The Company: Southeast based consumer credit and identity solutions software-as-a-service provider, majority owned by founder & CEO Ed Margolin. Visit Fraud Protection Network’s website to learn more.

The Financing Situation: The Company had previously financed its growth with a combination of equity and convertible notes.  With new product rollouts and strategic partnerships in 2020 creating accelerated growth, the Company was seeking non-dilutive capital to finance its working capital needs and extinguish convertible notes in order to preserve equity.

The Solution: SG was able to quickly get comfortable with the transaction due to the rapidly growing monthly recurring revenue, strong industry retention rates, and overall financial health of the company.  SG structured a covenant-lite $2.5MM loan with a tailored repayment schedule around cash flow that bought out the convertible notes to avoid further dilution and provided additional liquidity for the Company to continue its growth trajectory without equity support.

This transaction demonstrates SG’s ability to underwrite SaaS / recurring revenue loans. While many of you know us as a cash flow based lender, we now provide non-dilutive SaaS / recurring revenue loans requiring creativity, flexibility, and speed to close. Click HERE for a link to our SaaS / recurring revenue one pager to learn more.

In the 1990 film “Dances With Wolves,” Kevin Costner starred as a decorated army commander in the 1860s who volunteers to oversee the furthest outpost on the Western frontier. Out-of-footprint asset-based lending business development officers are filling a similar role in the current lending environment, dancing with wolves outside of their bank’s retail footprint, although this applies to non-bank ABL BDOs as well. Each non-bank ABL BDO understands what it is like to compete without a bank footprint, but it is a different adventure when your bank hires or sends you out of network to open up a new market and scout for deals. This means you are on the frontier of the lending world without backup.

All BDOs are not created equally, which can create advantages when selling within your footprint. Think of whichever bank or banks dominate the branding, retail branches and deposits in your city and those are the ones with a tacit advantage. Customers understand the strength of these banks and the legacy of their brands. The BDOs selling out of market have to adapt to living on the edge of the frontier, meaning they are selling without the backup of the bank. The non-bank BDOs are used to dealing with their only product being credit, but in the past decade, several bank ABLs took the initiative to push the frontier with the goal of establishing a coast-to-coast ABL presence.

Banks Push the Frontier

Having national coverage is one of several key attributes needed to become a successful ABL shop. This speaks to all market participants, as the goal is to service your referral network and sponsor community. These relationships are ultimately local, in-market relationships, so you need BDOs who can cover all markets regardless of where the ABL group is headquartered. Not surprisingly, many (although not all) successful bank ABL groups that expanded are Midwest-based entities, including UMB, Fifth Third, Huntington, First Business and Alostar (now Cadence), who successfully built national bank ABL practices out of their bank’s core footprint. This was partially done with a focus on sponsors, which dictate the need for national coverage, but were just as much driven by the strategy of pushing the frontier. The Midwest is a key manufacturing hub as well as the bedrock of the ABL business, so it makes sense that many of the ABL groups would love to expand coast to coast.

With such a high degree of difficulty in this endeavor, success hinges on a bank or non-bank being committed to the market and, most importantly, hiring the right BDO. Lack of brand recognition out of footprint limits the potential success of direct calling efforts. Also, different time zones play a factor as well. West Coast BDOs have notoriously had a disadvantage when their portfolio management group was in another time zone. Talk about not being on the same page. In addition, there are no internal bank referrals to be had when your bank’s headquarters is in another state. These are but a few reasons why it takes commitment and the right BDO with established referral source relationships in place already. Success and the perception of the bank or non-bank in each particular market is correlated to finding the right hire. It is very difficult to compete otherwise.

Increasing Competition

The combination of bank ABL out of network, bank-ABL in network and non-bank ABL BDOs the past decade has created an efficient market with intense competition. The bank ABL BDOs that set up shop out of network are almost always BDOs with strong credit skills and are oftentimes priced in between the big bank ABL groups and non-bank ABLs. This creates three tiers of ABL pricing in a market and plenty of options from which to choose for companies and their advisors. The out-of-network bank ABLs typically are able to be competitive on both price and structure, which is why this expansion model has been so successful, especially in the sponsor community.

Sponsors are less loyal to local bank branding and far more interested in building sophisticated lender relationships. They got this with the out of network bank ABLs as they expanded to new cities for lending relationships more than deposits. It’s a different dynamic when the relationship is principally focused on lending rather than treasury and that’s exactly what we’ve seen. The success of many of these regional bank ABL groups that expanded nationally has emboldened more competition as these bank ABLs operate very similarly to their non-bank competitors. You need to be tactile when on the frontier, meaning these are low overhead operations. Basically, good lenders who were hired far away from headquarters are using their bank’s balance sheet to go out and book deals. It’s a great proposition and a market study would clearly illustrate the amount of banks that have seen the seemingly low barriers to entering new markets.

Each group is one good hire away from competing in a new market. Entering is one thing, but competing is very different. It is similar to the visiting team (out-of-footprint) vs. home team (in-footprint) — they call it home field advantage for a reason. Commitment to the market is crucial and too much employee churn will be noticed. It’s a tenuous proposition when an institution’s reputation in any given out-of-network market is entrusted with one person. This is why it takes a special breed of BDO to be successful, and the repercussions of a bad hire can be felt in a market for years. The internal and external skills are different because the onus falls on the BDO to not only know credit but also to be able to sell internally just as easily as externally.

This partly explains why the groups that have succeeded are really bank ABL groups that think and act like non-banks. These are lenders first who understand risk and can undercut their non-bank competition and be way more aggressive on structure than their in-market bank ABL competitors. This trend is here to stay and will only continue to increase competition. Stay away from the BDOs who dance with wolves — they are out to steal your clients.

Charlie Perer is the co-founder and head of originations of SG Credit Partners. Perer appreciates feedback and can be reached at charlie@localhost.

Link to full article here.

The bank-ABL world is going to go “Back to the Future.” Just like in the movie, before visiting the future one needs to understand the past and present-day world of asset-based lending (ABL). Consolidation (past) and ABL product acceptance and proliferation in all levels of banking (present), have paved the road for the future. The way to think about the future is as a three-layered cake with the top layer being the Super Powers (Wells Fargo Bank, JPMorgan Chase Bank and Bank of America), the second layer being the Super Regionals (Bank of Montreal,  PNC Bank, Fifth Third Bank and Truist Bank, among others) and the third layer being the Super Communities (Wintrust, Western Alliance Bank and Synovus to name a few). Each layer of bank-ABL presents unique opportunities, challenges and threats, but there will be change as that seems to be the constant.

Here are a few key predictions for the next decade:

  1. Consolidation plus a twist – do not be surprised to see two separate ABL groups housed under one Super Regional bank,
  2. The hybrid bank-ABL coverage model will gain real traction and be successful,
  3. ABL (at least ABL-light) will truly become more of a product within banking, and
  4. Today’s big non-bank ABLs will achieve scale, capital efficiency and look like bank-ABL 20 years ago (Phase 1).

The bank-ABL industry is transitioning quickly from Phase 1 – which is banks simply owning ABLs as a separate business line – to Phase 2, which is banks integrating ABLs as a product platform. Phase 3 is too far away and could be any number of things including a tech-enabled transformation, but first let us start with consolidation. There are simply too many market participants right now – although that may change, quickly I might add, as we will soon see which firms were prepared for the new lending environment.

If you want to understand the future, look at the past as the same thing happened the last two cycles; consolidation is going to happen in one form or another. Every generation thinks it created lending and this is true if you go back to the days of Heller, Congress, Transamerica, Fleet, Foothill, Finova, Textron, Freemont, Sanwa, and the list goes on. These onetime giants are now part of ABL lore. Business Development Companies (BDCs) have been this last cycle’s most aggressive buyers of ABLs, but it remains to be seen what will happen to BDCs in the post-COVID world let alone ten years from now. To a BDC, ABL is an asset class; to a bank it is a product class. One industry veteran counseled the author to look at the CFA (now SFNet) membership list for the past 40 years to understand the past cycles of ABL formations and consolidation. The key takeaway is that per the firms mentioned herein, competition and consolidation has been going on for decades. History tends to repeat itself, but with variations.

Anything is possible, but it is unlikely that ten years from now we will find ourselves with BDCs being the dominant non-bank force in the non-bank ABL industry. BDCs will of course be around, but what remains to be seen is their industry-wide commitment to ABL through a difficult cycle. It’s hard to think about the future while there is so much uncertainty in the present, but uncertainty often spurs conversation and innovation. That is exactly what is happening right now as innovative leaders at the leading bank-ABLs are taking this time to think about the future.

The last 20 years saw two waves of ABL cycles from big banks buying ABLs, to the rise and consolidation of the non-bank ABL industry. The next ten years will bring real refinement to the bank-ABL business model.  This is going to happen as the ABL “market” is now mature, with both bank understanding AND client acceptance. Neither of these two points should be taken for granted.

Regarding two ABL groups under one Super Regional bank, the distinction being that one will be ABL-light and one will be true ABL. Yes, this may actually happen, but it certainly won’t happen within the nation’s largest banks (Super Powers). Products, risk-ratings, and yields have diverged enough over the past few years for bigger regionals (Super Regionals) to make a case for effectively owning a finance company apart from its ABL light product. Much of what may happen in the future will be driven by some “stroke of the pen” risk in terms of the regulatory landscape. Despite this risk or potentially due to it, many industry leaders think having two ABLs under one Super Regional is a possibility. Super Regionals have already ventured into specialty finance and there is an argument to be made this will indeed happen based on the white space created by risk-ratings alone as regulations, strategy and reserve requirements keep the Super Powers from pursuing a finance company. The thinking is linear in that a client within one bank could go from commercial banking to bank ABL- light to bank-owned ABL (full dominion, no springing). Right now, the bank-ABL folks often recommend the non-bank folks they are transitioning their clients to, so it is not a stretch – same client, better yield.

While history will repeat itself from a consolidation perspective, the bank-ABL business model is becoming much more innovative, collaborative, and tactile. The bank-ABL model is now mature and has evolved to the extent that it will drive and shape future consolidation. To make a long-story short, there are three bank-ABL business models:

  1. ABL as a product solely servicing the bank,
  2. ABL as a separate business line, and
  3. A hybrid of 1 and 2.

We are entering what many industry executives call Phase 2 or the hybrid period where bank executives have spent the better part of a decade or more understanding and integrating ABL into their bank’s culture. The past ten years every top bank in the country that understands ABL has been intensely focused on utilizing ABL for both client retention (defense) and new client acquisition (offense).

The hybrid model will only become stronger and commercial banking groups will continue to learn to work with their ABL groups. While at the same time these ABL groups still maintain their ability to go out and pitch new business in addition to servicing the bank. This is a real departure from a decade ago when ABL groups were a separate business line and coordination with commercial banking was not part of the business plan. Many things have changed over the past ten years, but platform integration became paramount at the nation’s largest banks, as did client retention. The OCC also played its part by enforcing stringent rules at pretty much every level imaginable, so customer retention became a point of focus. Enter stage right ABL – in other words, it’s showtime for ABL to enter main street banking, but with a diluted twist to make the product more palatable for the bank’s clients.

JPMorgan Chase Bank deserves special mention because ABL has always been a “product” for them rather than a business line, and the relationship has been managed by one Relationship Manager (RM).  Their model is unique, and they have spent many years building what should be considered an integrated and proprietary model.  Management made the decision many years ago to build an integrated team internally whereby in contrast you can trace the roots of Bank of America and Wells Fargo to Fleet and Foothill, respectively. There is no right or wrong model, but it should be noted that JPMorgan Chase Bank started where others are migrating toward due to an organic rather than acquisitive approach.

This strategy positions ABL partially as a collateral monitoring business and also allows for seamless on-boarding and transferring of clients. It also eliminates competition within the same bank. Too many times we hear about two different groups within the same bank competing. Under this model, the same RM can deliver two proposals and let the client decide. The client needs to decide the trade-offs between invasive reporting, high-tough monitoring, minimal covenants, and often-times no personal guarantee versus a strict covenant packaging (including total leverage) and an occasional guarantee, but less monitoring. The same RM can navigate through both groups, and over the course of a relationship a client might have a stint in each group.

This also keeps the RM involved throughout the relationship, which now becomes cradle-to-grave. Bank RMs are not used to staying involved when a credit migrates to ABL, work-out or worse, bankruptcy. This model keeps them involved rather than have a client potentially rotate through different groups (such as entering work out before either transferring to the ABL group or exiting the bank entirely). Ask a business owner if a trip to special assets made them want to stay with a bank? You won’t get too many positive answers! The RM has an enormous ability to keep a client and hence forth revenue and navigate a client versus what happens when you keep the business lines separate, creating a full client hand-off. It should be noted that the hybrid model allows for this type of flexibility as well.

Interestingly, both models (#1 Product and #3 Hybrid) appear seamless on the front-end. However, once the client goes to ABL the corresponding administration, credit review and account management is fundamentally separate and different from the commercial bank – same RM, but different credit and portfolio management. Said differently, the back-ends remain separate as cash flow lending at a bank is largely an asset-gathering endeavor, while ABL is largely an asset monitoring endeavor. The business model debate comes down to a few key decision trees of which the first is whether bank-ABL groups should be a product within a bank, their own business or a hybrid, as certain groups are very strong in the sponsor world. This fundamentally defines the single biggest point banks need to decide. The banks that have ABL as a product are truly relationship-focused because the RM who has spent in some cases years building a relationship is going to handle the relationship irrespective of loan classification.

To gain adoption in the biggest banks, the ABL product has diluted to springing rather than full dominion, among other key points such as diminished reporting frequency. It is an open secret that bank-ABL is really ABL-light. Even with that, it’s a big shock to the system when a client gets transferred from commercial banking to the bank’s ABL group. Said differently, it’s a shock to go from a 20-page laser-pro loan agreement to a 100-page ABL loan document – surprise! The competition has proved fierce for these borrowers, so a new bank-ABL product has been evolving over time with springing everything. This product is really risk-rating based more than anything else as the truly risk-rated companies get pushed out quickly. Think I am wrong? The author would like to ask every ABL with at least 20 years of bank-ABL experience how many liquidations they did the past ten years versus the non-bank world. This is only partially due to the appetite for risk from non-banks versus banks, as opposed to the ongoing trends in bank-ABL.

Several important and disparate trends are driving huge differences between how bank-and-non-bank ABLs conduct business. Bank-ABL today has truly migrated to an ABL-light and OCC regulated product. It is effectively classified under the same rules as C&I. Just as importantly, the covenants are light, the field audits are less frequent, and everything is springing. There is a fundamental issue that each bank-ABL executive will say – credit rating and credit risk are fundamentally different risks with one being real and the other being perceived. Pre-COVID-19, bank-ABL executives relished a good retail bankruptcy restructuring or liquidation. They would make the DIP a fee opportunity or be supremely confident in the liquidation value and then some. The risk-rating of these credits would have absolutely zero correlation to the real risk. The need to retain customers and the bridge between perception and reality should make for an interesting next decade in ABL.

This is just one of many examples that has created different business models in the ABL world with the bank-ABL going one direction and non-bank going another – better structures and relatively higher yields. That all said, where the convergence is going to come into play is where the non-bank ABL market at the upper end is going to achieve scale, capital efficiency and further margin compression. They are effectively going to become the version of bank-ABLs ten years ago! Yes, that is right, and it is also why it should lead to consolidation. At some point, this will be self-evident to the strategy departments of banks that can get strong yields, keep tougher clients, and reduce operating expenses in special assets. Just as importantly, most of the clients will come from the banks.

This leads into Super Communities joining the fray. The Super Communities defined as $10 billion in assets and above, compete regularly with the Super Regionals and Super Powers, but in their specific communities. The world changes once you are a C&I focused community bank that gains enough steam to get on the radar of the regulators. This means many things, especially increased costs in the risk management department. It also means that these banks need an ABL group, special assets or in several cases both.  A few years ago, this would have been considered a luxury, but it is now becoming table stakes for the Super Communities as it is very difficult to get the clients and sometimes just as hard to keep them. What they have found is that bank-ABL can be effective when done right. What is new about this trend is the amount of community banks that have transformed into Super Communities via successful acquisition strategies.

It is hard to think about the future while there is so much uncertainty at the present, but uncertainty often spurs conversation and innovation. That is exactly what is happening right now as innovative leaders at the leading bank-ABLs are taking this time to think about the future. The last twenty years saw two waves of ABL cycles from big banks buying ABLs to the rise and consolidation of the non-bank ABL industry. The next ten should bring real refinement to the bank-ABL business model. This is going to happen as ABL is now a mature one with both bank understanding and client acceptance.

So, what does the future of Bank-ABL look like?  Dr. Emmett Brown (Christopher Lloyd) said it best: “Roads? Where we’re going, we don’t need roads.” The future has not been written yet. No one’s has. Your future is whatever you make it. So as an industry let’s make it a good one.

Link to full article here.

SG Credit Partners was once a single product division of Super G Capital, but in 2018, Marc Cole and Charlie Perer decided to branch out by co-founding SG Credit Partners. Since then the company has expanded its product offerings, brought in a bevy of new talent and used an infusion of capital from Cynosure, 4612 Group and MidMark to position itself for further growth. 

SG Credit Partners has a clearly defined role in the lending marketplace. It is a term lender and provider of senior and junior structured credit solutions to the lower middle market. Led by Marc Cole as CEO, the company focuses on situational needs in the $1 million to $10 million range, with Cole noting that between $2 million to $7 million is the real sweet spot for his team.

“By focusing on situational needs between $1 [million] to $10 million, we stay above the fray of fintech and below the crowded and competitive field of much larger funds,” Cole says. “We are transactional by nature and do the hard work the bigger funds and conforming pools of capital can’t do in our size range.”

But SG Credit Partners wasn’t always set up like this. In fact, it wasn’t always called SG Credit Partners.

Beyond a Stretch Piece

SG Credit Partners can trace its roots back to Super G Capital, where Cole and Charlie Perer, who now heads originations at SG Credit Partners, ran the company’s cash flow lending vertical. At that time, Cole and Perer were primarily focused on partnering with the asset-based lending community to provide secured, non-collateralized term loans, or what are commonly called stretch pieces, to fill a credit void that conforming ABL could not solve. The cash flow lending vertical was part of a two-division approach for Super G Capital, with the second division focused on merchant services, which was the original driver of the business. While the company as a whole was active in lending to the payments industry, Cole and his team kept their eye on ABL as a growth opportunity and entry point into the market.

“Our initial cash flow division was solely focused on partnering with the ABL community,” Cole says. “We got our start by focusing on one product… and we grew that business from a startup within Super G to spin out as a separate company and built a brand in the industry.”

However, despite finding a niche for themselves, and close to several hundred million funded, Cole knew that relying on a single product was inherently risky.

“We realized the limitations and the risks that come from one product,” Cole says. “We set up SG Credit Partners as a platform focused on using national relationships to provide multiple solutions.

“Our success in building national relationships with senior lenders and investment banks led us to see a much bigger picture and opportunity. This realization helped us rethink our product suite, team and capital base.”

With that mentality in mind, Cole and Perer elected to spin off the cash flow lending business and launch SG Credit Partners in 2018, with their sights set on expanding their offerings in lower middle market business lending. In the two years since launch, SG Credit Partners has certainly been able to succeed on its expansion. The company now offers structured cash flow, non-conforming ABL, distressed/special situations lending, software lending and high net worth liquidity solutions.

“We mostly target the non-sponsored businesses as we understand the family-owned business mindset and needs,” Cole says. “Our partnership with the ABL community is still front and center, but for us it was important to expand beyond providing the stretch piece to their clients. We will never compete against conforming ABL, and instead we focus our products on the credit voids that regulated lenders can’t sell with traditional products.”

As SG Credit Partners built up its new lending capabilities, Cole identified a need to change the culture of the company, shifting from a focus on growth to one based on credit.

“As a startup, you go through periods where you are hoping for the phone to ring when you are trying to build a name for yourself,” Cole says. “Starting as lending outsiders, it wasn’t easy to see quality deals in the early days. We were patient and over time earned trust from senior lenders that saw us as a shorter-term capital solution for their clients. A few years ago, we woke up and were not a startup anymore, which mandated a new period of change. As deal flow increased and assets grew, suddenly credit discipline became everything.”

Assembling the Leadership Team

Part of that change involved bringing in an expanded senior leadership team to best position SG Credit Partners as it reached $100 million in assets.

First up was Mack McNair, previously from CIT, Silverpoint and Virgo, and currently CEO of MidMark Financial, who led the investment into SG Credit Partners as chairman. Then came Andrew Hettinger, who previously worked for Crystal Financial and was recruited to be SG Credit Partners’ chief investment officer. Lon Brown, a former Bank of America and credit fund executive with experience in real estate and special assets, joined next. Brown is now the senior credit advisor and a board member for SG Credit Partners, and Cole credits him with rebuilding the company’s portfolio management capabilities.

“With Andrew heading credit, Lon guiding portfolio management and Charlie focused on originations, that enabled me to expand the team and build SG Credit into a national credit platform,” Cole says.

The team building didn’t stop there. The company expanded its regional footprint by bringing in Gordon Brothers veteran Chris Koenig as a managing director in Boston, former AloStar Capital vice president Carlos Tan as a senior vice president in Atlanta and John Todd from AloStar Capital as a managing director in Chicago. Koenig and Tan became team members in 2019 and Todd was hired in February 2020.

“We now have superb professionals in each region,” Cole says. “These executives complemented our core team in Southern California and enabled us to have senior professionals throughout the country.”

Every team needs a leader, and Cole fills that role for SG Credit Partners, using a varied range of experiences to direct the company.

Cole got started as a professional with a five-year run in the venture capital space, an experience that still influences his perspective today.

“The venture world is incredible as it teaches you that the team is paramount and creativity and hustle can overcome most challenges,” Cole says.

Cole eventually moved on from venture capital and took a role leading investments with a family office in New York. There he was introduced to bridge lending and structured credit in the lower middle market, an experience that would later lead to SG Credit Partners. While working at the family office he met Perer, with whom he would work as a business partner for years, even to this day.

“Working side by side with a single successful investor teaches you how precious capital is, so there was always a focus on capital recovery similar to the lending world,” Cole says.

Within the family office, Cole became a business founder himself, helping to co-found fintech firm Bluefin Payment Solutions and guiding it through the startup and growth phase.

By 2013, with a number of varied experiences already on his resume, Cole joined Super G Capital to help institutionalize the business and five years later, he helped launch SG Credit Partners. Today, with the company continuing to grow, Cole still remembers what he’s learned.

“These different experiences are vital to a firm that focuses on providing situational credit to entrepreneurs,” Cole says. “I think my prior ventures solidified a belief that we can build a collaborative culture, think differently and provide lending solutions that were previously unavailable to lower middle market business owners.”

Filling the Void

Another recent and important step in SG Credit Partners’ growth was a 2019 investment from Cynosure, MidMark and the 4612 Group. The investment helped introduce some of the new leadership to SG Credit Partners and better capitalized the company to focus on the gaps it hopes to address in the market.

“Having a family office background, I understood the importance of working with long-term, patient family capital. It’s a huge market advantage,” Cole says, noting that SG Credit Partners has other advantages it leverages in the market.

“We feel that our team, the product set and capital base make us hard to compete with in an otherwise very competitive industry. Most conventional finance companies live and die by the terms of their own lenders’ credit buckets, and we are very fortunate to have two sophisticated family office backers that understand the importance of flexible capital and the cyclicality of credit markets,” Cole says. “There’s a large void for us to fill. By focusing on that credit void rather than owning the client relationship, we are a unique player in the market. We truly view other senior lenders as partners and not competitors, where we can provide shorter term capital to their clients.”

In a situation that Cole admits is not unique to his company, the COVID-19 pandemic created a difficult environment for SG Credit Partners to continue its growth, particularly during the months of March and April. However, Cole says the company will continue to meet the challenges ahead, with the hope of eventually completing acquisitions, hiring new team members and adding new lines of business.

“We remain cautious given significant uncertainty,” Cole says. “We’re eager to onboard new clients across all of our verticals when the collateral or cash flow meets our high bar of market caution. Across the industry we see defensive postures as the focus remains on portfolio management.”

Link to article here.

The Company:

Privately owned consumer debt collection agency.

 The Financing Situation:

The Company needed capital quickly to move on opportunistic portfolio purchases as well as working capital cushion while collection curves ramped up.

 The Solution:

SG was able to quickly get comfortable with the transaction due to the value of dedicated portfolio collateral as well as a strong personal guaranty from the owner. SG worked quickly to provide a $1.5MM funded ($2.5MM total) facility in a first lien position with interest-only payments. Closing timeframe was one week.

This transaction highlights SG’s ability to structure and underwrite collateral based / guarantor based loans. While many of you know us as a cash flow based lender, we now provide special situation (balance sheet) loans requiring creativity, flexibility, and speed to close. We also have a strong interest in providing customized solutions for illiquid high net worth entrepreneurs.

In the $850 billion private debt market, it’s the jumbo deals that tend to get the most attention. But the smaller transactions, to mid-size businesses that employ a large swath of Americans, make up most of the activity in the asset class.

Looking ahead at the remainder of 2020, the lower middle-market — broadly classified as financing to borrowers with less than $50 million in annual earnings — is likely to see a rise in activity, though far off the highs seen in earlier years due to the pandemic. Here, lenders that focus on smaller borrowers, weigh in on the dynamics they’re seeing, including higher yields and less competition.

Tas Hasan, partner at Deerpath Capital Management, which typically invests between $15 million and $50 million per deal:

“Our strategy has always been to do a larger volume of the same size transaction versus growing by doing a small number of larger deals in a very competitive space up-market. While there’s been a lot of growth in terms of players in the lower-middle market segment, you are not competing with 90 other lenders to do one $100 million loan.”

Brett Hickey, chief executive officer and founder of Star Mountain Capital, which makes investments ranging from $5 million to $50 million:

“We’ve been very active, across two primary camps of investing: one is helping existing portfolio companies acquire challenged competitors as well as helping structure, negotiate, finance and integrate multiple other strategic add-on acquisitions, in addition to investing debt and equity capital into new platform companies. I would say covenants and pricing for the non-sponsored lower middle market have remained strong — typically these business owners don’t want high amounts of leverage and they don’t mind giving protective covenants.”

Marc Cole, CEO of SG Credit Partners, which provides loans of about $1 million to $10 million:

“The economics have largely been sector driven. In software, where we’re highly active, we are seeing it be more competitive than pre-Covid lending. In broad based industries, within an asset-based lending umbrella, then we’re seeing more conservative terms across rates, collateral coverage and lending covenants that is a significant tightening over the pre-Covid credit bubble.”

Charlie Perer, head of originations at SG Credit, which provides loans of about $1 million to $10 million:

“We’re absolutely seeing a period of banks tightening. We’re busy for a few reasons: PPP has worn out, companies have to find a way of financing their working capital and borrowers in the lower end of the middle market aren’t really able to access private equity capital.”

Albert Periu, CEO and founder of San Francisco-based lower-middle market lender Neptune Financial Inc. (NepFin):

“One thing that we’re seeing more and more of is lenders partnering on deals. Lenders are reserving capital for loan losses, or they’re being more conservative and they want to diversify their risk. The uncertainty is still there, but we’re also seeing processes that we didn’t expect to be as competitive as they were. Overall, though, we’re still seeing spreads 50 to 100 basis points higher than before Covid.”

See the full article here.

SG Credit Partners provides situational capital ranging from $1-$10 million for the lower middle market with a focus on non-sponsored businesses. Headquartered in Southern California with offices in Atlanta, Boston, Chicago and Portland, the SG Credit Partners team has provided in excess of $250 million to 150-plus borrowers across a variety of industries and continues to expand its national footprint. Here, Marc discusses SG Credit’s efforts in going from a niche lender to a broader platform in order to better work with asset-based lenders and banks and why they are broadening their scope.

Marc, please provide some background on your career and your role as CEO at SG Credit Partners.

Cole:  I came from the private equity investing world and spent 11 years investing for a fund and a family office, so not the typical banking background.  I was involved in an entrepreneurial venture, where I co-founded a payment security company, and that’s what brought me to lending. In that capacity as chairman, I made eight acquisitions and one of those acquisitions introduced me to a niche lending business focused on merchant services. I moved my family from Manhattan to Newport Beach, CA, in 2013 to become the CFO of a niche lending company called Super G Capital.  My job was to institutionalize, capitalize and diversify Super G. In doing so, I ended up starting a cash-flow lending boutique with Charlie Perer, which became the predecessor to SG Credit Partners. In 2018 we formally spun out and re-branded as SG Credit Partners as part of creating a separate entity with which to raise institutional capital.

What drove the need to expand from being a niche lender?

Cole:  Charlie, who is co-founder and head of originations, and I learned and grew this business at the top of the market. In working with the ABL community, we found the right channel partners for our shorter-term amortizing term loans commonly referred to as “stretch pieces”; however, we knew that the best of times would not continue, as did our lending partners. We concluded it was time to raise fairly significant institutional capital from partners who understood credit. In our opinion, the best way to do that was from patient, institutional family offices. The objective was to raise capital that would not only survive, but thrive, during a downturn.  However, we also wanted to bring in outside expertise to help us launch a platform of credit products and build a national team as opposed to a continuation of the single second lien lending product that we were known for in the market.

Walk me through the process of raising institutional capital to broaden the platform.

Cole: We began by talking to balance sheet providers of credit. At that time, we were not interested or looking for a change of control transaction, which is what we ultimately did.  We were very fortunate to have met the right investors that came with a unique combination of credit experience, senior operating executives that they thought would complement our team and significant permanent capital. That process took about a year.  Like all great relationships, it started with an introduction to the right people and it grew organically from there.

What makes MidMark, Cynosure Group, and 4612 ideal institutional backers for SG Credit?

Cole: The investor group is led by Mack McNair, the CEO of Midmark. Mack also had experience with building nine other specialty finance companies into significant platforms. Cynosure and 4612 each has a unique combination of institutional capital bases, credit knowledge and patient family office structures. In the case of Cynosure, they come from a rich banking history.

Why did SG Credit decide to broaden its scope to become a national company?

Cole:  There is a significant market opportunity to partner with both banks and ABLs to provide a platform of non-conforming products up to $10 million in loan size.  We can now truly be a one-stop shop to finance everything from IP to M&E to RE as well as non-business collateral (personal assets) on a stand-alone or as a package. This is in addition to still providing our bread and butter second or split lien cash flow product. There is just so much competition upmarket, which portends well to our model as these funds are too big to focus on smaller or more complicated loans. 

The conforming ABL market is so efficient that what it did was create more white spaces across other lending verticals. That’s why we needed more non-conforming products to further complement and partner with banks and ABLs. The economics of a bigger fund make it next to impossible to consistently finance sub-$10 million non-conforming needs. Our uniqueness is our ability to solve most if not all non-conforming issues that ABLs face. We now have the platform, team and capital to do this.

We had the relationships and the deal flow, but we needed additional product to provide to meet their needs for nontraditional, non-sponsored, lower middle-market credit needs.

What has changed since the investment?

Cole:  The most critical change is we bolstered the senior leadership team with Andrew Hettinger from Crystal Financial, and Lon Brown who’s a veteran workout and portfolio management professional. We added an Atlanta office where Andrew, and a former Alostar executive, Carlos Tan, now sit and give us access to the Southeast, and we’ve added a Chicago office where another former Alostar executive, John Todd,  covers the Midwest, which is a huge priority for the company.

Additionally, we were able to take our check size, which historically had been $1 to $5 million, up to $10 million for select credits and we’re providing more flexible and more patient amortization. The combination of senior leadership, capital, national reach and broader product set has positioned us very well for the future. Our business has transformed into a national credit shop from a focus on just one product.

What are some of SG Credit’s strategies in partnering with ABLs?

Cole: We’re a senior lender-centric credit provider. So, when we’re working with ABLs, we can help them retain clients that need stretch or any type of non-conforming financing, we can help them exit clients when they’re looking to be taken out, and we can help them win business when there’s a sub-$10 million capital need. We can now do this better than before with Andrew as our CIO as he brings his upmarket sophistication to solving sub-$10 million credit needs.

What are some of the ways SG Credit Partners help senior lenders solve the needs of their borrowers since SG Credit has spun out?

Cole: We can participate in split-lien funding needs to provide additional borrower liquidity against assets that senior lenders may view as ineligible or out of formula.  In general, we can now provide an entire non-conforming solution and have the flexibility to be senior, second lien or uni-tranche in any given transaction. Most of our transactions are bespoke in nature.

How has COVID-19 impacted your deal flow the past few months?

Cole:  It is clearly a very challenging credit environment and, therefore, new deal environment. Because of the unique nature of our products, we are focusing on recurring revenue software, which has historically been half of our portfolio, and focusing on the highest quality, high net worth business owner-backed opportunities to solve their liquidity needs. This is an excellent market to find wealthy business owners who have newfound liquidity shortfalls where we can get comfortable with their asset mix, including real estate assets, personal and business assets.

When you’re not at SG Credit Partners, what can you be found doing in your spare time?

Cole: I am, like many, a newfound exercise enthusiast and I am in the quarantined Peloton club and haven’t left my bike when I’m not working.

Bio: Marc is the Co-Founder and Chief Executive Officer of SG Credit Partners, Inc. (“SGCP”) and a member of the Loan Committee. In 2018, Marc and Charlie Perer led the spin out of Super G Capital’s cash flow, technology, and special situations division to form SGCP.

Marc is a Director and Co-Founder of Bluefin Payment Systems. After completing a roll-up in merchant services, he partnered with payments entrepreneur Darrin Ginsberg, the Founder and CEO of Super G Capital, LLC (“Super G”). As Chief Credit Officer and CFO of Super G, Marc oversaw its diversification into cash flow lending and raised in excess of $100 million of institutional capital.

Prior to Super G, Marc was a Partner in a family office responsible for managing direct equity investments and a mezzanine loan portfolio of more than two dozen positions. Earlier positions include: Vice President of Mellon Ventures, a $1.4BN private equity partnership and Corporate Finance Analyst at Legg Mason.

Marc graduated Magna Cum Laude from the Pennsylvania State University.

Link to full article here.

2010 is the day the music died in special assets departments around the country. That’s the day that the Office of the Comptroller of the Currency (OCC) descended upon the big banks, especially special assets groups, and changed the rules by literally re-writing the playbook. What playbook you ask? Today each special assets group within banks with at least $50 billion in assets has an extremely specific policy manual that was re-written after the Great Recession in 2008. This policy drastically changed modern-day special assets professionals and essentially transformed America’s best fighter pilots from entering dogfights to becoming drone commanders. Prior to this change, the heart and soul of a workout was an intimate brawl and many of the weapons previously utilized were taken away. As a result, being a proverbial modern-day fighter pilot or special operative in special assets has changed dramatically in the past decade.

The proverbial F-16 stick was taken away from Maverick and every procedure was made by the book – or more specifically, by the OCC’s book. Special assets, historically, is a “by the seat of your pants” role, which is why you get the talented folks to do it – change is constant. You want uniquely talented professionals who want to solve puzzles whether it be credit or owner psychology. Today the process is fraught with red tape, and when you make the credit policy manual-driven, it can unknowingly give an advantage to the borrower. You should never take control away from the pilot, but that is what has happened. Since the last recession, the OCC has lived inside the big banks and thoroughly invested in re-writing the rules. The rules being applied to C&I lending and when a credit should be classified as criticized and reserves set aside.

The earlier the reserve, the faster the kick-out and less of a work-out is required. By virtually living inside banks, the OCC certainly did its homework and like all banks had to make rules on a portfolio basis. This means setting policy on a portfolio rather than on the individual recommendation of credit or special assets executives. Workouts are typically conducted on a case-by-case basis, or said differently, house-by-house, street-by-street warfare rather than city-by-city, which is how policy makers work. That is not the way it works in the theater of war, just asks the folks doing the work. More often than not, banks do come out whole, but nowadays all too often banks are incented to take the discount and move on, and we are talking pre-COVID-19. This is a major change from the past and again it should be noted that smaller banks without OCC monitoring face drastically different oversight. Too small to fail is an enviable position if you are at a larger bank.

After the last recession, the government came down hard on the biggest banks by increasing capital bases and forcing banks to reserve sooner. If you ask work-out executives off the record they will tell you that their own law firms conspired against them to make life more complicated as the credit approval list got longer. This created more paperwork, legal involvement, and of course more oversight. This definitely helped make banks sounder, but it had an unintended consequence by reducing the number of skilled workout professionals. Said differently, the problem credits were forced out earlier so the need for big work-out groups diminished. The actual workout work became more administrative. This change of taking power away from the operators in the field is a big deal. The pioneers that modernized special assets within banks trained for battle rather than paperwork – this is a real change from past practice. Being a workout office is tantamount to being a great fighter pilot. You cannot be afraid to engage and you need to know how to engage in a good dog fight.

Try doing that with no weapons! What the OCC changed was not only the rules of engagement, but the process to be even able to engage. Meaning, it became harder to enforce or even threaten enforcement because the policy behind enforcement at the big banks has become very bureaucratic. It is the point where trained professionals are more incented to take a discount than to engage in a real workout as the approval process and documentation process is more work than the actual workout. The author would encourage each reader to do their homework when it comes to the big banks.

It should be noted that there were of course positive changes from the OCC as their rules caused the banks to push out clients more quickly thus reducing the need for large workout departments. These changes fundamentally put the banks in very good capital positions, but it also made them weaker in key departments. Special assets is a pure expense until once a decade or so when a very unexpected event occurs that causes a major economic issue – whether it be economic or health related. Then, just like war, you need to recruit and train an army quickly. Here we stand today with banks having depleted their best tier 1 loan workout operators, and major write-offs are coming with a 10-year-old workout policy that was not meant for today’s economic environment. It is not hard to think back to the day when the music died.

The art of a workout comes down to hand-to-hand combat and knowing you have the skills and weaponry on your side. We are entering a whole new world that was clearly not expected and are going to ask professionals to go into battle with a legal manual rather than weapons. This needs to be examined immediately as there is an entire non-bank world at the ready.

What the OCC needs to do right now is unleash the tiger and let these tier 1 operators do what they do best, which is hand-to-hand workouts. Previously written handbooks were for a different time versus right now.

Don McLean said it best when he sang his famous song “American Pie,” but in the vein of today’s special assets world. Because the OCC tried to take the field, the special assets executives refused to yield. Do you recall what was revealed when the OCC showed their shield? The day the music died is the day the OCC arrived! Bye-bye Miss American Pie…

Link to full article here.

The sub-$10 million ABL facility space has long been a paradox.  Over the years, new capital providers have entered only to chase too few loans, while incumbent asset-based lenders shift and migrate strategy.  This creates a shortfall of good assets, and the cycle continues.  But it’s not always that easy.  Right now, we sit in what should soon be the start of a brand new cycle thanks to Covid-19. The past few years have been brutally competitive for the sub-$10 million ABL industry given the new entrants, specialization and certain vintage firms migrating upmarket.  Top of the market, like the last few years, may seem like an auspicious time to raise capital to form a new ABL shop, but that is exactly what happened in expectation of a re-set. The difference now is that the bar is higher and the need for scale or a point of difference, whether it be industry focus, national scale or selling strategy, has never been greater.

The last set of successful ABL shops to get purchased were borne out of the last great recession.  There has been no better time than the past few years to form a new ABL shop, focused on smaller credit, if one has a point of difference or ability to build a national dream-team, given we are at the start of what should be significant asset migration and the smaller credits at banks will absolutely be the first to experience stress.  This segment is the hardest to serve given the majority of these facilities will be sub-$5 million ABL facilities that require hands-on monitoring, among other things.  These credits are challenging to underwrite given the inherent risks of lending to smaller, working-capital challenged companies.  To state the obvious, managing a portfolio of smaller facilities requires a different team than running a larger upmarket bank-ABL group.  These are smaller, tougher credits with less liquidity and less management sophistication.

In addition, one point of caution that comes up over and over again is that new ABL entrants (not necessarily any of the ones mentioned herein) which are privately owned vs. private equity-backed are typically marginally capitalized.  Many have also not lived through a downturn, have a smaller margin of error and, if push comes to shove, may manipulate information to live another day.  It takes an experienced asset-based lender to adhere to sound credit policies and procedures and notice the red flags.

Despite the known challenges, the pre-Covid-19 environment was already over-competitive. That said, there should be plenty of room for both incumbents and new entrants to grow assets as right now banks are sitting on over $2 trillion of C&I loans.  To add to that, majority of community banks are not in the ABL business and most major banks have no appetite for sub-$10 million ABL facilities so the market will be there.  What this article seeks to explore are the strategies and points of difference of a few of the new firms who seek to take share in this new cycle. It should also be noted that some of the firms listed as new entrants are listed as such due to senior management changes that brought a change in strategy or significant capabilities.

New Entrants or ABLs with new leadership additions Republic (post-merger w/ Continental), Stonegate, Black Sail, Second Avenue, Dwight, Austin, Assembled Brands, Internex, Alterna

* For avoidance of doubt, this list does not include incumbents currently in this space or meant to be inclusive of every new entrant.

For new entrants, the reason for being is all about a specific point of difference, which could include industry focus, sales strategy or tech-enabled product offerings.  Take Assembled Brands, Second Avenue Capital and Dwight Funding who are are exclusively focused on consumer, food and retail/e-commerce and backed by groups with extensive experience. These teams have decades of experience in one industry segment and found strategic capital backing that enables them to go deeper into collateral.  On the other hand, Stonegate Capital is focused on several verticals and differentiates via its industry vertical strategy and human capital. It is one of the few lower middle market ABL firms who provide credit facilities to SaaS companies by viewing the recurring revenue as an asset to lend against – expect more firms to follow.

To juxtapose industry and vertical focused approach are generalist firms such as Republic Business Credit, Black Sail Capital, Alterna and Austin Financial that were either newly formed or, in the case of Austin Financial and Republic Business Credit, recruited experienced teams through hires or acquisition to expand their product offerings.  Republic has focused its strategy on a platform approach by offering multiple products (ABL, ledger line and factoring) now that it has national reach post-acquisition of Continental.

These firms rely on strong personal connections in certain respective regions and a flat organization structure that provides them the ability to close quickly.  The point of difference is senior level decision makers on the front line, minimal bureaucracy and lightning fast closing times.  Being able to provide certainty of close and consistently doing so is a major competitive advantage in this space as the deals are often more complex and the risk is arguably higher.

The aforementioned firms are not meant to encompass each new entrant or strategy, but rather to illustrate the breadth of new entrants and their respective points of difference.  From industry and sales vertical focus to tech enabled strategies there is clear innovation taking place.  The time also makes sense as the last new crop of ABL entrants were formed during the last cycle and many have been bought with Gibraltar, Veritas and North Mill being recent acquisitions. Many of these firms have also gone upmarket after getting bought as a way to justify the premiums paid as there is only so much scale possible when booking and servicing smaller credits.

The combination of economic cycle, entrepreneurial ABL execs and plentiful lender finance capital should create an exciting time for the low-end of the ABL market.  Regardless of front-end point of difference, the most significant change from an execution perspective is going to be time to close. These new firms are aggressive, sophisticated and hungry for new business. They have also streamlined their respective organizations to be able to execute. Being able to execute is a clear point of difference and a market changer.

Expect the time it takes to close an ABL deal to start to change as we continue to see more entrants.  The competition is too good and all ABL firms are going to have to re-think how they compete and where they deploy resources.  No one competitor maintains their lead forever, but what the new entrants should do is force every incumbent to focus on sales strategy and the tried-and-true basics of servicing the customer.  At the end of the day, that’s why we all got into this business in the first place.

Link to full article here.

One unexpected result of COVID-19 is the reexamination of asset-based lending initiatives by community banks. Smaller (sub-$10 billion) community banks have been exiting or evaluating an exit from ABL before they really gave it a shot. It should be noted that most entered during a great economy in preparation for a downturn, yet many decided to reverse course during a downturn, which is the opposite of what should be expected. Why did smaller banks get into ABL in the first place and why would they choose to leave now? There are actually good answers if one digs deeper.

ABL provided an obvious solution to growing pains. Many of the banks that grew via acquisition over the past 10 years formed groups in advance of what they knew would be a pending downturn. Two main enticements made ABL attractive to community banks: higher margins and lower perceived risk. The margins and fees on ABL products were higher than what these banks’ mature portfolios provided. Second, the perception of lower risk was created when community banks compared their own non-performing and charge-off ratios with what most proficient ABL businesses experience.

The ABL product, as it turns out, is a great fit conceptually but difficult fit operationally and organizationally. ABL is a people-intensive, fundamentally different product than traditional C&I community banking. Community banks are mostly real estate-driven and not set up to manage or underwrite tougher credits. Also, most community bankers are not trained as asset-based lenders. Mitigating weaknesses through enhanced monitoring and offsetting poor cash flow with availability blocks or boot collateral are far from a community bank’s appetite. It’s a different business and business model, and when push came to shove, smaller banks were not prepared to transition clients to ABL or on-board them like the bigger banks who have resources in place.

The community banking business model is the definition of relationship banking at its finest and very heavily real estate-oriented. The C&I credits are traditional cash flow loans with light covenants and quarterly reporting. Community banks thrive off deposits, real estate and relationship managers who can play an integral role with each client. ABL is the fundamental opposite — no real estate, no deposits and relationship handed off to a portfolio manager. Said differently, it’s a transactional product that does not come with all the ancillary business of a “good” community banking deal.  It makes sense that community banks would think about collateral management during the boom years and even put folks in place, but truly handing off a relationship and changing the dynamic has proven to be difficult.

The relationship between a business owner and their respective community banker is a tried and true bond. Most community bank relationship managers truly manage credits cradle-to-grave, with grave being sale or exit. ABL defines cradle-to-grave very differently because grave in ABL is typically a liquidation vs. exit in a community banking world. ABL is not in the DNA of most C&I trained bankers and it’s a very hard process to transfer a client to hands-on borrowing base management and field audits vs. exiting the client. Moreover, having ABL capabilities means having the infrastructure and for most banks with sub-$10 billion of assets, it is just hard to justify, particularly in the early stages of an ABL business when expenses are high and there’s little or no income. In addition, most community banks that even reach $10 billion in assets are less than 25% C&I, so the math gets further compounded as to whether it is worth it.

True community banks run very lean when a relationship manager provides hands-on client service to their own book of clients. You underwrite the character of the person just as much as the business because community banks simply don’t have the credit monitoring capabilities that asset-based lenders and big banks have. This business model requires a lean approach and reliance on local real estate, treasury and stable credits. It’s relatively scalable given the relationship manager and the chief credit officer review each credit quarterly. Community banks by definition are smaller than the big regional and national banks, so the chief credit officer is often the work-out officer who decides whether to go deeper in the credit or exit.

Realizing it or not, community banks entered a people-intensive, high-touch, low treasury, transactional lending business. It was not surprising that many community banks ventured in toward the end of a cycle, but very surprising to see them rush out at — or in some cases before — the start of a downturn. It is unclear whether the credit culture clash, necessary investment in back-office collateral monitoring or transfer of relationship was the key determinant in many community banks changing course. This article in no way is meant to criticize smaller community banks trying to be innovative, but is meant to point out the economic, organizational and cultural difficulties as it pertains to integrating ABL into a traditional community bank.

What should also be noted is that the community banks who have succeeded have significant scale.  Community banks such as Wintrust, Synovus, Western Alliance, Berkshire Bank, First Financial and First Midwest, among others, each invested significant resources and many years to build successful ABL shops. It should be noted that these banks have scale, assets and resources that rival regional banks. They also have such large asset bases that the overhead associated with ABL can be better absorbed. Give credit to these small community banks for being innovative and for sticking to their knitting. Fortune seems to favor the bigger rather than the bolder when it comes to ABL and community banks.

Link to article here.