gains. It became the second largest non-bank finance company in the world. And, right at the end, it nearly all fell apart.
Mr. Hudson had made a key error. He had shifted from his early practice of securing safe funding from investors such as life insurers to what he now calls the “heroin” of financial markets. After his final big purchase, a huge acquisition of AT&T Capital, Newcourt became totally dependent on the commercial paper market, borrowing at cheap rates for a few months at a time. It would turn around and lend that for long periods at higher rates, profiting from the spread.
That strategy made more money, but was much more risky. If Newcourt ever lost access to short-term money on good terms, the business model would break. When the Russian debt crisis of 1998 roiled debt markets, that’s what happened.
In early 1999, Mr. Hudson agreed to sell Newcourt to rival CIT Group Inc. for $4.1-billion (U.S.). But Newcourt’s earnings were falling apart, and the company had to accept a huge price cut to $2.4-billion to save the deal. A chastened Mr. Hudson, who was supposed to remain as an executive, left the company.
He left more than that, de-camping to Florida for what he now calls his eight-year “walkabout” to learn from his mistakes. He was rich, but guilty about the way that things turned out. Original shareholders of Newcourt made 120 times their money. But those who bought near the peak lost big when the company started to come apart.
“I ran away. It doesn’t take long to go from hero to a zero. It wasn’t a zero but it was a big dose of humility,” he says. “I thought I have to see if I could do it again in another business, where people don’t know my name, don’t know the story.”
He did it by investing in what he calls “a funky little business” called Hair Club for Men. From hair replacement to hairstyling, he took it on an expansion spree. He and his co-investors put up $25-million and sold the company for $210-million.
Next up was the weight loss business, as he invested in Herbal Magic, a chain of diet centres. It’s been a tougher slog, though Mr. Hudson expects to make money on it.
Then, in 2007 and 2008, the financial crisis hit. All around the globe, banks were pulling back on lending. Not only that, they were putting leasing assets up for sale. A manager with experience in leasing, with relationships at banks and insurers, could buy up leasing companies and fill the gap in the market. Mr. Hudson stepped back from Herbal Magic to start Element.