Navigation, Goldman invest $20m in subprime auto loans

Mellon Ventures’ successor firm Navigation Capital, along with limited partner Goldman Sachs, is looking to capitalise on an untapped niche in the specialty finance industry.

US private equity firm Navigation Capital Partners has invested $20 million (€13 million) in Exeter Finance, a Dallas-based company that buys and services subprime auto loans.

Navigation committed $10 million in equity, and Navigation limited partner Goldman Sachs Vintage Fund co-invested $10 million. The deal also included a $20 million credit facility provided by ReMark Capital Group in New York.

Navigation is the successor firm to Mellon Ventures, the private equity arm of Mellon Financial. Though Navigation usually targets lower middle market niche manufacturing and services businesses in the Southwestern US, its founders invested in several specialty financial companies while at Mellon, including business credit card provider First Equity.

Navigation was attracted to Exeter’s position in the industry, said partner and co-founder David Panton. The subprime auto industry has been largely neglected by traditional banks and finance companies, which have largely moved up-market into higher credit scores, he said. But Navigation sees significant opportunity for growth in the market segment: the firm plans to expand Exeter’s geographic locations from three to 12 within the next year, and also expects to grow Exeter’s loan portfolio substantially.

“We’re investing in a fast growing company with very strong economic fundamentals,” Panton said.

The subprime auto loan market has been affected by the turmoil in the subprime mortgage market, but the two are very different, Panton said. In the subprime mortgage market, the resetting of adjustable rate mortgages (ARMs) was a major cause of the spike in foreclosures, but auto loans are not structured as ARMs. There is also far less speculation and fraud in the auto industry, Panton said, where there are fewer opportunities to make a profit from flipping assets. Finally, the securitisation market for subprime auto loans has not dried up to the extent that the subprime mortage loan securitisation market has, he said.

Law firm Hunton & Williams represented Navigation in the deal, while Bracewell & Guiliani represented Exeter and Morrison Cohen represented Goldman Sachs. FalconBridge Capital Markets provided financial advice for Exeter.