To hear Steve Hudson tell it, he was summoned back to Bay Street to help save Canada’s economy. It was the fall of 2009, when he heard from Stanley Hartt, the very well-connected Toronto lawyer and investment banker who was federal deputy finance minister and chief of staff to Brian Mulroney in the late 1980s.
The economy was still reeling from the 2008-2009 global financial meltdown and then-finance minister Jim Flaherty had appointed Hartt to chair the Advisory Committee on Financing, a blue-chip panel of 10 business leaders. They were looking for ways to untangle Canada’s snarled credit markets and get stimulus to businesses and consumers. Hartt quickly discovered that it was still easy for corporate giants to borrow. But there was one group that financial markets were failing: smaller equipment and vehicle dealers trying to lease or sell their wares to corporate and individual clients. “The market for those people literally disappeared,” Hartt says.
Enter—or rather, re-enter—Hudson. Back in the 1980s and 1990s, he was one of North America’s kings of vehicle and equipment financing. He built Toronto-based Newcourt Credit Group into the world’s second-largest non-bank lending company – providing financing for big stuff like planes, railcars, construction gear, office computers and fleets of cars and trucks. But the 1998 Russian ruble crisis caused chaos in world markets and sideswiped Newcourt, exposing all of Hudson’s borrowing and accounting excesses. In 1999, he had to sell the company to New Jersey-based rival CIT Group for $2.4-billion (U.S.), giving Newcourt shareholders less than a quarter of the company’s peak stock market value the year before. The debacle made Hudson’s name mud—for a while.
“Stanley reached out to me and said, ‘Wouldn’t it be great if you came back?’” says Hudson. It was the “aha” moment he had been waiting for.
Hudson is now indeed back in the leasing-financing game as chairman and CEO of fast-growing Element Financial Corp. Since 2011, Element has raised $1.6-billion from investors, and its share price has tripled since it listed on the TSX in December of that year. About half of the company’s 80 corporate staff—and six out of seven top executives—are Newcourt alumni.
Although Element has been on a tear, Hudson vows that it will be much more conservative than Newcourt. Age and experience have made him a humbler guy. “We no longer believe that trees grow to the sky,” he says.
Some old habits die hard, however. In the 1990s, it was often difficult to tell from Newcourt’s financial statements just how much money the company was making—or how little. Veteran Toronto forensic accountant Al Rosen, founder of Accountability Research Corp., was a prominent critic, arguing that the company often structured deals and accounted for them in ways that goosed short-term earnings, share price and pay for senior executives. Looking at Element’s first two full years of results, he’s more curious than alarmed, so far. “They certainly are creative,” he says.
Hudson, whose father was a mechanic, grew up in a blue-collar section of the Toronto suburb of Scarborough. In 1982, Hudson and Brad Nullmeyer, now Element’s president, were articling accountants working on an audit for Manulife. They had no burning interest in vehicles and office equipment per se, but the potential they presented jumped out at them simply from looking at the giant insurer’s numbers. Over beers in a faux-English pub, they drew some simple diagrams—not on napkins, but sheets of paper.
When an insurance company writes policies, or sells annuities or other products, it needs to invest the premiums it collects in instruments that will generate enough returns to pay claims or benefits as they arise—plus some profit, of course. Traditionally, insurers chose to buy government bonds or commercial mortgages with terms that matched their expected payouts over time—one year, five years, 10 years and so on.
But vehicle and equipment leases also generate income month after month, year after year, just like bonds. Sketching a line for me across a graph, as he had done with Nullmeyer in the pub, Hudson says, “This is the annuity, pension or segregated-fund business.” Then he draws another line slightly above it, and says, “This is a railcar lease.” By investing in leases, insurers could diversify their holdings beyond bonds and commercial mortgages, boost their returns a bit, but not take on as much volatility as they would with stocks. Different vehicles and equipment could cover different time horizons—say, fleet-car leases for five-year obligations, railcars or business aircraft for a decade or two.
Later in 1982, Hudson moved to a job in operations management at Toronto General Hospital, which was strapped for cash to buy expensive technology such as MRI and CAT scanners. By age 26, he’d scraped up $400,000 in venture capital and founded a medical equipment lease-financing company to help TGH and other hospitals. Two years later, having left TGH, he brought in Nullmeyer, and named the company Healthgroup Financial Corp.