Beginners' guide to ACFC
ONE OF KRG Capital's companies had a problem. "We invested in a manufacturing company in the southeastern United States," says John Lanier, who is chief quality officer for the $800 million private-equity firm, based in Denver, Colorado. "The challenge was with a process efficiency that wasn't quite where they wanted it to be. They had scrap, which was recyclable, but there were storage issues. Either we would have to make the machinery more scalable and efficient, or we would have to make a major capital expenditure investment."
So the company's executives called in one of its lenders – not to discuss the terms of a new loan or capital markets financing but for some business consulting advice. And they got it for nothing.
There are few lenders that could provide this, let alone be prepared to offer it for free. But this is not a typical lender. It's not one of the commercial banks that dominate the syndicated lending business, or an advisory department of one the investment banks that are lending more. It is General Electric Commercial Finance.
GECF is doing this through a programme set up two years ago within each of GE's then 13, now 11, divisions, which goes by the rather dull and cumbersome name "at the customer, for the customer", ACFC for short. It might not be catchy, but it does at least describe the concept: GE's ACFC employees go to their customers and spend anything from half a day to several weeks, sometimes interspersed over a year, looking at their businesses, offering strategic advice and training their employees.
Lanier was impressed. "The result of GE's help was a seven-figure impact on costs," he says. "In and of itself that's pretty impressive. But that's only part of the story. Just as a NYSE-listed company trades according to P/E multiples, in private equity it's the enterprise value, based on ebitda. On a GAAP basis that seven-figure impact commands a multiple of, say, six times that amount. And that's conservative."
In other words, each dollar saved in operating costs because of the ACFC programme's work is effectively adding $6 to the potential value of the company if and when it's sold.
KRG is one of 1,200 of GECF's clients to use the ACFC team. They're a diverse bunch, a reflection of the broad scope, and large size, of a financial services firm that still operates below the radar screen of the more high-profile banks and investment banks.
Since GE restructured into 11 divisions from 13 last year, GECF has become the largest division in terms of revenues and profits, accounting for $3.17 billion in earnings for the first nine months of this year, 22% of the overall company's earnings of $14.41 billion before tax, interest payments and other charges.
Big, and getting bigger
GECF itself comprises nine divisions: aviation services, commercial equipment financing, corporate financial services, energy financial services, European equipment financing, fleet services, healthcare financial services, real estate and vendor financial services. It operates in 35 countries, offering to largely middle-market sub-investment grade companies financial products including asset financing, leasing, lending, revolving lines of credit and growth capital. It has more than $220 billion in assets, compared, for example, with $420 billion at Wells Fargo.
GE CEO Jeff Immelt wants GECF to get bigger, having earmarked it as one of the group's main growth engines. Buying new businesses is one way – GECF announced just last month that it was buying Citigroup's truck leasing business for $4.4 billion.
The consulting work is another way. "If we can help our customers fix problems, they'll probably grow as a result, and if they grow they'll need more financing," says Sharon Garavel, six sigma leader for GECF. "We hope they'll come to us."
It's not just repeat and increased business from existing clients GECF is looking for. "It's a marketing tool," says Garavel. "A tool we want to use for any market. We're dealing with private-equity firms for example. And we have also looked at the high-yield and high-grade markets as areas for possible expansion."
If that happens, the banks that now dominate those businesses are going to have a formidable competitor. Few, if any, can match the mix of size, lending power, and, crucially, experience across a diverse range of industries within GE. That experience has been developed over a 126-year history in businesses as diverse as finance, aircraft engines, TV and healthcare. Its executives feel there are few business problems it hasn't faced before in some way, and that it has some of the best tools, and people, to help advise its clients.
Garavel's title points to one the key tools at the core of the ACFC programme: six sigma, the management principles that former CEO Jack Welch made famous.
At its most basic, six sigma is a means of identifying how many defects there are in any given business process, and then getting rid of them. Six sigma is achieved when a process produces no more than 3.4 defects per million opportunities. GE started using it in the 1980s, beginning with its workout sessions, meetings open to employees to participate more fully and openly in the decision-making process. In a rare departure from management-speak, it also dubs this process bureaucracy-busting. So important was this step towards six sigma that GE now not only capitalizes it, as Work-Out, but has even registered it as a trade mark.
There are many books on the subject, most referring to the work achieved by GE. Much of the commentary centres on the role of Welch, who has been such a proponent of six sigma that he has been asked by other corporates – JPMorgan Chase being a high-profile example – to offer them his advice.
Since Immelt took over as GE's CEO in September 2001 he has turned Welch's somewhat ad hoc approach to spreading the gospel of six sigma into an integral part of the group's offering to clients.
Other leading companies, such as Toyota, have passed on knowledge of six sigma management. In Toyota's case, though, such transfers have usually only been to companies in its own direct supply chain and with the primary aim of improving its own business.