For those who work in or follow the used-car market, you may have seen a familiar face during a late autumn airing of “Mad Money” on CNBC.
That being Jim Hallett, chief executive officer of KAR Auction Services, who was interviewed by host Jim Cramer.
During NADA Show 2019 in late January, AuSM asked Hallett what he aims to emphasize about the used-car market when he talks to audiences of such venues as “Mad Money” that cater to an investment-minded crowd.
Hallett starts with focusing on the sheer size of the used-car business.
“When you tell people there’s 290 million vehicles on the road in North America, when you tell people that the used-vehicle churn in the United States is 40 to 45 million cars a year, and when you tell them that we’re selling 5-and-a-half million cars a year and over $40 billion in proceeds, that gets somebody’s attention,” Hallett said.
“Describing how big the market is, and then, describing the opportunities in the market,” he said. “So, it’s not just about, ‘get a call, sell a car.’ It’s about the car, the transportation, the ancillary services, the online platforms, the digital platforms — all the different venues where we can actually transact.”
Asked if he has seen the investment in the used-car space increase, Hallett described it as “steady.”
“I’ve never really thought about it as ‘more’. I’ve always kind of seen it as there’s been continuous (investment), but it’s not like all of a sudden I’ve seen this big ramp-up,” Hallett said. “I think I’d say there’s been continuous investments, and as you know, (with) private equity, they get in, they get out.”
But, like Hallett described, the used-car market — wholesale and retail — is massive. Its tentacles spread into online sales, transportation, technology, ancillary services and beyond.
Several of the players who operate in those venues, either wholesale or retail, are publicly traded, just like KAR. CarMax, Carvana and Copart, for instance.
There are also used-car players like ACV Auctions that are making big inroads in the venture capital space. In December, for example, ACV announced a $93 million Series D funding round. Bain Capital Ventures and Bessemer Venture Partners led the round, which also included Future Fund, Tribeca Ventures and Armory Square Ventures.
There have also been investments from within the space.
For instance, AutoNation was the lead investor in an $146 million funding round for online car retailer Vroom, which officially announced the Series G round in December. AutoNation had announced its piece of the investment in late October, saying it obtained roughly a 7-percent ownership stake in Vroom after a $50 million strategic investment in the online car retailer.
With its $54 million investment, Lithia led the $140 million round of Series D financing in online marketplace Shift that was announced in September. Lithia and Shift also formed a strategic partnership, and Lithia president and chief executive Bryan DeBoer joined Shift’s board of directors. In October, Lithia said it had acquired more equity interest in the online marketplace.
In January 2018, Penske Automotive Group closed its purchase of U.K. used-car retailer The Car People, a deal first announced in December 2017. This followed a similar move Penske made in January 2017, when it announced an agreement to buy CarShop, a U.K. chain of five standalone used-car retail stores. That acquisition was completed in February 2017.
Stateside, Penske announced a deal in December 2016 to buy U.S.-based used-car retailer CarSense, closing that acquisition in January 2017.
Erin Kerrigan — managing director of the Kerrigan Advisors firm that specializes in buy-sell in the new-car franchised dealer space — said investors in auto retail may look beyond the traditional new-car dealer.
“I think that those that invest in our industry will not limit themselves to the box of the new-car franchise. They will continue to look at how they can vertically integrate the business model, tapping into other parts of the business such as financing, such as used-car-specialized business models and collision centers,” she said in an interview at the NADA Show for an upcoming episode of the AuSM Podcast.
“The smart money is going to continue to look at ways to really maximize their return-on-investment, which may include doubling down on the higher-profit parts of our industry, which certainly are in the other aspects (like) the F&I, the service business, the used-car business — the margins are just much more attractive than they are on the new-car side of the equation.”
In a seperate AuSM story, Kerrigan explains two factors that are driving the appeal of investment in franchised car deaershps.