SAN FRANCISCO -- George Soros' people weren't the only nontraditional buyers of car dealerships prowling the NADA convention.
Rick Kotzen and Ron Sompels, partners at accounting firm Crowe Horwath, held meetings here with several well-heeled groups looking for a piece of the considerable action in auto retailing.
In the past year or so, Kotzen says the firm has been in contact with up to 20 so-called "hybrid buyers," which includes private equity funds, super-wealthy families and combinations of the two.
This new category of dealership buyer could turn out to be as transformational as the six public groups that rolled up a significant part of the industry almost 20 years ago.
"They have access to an enormous amount of money," said Kotzen. "Some are very, very new to the process and some have been looking at it for several years. They are in all different stages and NADA has been a very fertile ground for them to come and learn."
The new investors made their presence known a year ago in New Orleans, though on a much smaller scale. They were feeling their way a bit, but they got a big dose of encouragement with the announcement in October that Warren Buffett's Berkshire-Hathaway would acquire Van Tuyl Group.
'Lot of activity'
"The Buffett transaction has brought very positive attention to the auto industry," said Kotzen. "It crystallized things, showing these groups that they were doing the right thing. It was positive reinforcement and it has driven a lot of activity."
Dealmaker George Chaconas of Performance Brokerage says Buffett "legitimizes the industry."
"More private equity money seems to be wanting to come into the game," he says. "I think it could continue to drive prices because there is more competition."
Broker Mark Johnson says the Berkshire Hathaway deal has "emboldened other family offices and other private equity groups, and gave the automobile business, in the investor world, the Warren Buffett stamp of approval as a place to put your money.
"It's not going to change valuation," he says, "but as one guy said to me, 'now I can tell my mom what I do for a living.'"
More bang for the buck
The moguls and rich families and private equity funds simply want more bang for all those bucks.
"We see a lot of nontraditional buyers who are interested in the business right now and it's all for the same reason," Johnson says. "They are unable to get yield on cash."
And they like much of what they see in the auto retail sector. For instance, Kotzen says they appreciate that the primary market is protected.
"You can put a used-car lot on every corner if you want, but you can't put up a Mercedes dealership on every corner," he said.
Another thing that turns their heads is the way car dealerships came through the recession.
"At the worst of it, they were still profitable and still had positive cash flow," Kotzen says.
Not all of these nontraditional buyers are accustomed to the automakers' degree of influence on retailing.
Mark Johnson says: "Manufacturers require the operating partner [at a dealership group] to have control. All the voting shares have to rest with the operators. That's a very difficult thing for private equity to get around. The No. 1 private equity deal killer is voting control."
There is a big difference between private equity and a family office, which is just a wealthy family that has hired a pro to invest and manage its money.
"Private equity is a fund manager," Johnson says, "and those guys are having a very difficult time figuring out how to get factory approval. If it's a family office, they'll come in and buy a deal or part of a deal and just continue with the operations. It's a much simpler deal to get done."
Doing their homework
Kotzen says the new breed of buyers are doing their homework.
"They're trying to learn what the manufacturers want and they are saying the right things, such as that they are long-term holders of assets."
And he says they are mindful of the factory requirements, like the limitations on debt that carmakers insist upon for dealership operators.
The Buffett deal aside, we've yet to see all of this interest turn into a stampede of dealership acquisitions. But I'm told by everyone who has interacted with these folks to expect several big deals in the not too distant future.
"Whether this year or next year, transactions are going to happen," said Kotzen. "It is exciting for the sector, with new capital and new philosophies."