Link to article here.

In this installment of our series of “Executive’s Corner,” featuring articles from guest writer Charlie Perer of SG Credit Partners, the author sits with Ken Frieze to gain an understanding of his views on leadership, market cycles and the competitive environment, among other topics.

Charlie Perer: Thank you for your time. It’s incredible to think that Gordon Brothers was founded over 100 years ago. Can you talk about the legacy of Gordon Brothers and what your family has done to preserve and maintain its culture?

Ken Frieze: Thanks Charlie. First, let me thank you and ABL Advisor for inviting me to share the Gordon Brothers story…and yes, it’s a long one. Gordon Brothers was founded by my great-grandfather in 1903. I actually remember going to see him as a young child at the small Gordon Brothers office in downtown Boston in the 1970s. While the operation was small back then, the values he, then my grandfather and then my father championed, still guide who we are today. Always do the right thing; follow through on commitments, even if it hurts; embrace change; take risks and learn from your mistakes. That same strong integrity and entrepreneurial spirit still underpins our now 25 offices worldwide.

Perer: What does the Gordon Brother’s brand stand for?

Photo of Ken Frieze - Chief Executive Officer - Gordon Brothers

Frieze: Put simply, and we hear this from clients, their capital providers and professionals, that above all else, “Gordon Brothers closes on transactions we propose.” In an industry often maligned by “bait and switch,” “left at the alter” and other negative connotations, we are proud that our reputation stands out and connects back to the values established by J.B. Gordon in 1903.

We often talk internally about why we do what we do. Today’s workforce is purpose-driven. We discuss how we can help companies transform to meet changing market conditions; keep client companies alive and employees employed; recycle assets to their highest and best use; mitigate uncertainty and lock-in outcomes; keep lenders safe and informed; and use our success to benefit our employees, shareholders and communities.

Our mission is to successfully guide companies through major transformations. This is the core of who we are and what we do. We actually refreshed our brand and updated our logo a few years ago. It now includes a symbol we call the “portal” which graphically represents Gordon Brothers guiding clients through such transformations. We make that happen through the three operative words of our mission statement: rapid, customized and guaranteed.

Perer: When did you become CEO? Can you please talk about your leadership style and how it has evolved?

Frieze: My career at Gordon Brothers dates back to 1998 and I have served in various capacities and divisions since. I was appointed by the board to CEO back in 2014 after being president for a period. Of course, you’d have to ask my colleagues at Gordon Brothers to get a true sense of my leadership style. That said, I strive to lead by example, be transparent and inclusive, and focus on the objective facts. I’m much better today, now in the second half of my own century, at focusing on what truly matters instead of the daily distractions of running a complex business. As a firm, both employees and clients are the top priority–which we believe drives long-term enterprise value.

Perer: How has Gordon Brothers’ legacy strength in retail liquidations led to multiple strong businesses, including lending, appraisals and valuations? Can you please describe the breadth of your offerings?

Frieze: We have such an established heritage in retail, it surprises some that we actually do more commercial & industrial transactions than retail. Today, Gordon Brothers is the only firm that offers the combination of disposition, valuation and capital solutions globally. While some of our competitors have strong and established offerings in certain geographies or products, we have the unique ability to bring it all together under one global integrated solution.

We are currently the largest appraiser to the commercial finance industry in the world (stemming from the combination of the Gordon Brothers legacy global appraisal businesses with AccuVal and Emerald Technologies). We purchase and sell more C&I assets than our direct competitors combined. We conduct more retail events than anyone – including country exits, customer migrations and SKU-reduction programs.

What’s interesting is the vast majority of our clients are healthy companies going through proactive paring of assets or liabilities to remain healthy as their market environments invariably change.

We often combine our segments – inventory, receivables, real estate, brands, machinery & equipment – into one comprehensive solution we call “strategic optimization.” A great example of this is a concept we pioneered in retail that we coined “Opti-channel.” Opti-channel is the next evolution of omni-channel focused on ROI, not just cross-platform integration.

Ultimately, we leverage both art and science to narrow the standard deviation of estimated outcomes – the essential ingredient for accurate appraisal to successful transaction results for our clients. Fortunately, we maintain the world’s largest database of asset values along with the most ASA accredited appraisers and the most tenured team of deal-professionals in the industry. We pioneered bringing these analytic and merchant capabilities together by industry segment. We maintain expert teams and databases in over 30 major sectors and hundreds of subsectors.

All of this adds up to roughly $10 billion of transactions annually and over $1 trillion of appraisals to-date, making Gordon Brothers one of the largest firms of its kind in the world.

Perer: Where does international expansion fit into the picture?

Frieze: We’ve been on a steady march to build out Gordon Brothers globally over the past 15-plus years. We conduct business in over 35 countries representing the vast majority of the global economy. We have centered our global footprint in the US/Canada, UK/Europe, Japan, Australia and South America, but we reach far beyond this. For example, last year we did our first deal in Russia and we’re right now operating a major deal in Indonesia and Malaysia. Each jurisdiction presents its own unique challenges and opportunities, so we always build out local teams to serve these geographies.

What’s interesting is that while local laws, language and customs are always different, the fundamentals of our business tend to be more common than you would think. Consumers respond to retail sales similarly regardless of where in the world they are. Also, brand and machinery markets are often global rather than local.

Perer: What is the most innovative line of business at Gordon Brothers?

Frieze: Innovation is a core part of all our business efforts, but I think one of the more interesting areas for us right now is our brands business. We have been buying, selling, developing, licensing, appraising and lending against middle-market brands for years. We are the only firm, as far as I know, that fully integrates a brand capability seamlessly with our other asset solutions. Our recent transactions have ranged from the purchase of Bench, to financing of Cherokee, to supporting the conversion of Ben Sherman. These follow on from a long and successful run owning brands like Polaroid, The Sharper Image and others with partners.

There is an uncomfortably wide range of brand valuation opinions out in the market, which is why we built our own in-house ability to value and underwrite brands. We’re often surprised by the lack of disciplined approach in this segment exhibited by otherwise respectable firms.

Perer: It was publicly announced that Stone Point Capital invested in Gordon Brothers. How much of this had to do with timing of market cycle given you are in a counter-cyclical business?

Frieze: Ah, that’s one of the common misconceptions. While we certainly benefit from recessionary periods, our opportunity set is driven as much by sector dynamics and company-specific circumstances as the overall macro environment. Our decision to take on Stone Point as a partner had more to do with potential for collaboration with the Stone Point team and their portfolio of other financial services companies than anything else. Now, with a year and half under our belt, we couldn’t be happier with the partnership.

Perer: You have tremendous insight into the economy given your firm’s reach. Where do you think we are in this market cycle?

Frieze: Well, the pundits are now predicting a U.S. recession in 2021. We’re certainly due for one if you look at sine wave of past cycles. It’s easy to point to many indicators on both sides of the argument (e.g. inverted yield curve vs. low unemployment). One thing is for sure, this time around has greater uncertainty around geopolitical risks than before. When we will look back at the cause(s) of the next recession, my guess is it’s going to be more than one or two focused disruptions or bubbles, but the overall correction will still not risk the total meltdown at the core of the Great Recession. More specifically, we’re certainly at the high end of the cycle with high asset values, cheap and easy credit and low interest rates. As those fundamentals shift, it will place even more pressure on poor performing companies and their lenders to work out of these tough situations. However, there simply aren’t as many experienced work-out professionals at these lenders today, and the “boot collateral” of the past has mostly been soaked up as additional collateral in the run-up since 2009.

Perer: Lastly, tell us something you are worried about that the rest of the market has yet to figure out.

Frieze: At the highest level, it’s the deepening global division between populists on the right and socialists on the left – leaving a void in the center. Healthy economic activity is rooted in stability and the world is less stable now than in recent times. One always looks back at disruptions to easily see the lemmings who didn’t stop to think or look ahead. This is proven human and business behavior, so it will be no surprise to reflect back on to what the market didn’t figure out at the time. I have often commented that the press and social media overamplifies while the markets are short term and don’t price in what’s around the next corner too well. Somewhere in the middle is the most likely. So, what am I ultimately worried about? Time. With little buffer in the system, experienced decision makers are spread too thin and face too many distractions to guide us through the next cycle.

An increasing number of commercial banks are creating ABL divisions. Yet, as Charlie Perer muses, these divisions are still playing second fiddle to C&I and not receiving referrals from their C&I colleagues, even when ABL might be a more appropriate product and not utilizing it will cause a client to exit. He explains that breaking down the silos between divisions will serve customers more effectively and keep them as clients.

Is bank ABL the most undersold bank product?

This is the question many of the nation’s leading banking executives are asking themselves, and the answer is “yes!” The reason is simple — ABL is a hard sell in an “ABL light” world, and many banks have not functionally integrated ABL with C&I. All major and regional banks have their playbooks for retail banking — deposits and services — and large corporate services — access to banks’ balance sheets and Wall Street.

However, the C&I loans market is already competitively targeting middle market companies, typically defined as between $50 million to $250 million in revenue and $10 million to $200 million in facility size.

Direct marketing easily reaches retail-driven clients. The credit policy remains FICO-based, as it has for many years. Large corporations are served by teams from the major money center regions, but middle market businesses are widely spread throughout the country and need to be serviced by regional commercial banking teams. For every GM and Boeing, there are 10,000 companies that comprise the supply chain for those conglomerates, and these companies have middle market banking needs.

An Underserved Market

Acquiring and servicing these middle market companies as clients has also proven to be challenging, as well as competitive. This asset segment continues to be the hardest and most complex to holistically solve. Non-sponsored middle market companies continue to be underserved by lenders, and ABL is at the crux of it. Most banks continually under-or-poorly sell ABL, and it’s typically no fault of the banks’ ABL groups — just ask them.

A bank ABL group’s best referrals usually come from its own commercial bankers. So, the ABL group is sometimes only as good as its commercial banking partners. Try attending a strategy meeting at the nation’s largest banks when you have thousands of middle market bankers in every major city in the country. Do these folks know the ABL product? Do they know how to sell it? Is compensation aligned for both groups? These sound like easy questions to answer, but this writer can assure you, they are not. This writer travels the country and asks these questions, which all readers/lenders should be asking, and receives a wide variety of different answers.

Banks Restructuring ABL Groups

The tide is finally starting to turn as we get closer to the next recession. Interestingly, many banks are restructuring their ABL calling strategy to intensify efforts to better serve middle market business. In other words, they recognize an education gap exists regarding how best to educate bankers on the ABL product and then sell it to clients. It requires both a cultural change and a deeper understanding of a new product that is high touch. Banks are used to competing against each other as opposed to selling ABL. The banks that succeed in keeping more clients and better managing risk will successfully educate their front-line commercial banking groups.

Communication amongst groups is as important as education. At SG Credit, we have developed the “Triangle Offense” to better integrate with banks and help transition clients to and from each key division — C&I, ABL and special assets. Regional banking executives may know there is a problem, but might not want to give up the client for fear of the client getting stuck in special assets or have concerns over the client relationship if transferred. Banks rely heavily on their reputations in each market, and nothing is worse than an unhappy borrower spreading bad news.

SG Credit created this simple diagram to better work with banks who have strong bank ABL practices. Our capital is typically in the form of a structured term loan and acts like an unregulated pool of capital within a bank or ABL to better enable banks to keep, transfer or exit a client. The next iteration of better bank integration of ABL will be based on how well banks transfer C&I clients to ABL and thus keep the client that does not qualify for a C&I loan, rather than exiting in full. This is a major endeavor that the nation’s leading banks are actively working to accomplish. The challenge for large banks is to enact this strategy on a regional basis in every section of the country it operates in and to overcome its own silos of C&I, ABL and special assets.

Triangle Offense

We have now seen this first-hand. This writer has been on the phone within days, if not hours, of receiving a client transferred by a special assets division. The bank’s special assets and ABL groups both realized a financing gap existed and knew to call SG Credit to ensure the client had a solution. SG Credit did not re-invent the wheel or, in this case, the triangle, but we have started integrating with banks as they begin to appreciate the significance of bringing their ABL groups to the forefront. Providing an unregulated strip of capital can make a huge difference when transitioning from a traditional cash flow leverage structure to conforming ABL.

Historically, the process of converting clients to an ABL structure has been disjointed as bank-owned ABL is still a relatively recent trend, and banks would traditionally just exit stressed credits. Education and compensation are key when building a platform that requires cross-selling. Most banks have either formed or acquired ABL groups over the past decade. Still, the ratio of ABL to C&I clients is still very small in most banks. It is a mystery why banks do not see that integrating more with their ABL divisions offers can allow banks to keep clients and exploit a large market opportunity.

The banks that are most successful at executing this integration will keep more clients and better transition those clients to ABL when needed. Some banks talk about putting the client first, while others actually do it. Per above, investing in and integrating a multi-product platform is challenging, but highly rewarding if a regional or national bank can successfully assemble and integrate all products — C&I, private banking and investment banking and especially ABL — under one roof. Many banks are trying to do so, and it should be fun to watch and see which ones succeed.

Link to article here.

MidMark Financial Group, along with The Cynosure Group and The 4612 Group, announced a significant closing of $113 million in growth capital to acquire majority control of SG Credit Partners, Inc., in partnership with management.  This investment is the initial phase of a plan to build SG Credit into a leading multi-product opportunistic credit platform.  As part of the investment, industry veterans Andrew Hettinger, Lon Brown and Christopher Koenig will join the firm as Chief Investment Officer, Senior Credit Advisor and Managing Director, East Coast, respectively.  Based in Santa Monica and Newport Beach with regional offices around the country, SG Credit Partners helps middle-market companies seize opportunities and solve challenges when traditional banks, non-bank lenders, and larger funds cannot due to regulatory, timing, funding, or size constraints.

SG Credit focuses on structured credit solutions in several niches including structured cash flow term loans, technology/recurring revenue, and private banking. The new investment provides the capital and resources necessary to fully fund SG Credit’s business plan and provide national scale to partner with lenders across the country.  “We are filling a void for shorter-term capital needs requiring speed to close and creative structuring that do not fit with traditional mezzanine and uni-tranche lenders,” said Marc Cole, co-founder and CEO of SG Credit Partners.

“We picked MidMark, Cynosure, and 4612 given their longstanding success investing in innovative specialty finance businesses and proven ability to create value.  Their investment solidifies our capital base and will further accelerate our goal to be the market leader in solving $1 to $10 million capital needs for mostly non-sponsored businesses. Our structured cash flow, technology, and private banking lending business became so successful that the time had come to bring on institutional capital,” said Marc Cole.

“SG Credit Partners is senior-lender-centric, meaning many of our referrals come from banks and non-bank lenders. Our goal is to provide a customized non-dilutive solution to their clients. We look forward to the next stage in our firm’s growth and to collaborating with our new investor group. Capital is no longer a constraint and the investors’ disciplined underwriting and attractive capital base make them the ideal partner for SG Credit,” said Charlie Perer, Head of Originations.

“We are excited to partner with SG Credit as we work together to build a national platform of opportunistic credit products,” said MidMark CEO, Mack McNair.  “Marc and Charlie’s relationship-based approach to originations and client partnership fits well with our investor group’s philosophy, and having Andrew join as CIO will be a game changer for the company as SG focuses on its core product and considers opportunities in adjacent markets.  Likewise, adding Lon as a Senior Advisor will be invaluable to the evolution of the organization.  We look forward to extending our experience growing emerging specialty finance companies by bringing management, technology, and capital to support SG Credit’s creative approach to the market.”

McNair will serve as Chairman alongside board members, Marc Cole (CEO), Andrew Hettinger (CIO), Lon Brown, Jeff Brown, Mark Oligschlaeger (Cynosure), and JT King (4612).

Link to article here.

Clint Eastwood starred in the classic year 2000 movie, Space Cowboys, about a retired astronaut who, along with his colleagues, was sent back to space to fix a satellite he helped build in the 1960s. It turned out (in the movie) that NASA had no one around with any knowledge of the dated technology built into the satellite, so they had to turn to a retired astronaut to solve the problem. The importance of this particular satellite was that it was carrying an old nuclear warhead at risk of detonating.

Flash forward to 2019 and one could argue we are dealing with the same crises in the field of special assets. The good battle-tested professionals who were in their 40s and 50s during the 2008 downturn are now in their 50s and 60s and thinking about retirement or joining a more lucrative turnaround firm. This combined with banks focused intensely on their expense ratios as mandated by Wall Street and the slimming down of non-revenue producing divisions, has a created a dearth of experienced special assets professionals. It’s easy to see why banks are holding on to assets and trimming expenses to maximize profits while they can, but it’s a clear risk to do so at the expense of your front line of defense — professionals skilled in workouts.

Rather than one proverbial satellite, the nation’s banks are dealing with the equivalent of a watchlist of marginal credits and a bunch of space cowboys — professionals who are at or nearing retirement or worse have been downsized as part of cost cutting. Try calling the workout departments of big and small banks and ask them off-the-record whether they are prepared for the next downturn. The answer is no. It’s a hard job that requires on the job training and a unique set of qualifications — knowing when to use the hammer versus the velvet glove; knowing when to exercise remedies versus judgement and patience. Banking is at the end of the day a local and regional business — meaning whatever experience a borrower has on the way in or out will surely be communicated to their respective communities.

It’s a unique job that demands a high level of mental acuity. There is a daily/weekly/monthly grind to dealing with the hardest credits. It’s tantamount to getting a new multi-dimensional puzzle to solve each week with problems ranging from uncontrollable commodity price swings/tariffs, to bad or entrenched management. Neither is easily solvable and these are real time problems as liquidity will be challenged during these situations. There is a toll this takes when the hardest problems are put on your desk and success is defined as getting par and moving on. In addition, the time spent on regulatory and general reporting requirements makes an already time-consuming job more arduous.

Another factor to consider is that the job has become eminently more complicated over the past ten years for two critical reasons: The proliferation of complex uni-tranche and split-lien deals, and growth in capital markets. Stated differently, deals are not only more complicated, but there are many more multi-lender deals that will surely create court fights… and the take-out options are much different. The ABL market exploded during the past decade and there are now options from distressed private equity to bulk loan sales. The non-bank lenders have provided liquidity that was limited in the past. Knowing capital markets is also becoming a critical component.

It does not take crystal ball to know the direction we are heading and that it can’t be that far off on the horizon. According to the New York Times, loans to companies with large amounts of outstanding debt — known as leveraged lending — grew by 20 percent in 2018 to $1.1 trillion, according to the Fed’s twice-annual Financial Stability Report.” There is no arguing that credit standards have loosened (both bank and non-bank) over the past few years and banks have fought bitterly for assets. The result is that while the economy is by all means still thriving, the banks have just booked significant assets with higher risks, looser standards and lower rates.

There is going to be a real leverage epidemic in the next downturn and the resounding theme seems to be that management seems to think allocating staff with commensurate experience will be easy to do when many of their most experienced staff have been downsized, are on the verge or retirement or have found more lucrative consulting work. Each bank should be asking themselves what their plan is for their workout department and start checking where their space cowboys are today.

The Company:

Venture-backed, cloud-based software platform primarily targeting outbound sales organizations.

The Financing Situation:

The Company experienced significant year-over-year growth but the Company’s existing credit facility was maturing and the incumbent lender did not want to extend its maturity date. Additionally, the Company was seeking non-dilutive growth capital to execute on its sales pipeline and increase ARR to improve its valuation prior to raising additional equity.

 The Solution:

SGCP was able to quickly get comfortable given the rapid growth, contracted recurring revenue, enterprise customer base and strong management team to provide a $6.5 million senior secured credit facility that was bifurcated into a $3.5 million interest-only loan and $3 million term loan. SGCP provided this structure to close the deal quickly and to bridge the Company to a new senior lender. The new senior lender will refinance SGCP’s $3.5 million interest-only loan and SGCP will then subordinate its $3.0 million term loan under its typical second lien structure.

This transaction highlights SGCP’s ability to write larger checks as a result of its recent capital raise as well as our ability to provide a one-stop solution.

In this installment of our series of “Executive’s Corner,” featuring articles from guest writer Charlie Perer of SG Credit Partners, the author sits with David Marks, Executive Vice President, Head of Wells Fargo Commercial Capital, to gain an understanding of his views on leadership, running one of the largest asset-based lending businesses in the U.S., and Wells Fargo’s middle-market strategy.

Charlie Perer: Thank you for your time David. To begin, can you please tell us about your background?

David Marks: I have been fortunate to be a part of Wells Fargo for over 30 years, and have held a variety of roles from Head of International, Corporate Banking and Chief Credit Officer for a number of businesses, and other risk management positions. During my time in banking, I have worked in Minneapolis, Hong Kong, Los Angeles, London, and, now, San Francisco. My first commercial finance role was in 1989 when I joined our factoring business.

Perer: Please describe your leadership style; and has it changed over the years as a younger generation has entered asset-based lending? Something tells me the days of bare knuckle field audits are over.

Photo of David Marks - Executive Vice President - Head of Wells Fargo Commercial Capital

Marks: I place a premium on candor, respect, and teamwork. I think if you asked those I work most closely with what I’m like, they’d say I was direct, fair, a big fan of thoughtful debate, and likely that I have an irreverent, slightly sarcastic sense of humor. I like to cut through clutter quickly in the spirit of doing what’s right for our customers and for the team.

As far as my leadership style evolving over time, my guess is it has remained largely the same. Beyond keeping me humble, my kids have helped ensure that dad stays relevant and knows how to communicate to our younger team members.

As the leader of this team, I love to see us “win” – because winning resulting from taking care of customers is a lot of fun. It means you’re focused on the right things, and the results confirm the approach is working. The last several years have been challenging for Wells Fargo, but I know it has made us a stronger institution for our stakeholders. I just finished reading the book “Tribe: On Homecoming and Belonging,” by Sebastian Junger. He got it right when he talked about the strength that comes from working together in tough situations. We are a much stronger institution today because we are better listeners for our team and our clients.

Perer: Wells Fargo is the leading middle-market lender in the country. Where does asset-based lending fit in this picture within Wells Fargo and how are you shaping it?

Marks: It is a great question, but I would like to reframe what you asked just a bit. When we put the customer at the center of what we do, we ask ourselves how we serve a client through their lifecycle. Asset-based lending is an important part of our business, and it provides us with significant flexibility to care for our clients as they evolve through periods of rapid growth and even periods of stress.

Perer: As a bank, how does Wells Fargo view asset-based lending, and how has your group evolved over time as asset-based lending becomes more aligned with RCBOs (Regional Commercial Banking Offices)?

Marks: Asset-based lending is core to what we do inside Wells Fargo. It’s great to be the number one book runner in asset-based lending, and it’s great to have the largest factoring platform in the U.S. and globally because they give us scale, and is helpful to retaining and attracting talent. But where we are evolving is to more of a “One Wells Fargo” operating environment in which the RCBOs and the Commercial Capital businesses work side-by-side delivering the asset-based lending solutions, integrated along with the client’s other financial services needs.

Perer: What is your middle-market strategy, and do you think the middle market is underserved from an asset-based lending product perspective?

Marks: We have the same vision for all of our customers at Wells Fargo: to help them succeed financially. This is why we are product-agnostic between cash flow revolvers or asset-based loans for us when there is a choice for the client. There is no question the world is not short of asset-based lenders. It is difficult to imagine there is not more than one for every company that has the need. But where the market is significantly underserved is delivering that asset-based loan along with an equipment lease, supply chain options and trade services. What the market doesn’t have are many firms that can deliver multiple forms of financing in tandem. That is a powerful and differentiated offering.

Perer: What led to the realization that Wells Fargo needed to create a middle-market asset-based lending group headed by Kevin Gillespie? How did you go about forming the group once you realized there was a need?

Marks: We have always been in the middle-market asset-based lending space. But we wanted to enhance our focus, connect better with our Commercial Banking partners, and really be prepared for the next cycle when more Wells Fargo clients might need to transition to different forms of financing. Kevin and Mike Marcolina, who leads sales, are talented leaders and are off to a strong start. I am pleased with the enthusiasm I have seen and the new clients we have on-boarded in a short time.

Perer: The group has now been around for a year. What are the lessons learned and would you say the biggest challenge is internally versus externally?

Marks: I think the biggest challenge is sometimes the greatest opportunity. The best outcome for the customer is a seamless transition from a cash flow or unsecured financing to an asset-based loan. It requires internal coordination, strong communication up front, and a different way to think about technology than in the past. What has really changed is how teams collaborate differently and are selfless in working together. It is awesome to see the change.

Perer: Is today’s market environment the most competitive you have ever seen, given that we are at the tail end of an economic cycle?

Marks: If you ask anyone if they thought any year seemed easy at that time…it never does! It always seems like the prior years are easier than the current ones. That said, we are in the longest economic recovery ever, with a benign interest rate environment. What we are all seeing is end of the cycle behavior in the market. Who doesn’t wish they had a crystal ball to know when the cycle changes? I can’t find mine, unfortunately.

Perer: Has the sophistication and fundamental job changed/evolved as nonbank and alternative credit funds have entered the field and looked to partner with asset-based lenders?

Marks: At its foundation is a relationship with a client based on leveraging their company’s available assets. I can’t see that ever changing. Nonbanks, business development companies, and credit funds that provide asset-based loans have a role to play in this market. Many of the leaders of those funds started on our platform, and they are clients and partners of Wells Fargo today. The one thing it makes all of us do is move faster for the client. And that is a good thing.

Perer: Your prior roles seem to have put you on the forefront of technology within banking. How has technology changed the asset-based lending industry, and how does Wells Fargo think about implementing technology to stay ahead of the curve?

Marks: I am excited about how we are using technology and business process mapping in our businesses. Over the next several years, I think we will be using technology as an advantage to add new clients and better-serve our existing ones. We are already using the iPhone for field exams in one of our businesses today; compared with a “brick” the examiner needed to plug in at the hotel after her day was over. In early 2020, another business of ours will be rolling out the ability for customers to use smartphones and tablets to pass credit applications to us that will be auto-decisioned. This will help our clients close more sales and generate assets that we can lend against or purchase. Digitizing the customer experience will change the game.

Perer: Lastly, tell us something you are worried about that the rest of the market has yet to figure out.

Marks: The market is efficient, and I am not a worrier by nature. What I will say is that there is a fight for talent. The institutions that can retain experienced talent that have lived through cycles will be the employers of choice for the next generation, and will also win at diversity and inclusion – making everyone else worry.

The Company: Provider of IT managed services and cloud collaboration solutions.  The Company’s management team owns corporate real estate held in a LLC outside of the Company.

The Financing Situation: The Company was in need of upfront working capital for new contracts, but did not have availability on its bank ABL.  The bank ABL had recently closed its credit facility and was not able to provide additional financing until there was a six month track record of positive financial performance.  Management was intent on executing the new contracts and was willing to provide a second deed of trust on its corporate real estate outside of the business as security for a loan.

The Solution: SGCP quickly underwrote the Company and was able to get comfortable with projection based debt service since there was sufficient equity in the corporate real estate as security.  SGCP provided a $2 million second lien cash flow loan to the Company secured by a second deed of trust on the corporate real estate which enabled the Company to execute on its new contracts and grow the business.

Link to the article here.

In this installment of our series “Executive’s Corner,” featuring guest writer Charlie Perer of SG Credit Partners, the author sits with David Grende, CEO of Siena Lending Group, and Tim Stute, Managing Director and Head of Specialty Finance of Hovde Group, to discuss their backgrounds in the industry, their views on the current M&A environment, and why now was the time to sell.

Charlie Perer: Thank you for your time gentlemen. To start, can each of you please tell us a little about your backgrounds?

David Grende: My introduction to the industry was completely accidental. I answered a few ad placements at the college recruiting center, one of them being a placement for an assistant account executive at Trefoil Capital, a commercial finance company—whatever that was. Trefoil Capital became Fidelcor Business Credit, which then became CIT Group Credit Finance. I had worked my way up to running the small ABL business of CIT Group. Most trajectories are not a straight line up with successes at each step; mine wasn’t either.

Photo of David Grende - President & CEO - Siena Lending Group LLC

In 2006, I was approached to start an ABL business for Burdale Capital in the U.S. as a Bank of Ireland company. When our U.S. business, alongside the UK business, was sold to Wells Fargo, I was told by senior Wells employees that, if the team could find equity, they would be happy to provide a leverage facility to start an independent finance company. That gave me and my colleagues (six of us) the tailwind to go down the road and keep plugging away until we succeeded in raising equity for a relaunch. And so became Siena Lending Group.

Tim Stute: I’ve spent the last year and a half serving as head of specialty finance investment banking at Hovde Group, a 30-year old boutique focused on the financial services sector. This is my second gig working in specialty finance M&A and corporate finance after spending 16 years at Milestone Advisors and Houlihan Lokey, after the latter acquired the former. My team advises a wide variety of bank and non-bank clients on specialty finance M&A transactions, capital raises, valuations, fairness opinions and other miscellaneous advisory assignments. Since 2004, I’ve been part of the team that’s advised on the most specialty finance M&A transactions in the U.S.

Perer: We are here today to talk about the M&A markets and Siena’s sale to Benefit Street. Dave, to start, what made you and your board decide to sell now?

Grende: The sponsor and Board did not have a sale in mind when Hovde was engaged. The assignment was to raise additional equity for continued growth of the business. As we were going through the process, it became clear to me that a control sale was Siena’s best option for the future. Raising the equity we desired, coupled with our sponsor’s desire to retain control, was an almost impossible outcome to achieve. That, along with the transaction terms put forth, as well as the financial strength of Benefit Street, made it an easy decision for the management team and ultimately for our sponsor and Board as well.

Perer: Dave, did market cycle timing play a role and did you have any preconceived notions about what you and your team wanted in a new partner? Did you accomplish what you set out to when you founded Siena?

Grende: Market conditions certainly played a role but as I stated before there was also a need for us to strengthen our balance sheet for the future. From inception, we had optimized our balance sheet to the point that it could no longer be optimized without new equity. The team’s desire at the outset was to find a partner that understood our space, was going to continue to let us run the business as we had for the past six years, and had the capital resources so that we did not need to worry about capital going forward. To that end, asset managers, credit funds and BDC’s fit those parameters. In regard to accomplishments, we have built a great company around great people who enjoy working with and challenging each other and it is like a family, which was my goal from the onset. However, there is much left to be done as we continue to build the business responsibly to the next level.

Perer: What strategy did both of you come up with in terms of marketing Siena? Were either of you predisposed to a bank or BDC/credit fund? Which constituency seems to be more active now in the market?

Photo of Tim Stute - Managing Director & Head of Specialty Finance - Hovde Group, LLC

Stute: As Dave mentioned, my group was actually engaged to find a minority equity partner that could inject growth capital into Dave’s company as they continued their impressive growth. I ran that idea by Benefit Street Partners, and they considered it. But in the end, their preference was to do a control transaction. We never spoke to a single bank about the acquisition. Banks have always been fantastic acquirers of commercial finance companies, but not anymore. I find it to be really challenging to find a bank that understands the brand of asset-based lending that Siena and its peers are involved in. By that I mean, the sub $20 million credit line deals that price with all in double digit yields. They generally judge the borrowers as if they’re run of the mill C&I borrowers which isn’t accurate or fair. To me, the BDCs and credit funds are where you’ll continue to see more activity. There is a desire among that group to diversify into other products. They have other lending programs and a large customer base of both direct borrowers and sponsors to call on. Adding ABL to the product offering makes a lot of sense.

Grende: Our strategy was very simple, just tell our story. Siena was a restart with the core management team of Burdale U.S., an ABL business we started for Bank of Ireland in 2006. Because of the forced deleveraging of Bank of Ireland’s balance sheet, that business was sold to Wells Fargo in 2012. The core management team of Burdale started Siena in 2012 with financial sponsor backing and a leverage line from Wells Fargo. Since inception, we have focused on the lower middle-market, transacting over 100 transactions totaling more than $1 billion in credit facilities, maintaining excellent credit metrics and excellent financial metrics.

The team, sponsor and Board were keenly aware that a bank was the wrong answer for our business, and so, yes, we were predisposed not to look at that segment at all.

Perer: What are buyers looking for most in an acquisition – yield, platform, team, etc. and what key attributes drive purchase price? How competitive was the acquirer interest in Siena and is that indicative of the demand for ABL platforms in today’s market?

Stute: In commercial finance, we find that the quality and depth of the senior management team and a historical track record of clean credit quality are the biggest drivers of value. Those attributes need to be accompanied by strong financial results – i.e., attractive return on assets and return on equity – to drive value. But good financial metrics are somewhat meaningless without the institutional backbone that a deep, experienced team who’s weathered various downturns can provide.

Perer: Where are we in the demand cycle for ABLs and what surprised you most about the prospective acquirer interest in this process? Also, is now a time to start a de novo platform? We are top of the market and many incumbents will have portfolio issues during next downturn?

Stute: Yield continues to be tough to find across most segments of lending. In addition, the competition for quality loans in all asset classes is at or close to an all-time high. That contributes to high demand for ABL companies that fit the characteristics laid out above. That said, I’d be cautious about starting a de novo lending business today. I would think it’d be hard to profitably build scale in this competitive of an environment. That said, I do feel strongly that when we do hit another downturn, those with access to capital are going to be best positioned to exploit opportunities, both organically and by acquisition as finance companies with fickle capital providers are left looking for new partners.

Perer: What was it about Benefit’s platform that made Siena go with them? What is it like to be on the receiving side of a diligence list when you are busy running a business?

Grende: The transparency and openness of the senior leaders, as well as their creativeness and focus to keep moving “the ball down court” despite many obstacles that occurred during the process. Couple that with their size, the size of their new parent, Franklin Templeton, and the decision was not that difficult.

Our CFO and CRO did most of the heavy lifting on the diligence and I can’t thank them enough because the deal wouldn’t have gotten done without their work.

Perer: Tim, how many ABL consolidation cycles have you been through and is this one different due to the outsized role that BDCs and credit funds are playing? Are they making life difficult for traditional bank acquirers?

Stute: This long cycle we’ve been in since the beginning of the decade is really only the second material consolidation cycle I’ve been a part of. Before the recession, from 2003 to 2008, we saw a lot of M&A activity in this space and it was then that my old firm, Milestone, started to play a meaningful role in the sector. You’re right that this cycle is quite different from the last one because of the BDCs and credit funds. Before the recession, most buyers were banks. As I mentioned before, banks are still active players for these businesses, but they have to be almost a perfect fit credit quality-wise for a bank to get there in the end. From that standpoint, I’m actually quite thankful that the BDCs have emerged as such a force because it’s given my team a reliable option to pursue for our clients.

Perer: Why is ABL in such high demand in the market right now? What is driving the demand from both strategic buyers i.e. banks and BDCs/credit funds? Why are these platforms critical to such different constituencies?

Grende: ABL today has become a mainstream financial product. From a bank’s perspective, it sits at the top of a capital stack, has very low risk, and brings with it all the ancillary products and income they desire; bond fees, cash management, insurance, swaps, etc. From a non-bank perspective, the product has a great yield, variable rate, very low loss given default ratio, is counter cyclical, working best in out of favor industries and slumping economic conditions. This makes it ripe to fit into credit funds and BDC’s.

Stute: I would just add that oftentimes with banks that are attracted to ABL, they can be interested in adding more management team depth that also helps them get into another segment of the market. For example a bank with expertise in the lower yielding, $20 million+ facility market may find it appealing to add higher yielding loans in the smaller loan market. Or a bank might see strategic value in getting into a particular niche like staffing or transportation.

Perer: Tim, do first-time ABL acquirers fully understand the risks and the dynamics of the ABL product? What are some mistakes you have seen?

Stute: I think in most instances the buyers getting into ABL for the first time have a comprehensive understanding of the product and the market. But I can think of a few instances where I’d argue that a bank buyer maybe didn’t fully appreciate the “roll up your sleeves” diligence and collection work that is required sometimes to be successful in ABL. The vast majority of M&A transactions I’ve been involved in have been a success for both buyer and seller. The less successful transactions have generally stemmed from the buyer’s unwillingness to leave the target’s operations, credit policies, and culture in place. A pure portfolio deal is a different story. But if you’re buying a platform and presumably paying a meaningful premium to get the deal done, then I think it’s foolish for the buyer to come in and add layers of bureaucracy that will in turn drive the talent away from the organization, or at least make it more difficult to close loans in a timely fashion.

Perer: Dave, how do you see the ABL market evolving given the consolidation that has taken place? Do you have any strategic changes planned?

Grende: I see the larger banks going down market size wise, doing smaller deals they previously shunned. Smaller banks will continue to get into the space operating with small teams providing another product alternative to their customers. The non-bank ABL players will get a great boost from the next credit downturn with the non-scaled weaker players going through a shakeout.

Perer: Can you two give the readers the most memorable part of the process?

Grende: Closing finally! Second was the review of our watch list accounts with the Investment Committee of Benefit Street. This occurred a week before closing and reviewing only your more challenging accounts is never an uplifting meeting.

Stute: Some of the most memorable parts of the process need to be kept confidential unfortunately. But I will say that Dave and his shareholders had significant interest from some of the most well-known institutional investors in the market, and I suspect that some of them are not used to losing many deals. So negotiating simultaneously with all of these groups was fun, albeit a bit stressful.

Perer: Gentlemen, last question, what is next trend in ABL that the market has yet to embrace?

Grende: Intellectual Property lending.

Stute: I wish I knew! The ABL market generally is not one that has embraced technology as much as some other commercial finance sectors like equipment lending and leasing. But there are definitely a handful of players that are trying to use technology to enable more efficient lending, but only a small handful. I think more private lenders are going to get into cannabis lending. Some players have started to look at it more closely, and I see more commercial lenders embracing the sector going forward.

The Company: Industrial recycling company that sells processed and unprocessed materials to domestic and international mills, foundries, and other material processors. Ownership: Family-owned. Financial Profile: $40 million of revenue.

The Financing Situation: Management was exploring a sale of the Company and needed additional working capital beyond the availability on their asset-based credit facility. SG was approached by the Company’s bank ABL to provide a second lien working capital loan to enable the Company to run a sale process without any potential for liquidity shortfalls.

The Solution: SG Credit Partners was able to quickly get comfortable with the Company’s financial profile and provided a $1.5 million loan with interest-only payments to give the Company maximum liquidity throughout the sale process. The loan funded within three weeks of a signed term sheet, alleviating liquidity constraints and allowing management to focus on selling the Company.

SG Credit Partners’ second lien loans can help senior lenders close deals (onboard new clients), offer a liquidity solution when unable to lend up (retain existing clients), and/or solve out-of-formula / technical default issues.

Target Company:
Oilfield service provider that specializes in pipeline construction and the fabrication of modularized production facility equipment to midstream operators as well as exploration and production (E&P) companies that operate in the Permian and Eagle Ford Basins.
Financial Profile: Revenue: $50mm | EBITDA: $8mm

Acquiring Company:
An energy-focused holding company that provides financial, technical, operational and strategic management services to its subsidiaries across the globe.

Financing Situation:
Target Company management wanted to sell its oilfield services business for liquidity and to focus on larger infrastructure projects. Given the timing of new infrastructure projects, Target Company management wanted to sell its oilfield services business within 30 days. Target Company management had a personal relationship with Acquiring Company management and presented an exclusive, quick closing acquisition opportunity. Since the Target Company is asset light (primarily just accounts receivable with a progress billing element), an ABL facility was insufficient to close the entire deal and a bank offering a revolver + cash flow term loan would have taken too long.

The Solution:
SG Credit Partners (“SGCP”) was able to get comfortable with the deal based on previous lending experience with Acquiring Company management, strong historical financial performance of Target Company, and industry tailwinds. SGCP provided a $5.0 million bifurcated credit facility to close the acquisition quickly (within 3 weeks) and provide additional working capital. SGCP’s $5.0 million bifurcated credit facility consisted of a $2.0 million interest-only loan and a $3.0 million term loan. SGCP provided this structure to close the acquisition quickly and bridge the Company to a new senior lender. The new senior lender will refinance SGCP’s $2.0 million interest-only loan and SGCP will then subordinate its $3.0 million term loan under its typical second lien structure.