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SG Credit Profile: SaaS

The Target: Corporate travel and entertainment software, data integration, and business intelligence (BI) provider for large enterprises and travel management companies.

The Buyer: Enterprise software operating company backed by private equity.

The Financing Situation: The Buyer was seeking a debt facility to supplement the equity contribution made to purchase the Target.

The Solution: SG structured a $4 million term loan to support the closing of the acquisition. SG was able to get comfortable based on the Company’s recurring revenue, strong SaaS metrics, experienced management team, and the strength of the Buyer.

The famous Russell Crowe movie about an ancient Roman Gladiator battling stronger and better armed opponents is what every BDO feels like in the field. Step into our ring for a moment: Learn how to build a network, land a client, compete against formidable competitors, sell a deal internally and make time for networking after a busy day. This is a tactile role, and we are asked to win constantly while given the same tools or weapons as all other entrants.  The flag of your bank or non-bank only goes so far in the arena of competition. Sure, the brand matters, but there is a reason some Gladiators are better than others. To be excellent requires mastering necessary and disparate skills – part credit, part sales, part project manager and most importantly politician. A strong Gladiator is the face of his or her organization and a true brand in their own right.  This is the heart of being a Gladiator – you are in the arena on your own fighting to win.

Let’s face it, as BDOs we are all told our platform or brand is the best and then sent into battle with and against each other. Like all other competitive activities, most folks see the end result, not the process or the nuances. The hours are long, the stress is high and things change on a dime. If anyone wants to be a Gladiator, then follow one of us around for a week and see whether you are up for the challenge. Let’s start here: When everyone else goes home at night we go to a networking event or find ourselves on the road. While everyone else is off on weekends we are taking calls and working on a proposal. It literally never stops as we are the engine that needs to keep running so the pipeline stays full. We are also always the first to be sacrificed in any downsizing. No other role deals with the quotas or conflicting message of being asked to book the perfect deal with no risk, constantly. While everyone else tells us how to fight, we actually have to step into the arena and know how to win a deal. It’s easier to be a spectator than in the actual arena getting bruised.

Let’s talk about the arena for a moment. 100+ days a year in a hotel, competing in multiple arenas across many markets and managing meaningful internal resources. While the Gladiators might change from city-to-city, the arena typically stays the same.  Each market is by and large the same – there are market makers and market takers – with the big institutions moving the markets with low-cost pricing whenever they really want to take more share. This just means you will never be the lowest priced or most aggressive in each deal bake-off.  More often than not, you are competing against another Gladiator with better weapons. This is why our business is all about the Gladiator and less about the institution, although the institution does matter. No one ever said, “Bet on the horse, not the jockey.”  Our brand as a Gladiator matters, the relationship with the client matters and knowing how to win matters. Step into the hardest arena in lending – lower middle-market asset and cash flow lending.  

The best Gladiators put the pieces together over years, know their weapons, arena and competition. There is a reason certain BDOs dominate certain markets. The platform does matter and should not be undersold, however, knowing how to sell a platform and what can be approved is pure art in this day and age.  Bank-ABL is still a hard credit product as it is still risk-rated and there is a reason a true ABL deal is often not being done by a bank. The margins have never been lower while competition never greater, so the the level of expertise needed to land these deals should not be underestimated. We are in an unforgiving market where advisors don’t forget being left at the altar. BDOs are often in a precarious situation fighting for a tough deal that will surely get done somewhere. This is why we call it the arena and why the good BDOs can navigate the internal and external forces to book assets and win.  

What’s great about the arena of lending is that many of the Gladiators often socialize outside the arena but are fierce opponents inside. It’s the truest sign of respect and what makes our industry so great is that there is a real sign of admiration amongst the folks fighting the battles. This article is dedicated to all the BDOs in the arena who are the real Gladiators. This is our arena and what we live for.  I look forward to seeing my fellow Gladiators in the Arena! 

The author appreciates feedback and he can be reached at charlie@sgcreditpartners.com.

Link to full article here.

SG Credit Profile: SaaS

The Company: Provider of procurement and spend management software to mid-market businesses.

The Financing Situation: The Company had legacy bank debt from a previous acquisition that was underwritten primarily by cash flow, not recurring revenue. The Company’s growth plan called for re-investing all excess cash flow into growth, which conflicted with the profitability-based covenants of its existing credit facility. The existing bank lender was unable to re-underwrite its loan based on recurring revenue so sought to exit the loan at maturity. The Company needed an experienced tech lending partner who better understood its SaaS business model and could scale with the Company as it executed on its growth objectives.

The Solution: SG structured a $2.75 million term loan to pay off the Company’s existing lender and provide additional liquidity to support its continued growth plan. SG was able to get comfortable based on the Company’s recurring revenue, strong SaaS metrics, and experienced management team.

SG Credit Profile: Cash Flow

The Company: A family-office backed provider of mental and behavioral health services catering to Medicaid patients.

The Financing Situation: The Company was experiencing high growth due to a combination of strong demand and positive regulatory tailwinds. To capitalize on this growth, the Company sought a non-dilutive debt facility to fund expansion opportunities requiring hard upfront costs.

The Solution: SG was able to underwrite the history of profitability, variable cost nature of the business, and positive growth trends. SG structured a $5.0 million credit facility to provide the Company with the immediate capital it needed to open new locations in its pipeline as well as a delayed draw component to scale with the Company.

SG Credit Profile: Cash Flow

The Company: An entrepreneur-owned specialty delivery service catering primarily to the medical industry.

The Financing Situation: The founder of the Company needed growth capital to fund an emerging but unrelated new venture. The founder had previously signed an LOI with another lender that re-traded key deal terms during diligence. Faced with immediate time constraints, the founder needed a new debt provider that could execute quickly and provide certainty to close.

The Solution: Although the new venture on its own could not yet support a debt facility, SG was able to mitigate this by underwriting the cash flows of the Company. Given the Company’s positive growth trend, diverse customer base, and historical cash flow, SG was able to provide substantial covenant flexibility and permitted growth capital advances to fund the new venture. SG closed within three (3) weeks of signed term sheet.

When it comes to special assets, many small and medium-sized banks are in a situation reminiscent of the classic 1989 comedy “Weekend at Bernie’s.”

For those who haven’t seen it, the movie centers on two hapless employees who stumble upon their dead boss, Bernie, and try to fool everyone into thinking he is alive while they buy time to determine what to do. Similar to the movie’s premise, there are a lot of lenders, both of the bank and non-bank variety, pretending to be fine when they are in fact also buying time. Banks, in particular, are not kicking anything out and most workout folks simply are not focused on exits for a variety of reasons. In addition, regulators are not pushing even though P&Ls might be bad because liquidity granted by the Paycheck Protection Program has been decent for many borrowers.

Many small and mid-sized banks are very reticent to take losses and it was well known that many were sitting on real problems prior to the COVID-19 pandemic. A more than 10-year run of good times led to a lot of risk taking by banks, leading to the start of significant portfolio problems, which has only been compounded when considering that there have not been many bank failures, absent fraud, in a very long time, nor has there been a wave of kick-outs.

To the uninformed observer, it would appear that banks have no problems whatsoever, but that is truly implausible. A broken business model for a small business banking client before the COVID-19 pandemic is still a broken business model today. All the pandemic did was put a bandage on a major problem via an influx of stimulus.

To that end, let’s talk COVID-19 pandemic ramifications for a minute. National moratoriums and delays on residential and commercial rent evictions and corresponding bank forbearances are about to expire.  Once that expiration comes, thousands of restaurants, hotels and hospitality businesses simply won’t make it despite the massive government stimulus we’ve seen in the last year. Making matters worse, the U.S. economy is experiencing inflation, interest rates should rise and not all businesses will be able to pass on the cost increases, which should create real margin tightening. This should ultimately result in more borrower and bank stress. Despite this situation, we’re still not seeing bank kick-outs or major community or regional bank write-offs.  In fact, we’re seeing quite the opposite, as banks are back to trading at all-time highs even though most community banks are real estate heavy.

To say the asset-based lending and turnaround community at large is hungry is an understatement — try starving. ABL portfolios contracted significantly in 2020 and have yet to be replenished with new clients. It’s still unclear whether we are at the tail-end of the last cycle or the start of a new cycle, but the stock market does not seem to think problems are on the horizon, as bank stocks are back to all-time highs. For perspective, according to the FDIC, there were approximately 500 bank failures from 2008 to 2014 and approximately 30 from 2015 to 2020. For added perspective, in the United States, a nation with thousands of banks, there have been fewer than 10 bank failures the past three years and this includes 2020! To further quantify, this implies approximately $700 billion in assets of banks failures from 2008 to 2014 and under $15 billion the past five years, meaning the last five years’ amount of bank failure assets equated to 2% of the previous five years. Here is underlying data from the FDIC should any reader want to see for themselves.

Altogether, the key indicators are starting to point to problems for banks, but there does not seem to be distress on the horizon. Non-bank real estate investors and the ABL community are not experiencing increases in deal flow or even signs of it. Billions of capital has been raised, but banks don’t seem to be in a hurry to force clients out or to start signaling they have portfolio problems. The catalyst is always apparent after the fact, but, despite the apparent lack of concern about future distress, it seems like the proverbial can has only so much kicking left in it.  At some point, regulators will start to put pressure on banks, real estate owners will reach a maximum number of deferrals, inflation will set in to a greater degree and PPP funds will run out.  Any one or a combination of these variables could force banks’ hands quickly.

One key point to keep in mind when comparing the current bank environment with the Great Recession is that most banks have much higher reserves today than in years past. This could be interpreted to mean many banks will be better positioned to take some discounts to free up capital whenever the next round of restructurings take place. However, at some point, the weekend is going to end and banks are going to have to deal with their portfolio problems, unless they are able to produce a sequel to the current circumstances, like the folks behind “Weekend at Bernie’s” did by releasing “Weekend at Bernie’s II” in 1993.

The article was first published here.

Wingspire Capital provided a $50 million senior secured revolving line of credit to SG Credit Partners to support their growth trajectory. SG Credit’s broad credit lending platform, focused on serving lower middle market entrepreneurs, is unique with its ability to structure senior and junior debt transactions based on cash flow, working capital assets, equipment, real estate, intangibles, and personal assets individually or in a hybrid structure.  

“Partnering with the creative and experienced Wingspire team provides us with additional flexible capital that will assist us in maintaining our momentum toward being the lender of choice for the non-bank lower middle market,” said Marc Cole, CEO of SG Credit Partners.

“We are pleased to support SG and their respected team of lending professionals, many of whom we have known for over 20 years. This team has a successful track record, and we are proud to have been selected to play a role in their growth story,” said John Rosin, President and COO of Wingspire Capital.

SG Credit Profile: Technology (SaaS)

The Company: A leading online invitation and digital greeting card subscription platform.

The Financing Situation: The Company was seeking non-dilutive growth capital to acquire VidHug, an easy-to-use video platform that enables you to request, collect, and combine videos to create a personalized and meaningful montage for celebrations and holidays.

The Solution: SG was able to get comfortable with the transaction due to the Company’s committed management team, consistent financial performance, recurring revenue metrics, and overall industry trends. SG’s solution allowed the Company to complete an accretive acquisition without dilution and Punchbowl leveraged the acquired platform to launch Memento.com. The Company now offers a comprehensive technology platform for celebrations, holidays, and meaningful life memories.

To learn more, please click here to view the full press release.

For more information about this announcement, please contact Kristen Elworthy at Seven Hills Communications (punchbowl@sevenhillscommunications.com).

In May, SG Credit Partners announced their expansion to a situational credit platform from a niche lender; a strategic business strategy shift predicated on the evolving state of the commercial lending landscape. To learn more about this expansion in the asset-focused lending market, ABL Advisor sat with Charlie Perer, Co-Founder and Head of Originations at SG Credit Partners for an exclusive Q&A interview.

As Charlie Perer eloquently stated when we began our interview, the famous Bob Dylan song, “The Times They Are A-Changin” could easily be applied to the commercial finance world in 2021 coinciding with the end of a decade. We asked Charlie to expand on his view of the market.

ABL Advisor:What changes have you and your team observed in the market that acted as a catalyst for this strategic market expansion for SG Credit Partners?

Photo of Charlie Perer - Co-Founder, Head of Originations - SG Credit Partners

Charlie Perer: The changes that took place over the past decade were long in the making prior to the COVID-19 pandemic, which added its own final twist. To respond to these conditions, we recently announced our expansion from a niche lender to a comprehensive situational credit platform. In practice, we have been providing these new products for several years with much success, and we are now ready to market these capabilities to the ABL community. Since inception, we have been planning to provide more solutions to the ABL community, but the market changed so drastically in 2020 that it made clear the need for us to accelerate the expansion to a broad platform. From an industry perspective, 2020 was the culmination of a decade-long evolution; consolidation and market efficiency of the traditional ABL business model has created some spectacular voids in the market. The market changes and voids created are correlated and two-fold: first, new and existing large non-bank ABLs and term lenders moved upmarket, and second, small-ticket ABL consolidation to drive scale and efficiency created an opportunity for new entrants with a unique point of difference. This confluence of changes across the industry has created numerous market opportunities for creative lenders.  

ABL Advisor: What is SG Credit’s goal in creating this platform – what is missing in the market from your perspective?

Perer: There has never been a greater need for new, non-traditional platforms in the market more than right now. SG Credit has evolved to provide a platform of products and structures that fill all the voids created by mainstream ABLs defined as traditional working capital lenders with typical accounts receivable to inventory collateral lending capabilities. The goal of SG’s new platform is to be able to offer a proverbial menu of options to every bank and ABL so we can better partner with them. The platform includes credit solutions for structured cash flow outside of asset-based formulas, multiple forms of asset-backed collateral (including and beyond traditional working capital assets), high net worth assets and recurring revenue/technology. This platform of products combined with flexible security positions is meant to complement any bank’s lending divisions including C&I, ABL, Private Wealth and Technology. The white space we and others should target is the creation of an ecosystem that serves as a complete non-bank match to supplement an ABL and provides complete solutions to traditional non-bank ABLs. In essence, simplify the lives of borrowers and lenders alike by providing a two-lender solution instead of three or four.

ABL Advisor: Please tell us about the market SG Credit is targeting and the products you will now be offering ABLs.

Perer: Our whitespace is providing customized solutions to the primarily family-owned/non-sponsored borrowers that have situational credit needs up to $10 million. We can now provide a product for each unique situation – as opposed to most lenders trying to fit a one-product solution for all situations. The solutions are always bespoke, often in connection with another lender, but in many cases on a stand-alone basis. The structures we offer span senior, split-lien, second lien and distressed and cover a broad range including cash flow, many types of collateral, high net worth assets and recurring revenue/technology. The goal from the start has always been to be every ABL’s first call, and that goal remains, except the platform now allows for many more solutions as we extend our capabilities in asset-focused finance, including real estate and high net worth lending.  The flexibility in this new platform now includes extending credit to high-net-worth entrepreneurs whose businesses or outside assets may not qualify for traditional credit. One of our points of difference is that we can take a holistic view of an entrepreneur’s business and personal assets and treat them as one. We also have a strong capital base that is not entirely dependent on leverage, enabling us to provide a bespoke solution to both our referring lender partners and the ultimate client. 2020 re-set the playing field on many levels in the sense that most firms experienced changes whether desired or not.  

ABL Advisor: Can you please speak to the large and small-ticket ABL market changes? Why have these changes created a larger market opportunity?

Perer: The market moved the most for both the largest and smallest players in terms of facility sizes, but less so for the middle-market participants, defined as those focusing on facility sizes from $10 to $30 million. This trend is going to continue for the foreseeable future and merits discussion. Big-ticket ABL defined as facility sizes of $30 million and above have become the new hotspot for competition. Several new platforms have been announced over the past year or so of which some are traditional ABL focused, and some are more term focused.  Many firms have been forced to move up market as a product of their own successes, be it in ABL or another lending vertical, and now find it challenging to make smaller loans – the economics and time management of a sub $30 million facility are simply less compelling for many lenders. What it does speak to is the true size of this market opportunity and why the need for scale enticed many to shy away from smaller deals. It should be noted that competing at this level entails an “any given Sunday” approach as any firm can win or lose on any given day – the competition is fierce.

Now juxtapose big-ticket with small-ticket and it is a tale of two cities. While non-bank big-ticket experienced many new entrants, non-bank small-ticket experienced consolidation by BDCs and independents to create national firms with scale, pricing power and standardization. In lock step, this moved the small-ticket market by driving pricing down, creating even more incentive for firms to continue to scale to absorb the lower market pricing, a virtuous cycle and land grab for market share. The small-ticket ABLs are typically focused on providing traditional working capital lines rather than taking less liquid asset risk. The market to partner with these firms consists of single-product providers, of which SG used to be one, rather than a platform that provides either a la carte products or a comprehensive solution. The goal in creating a platform is to be able to finance multiple forms of collateral plus provide a stretch piece beyond what the assets could traditionally support. While the small-ticket ABL market has consolidated, the ancillary ‘one-product’ market has not. There are too many firms focused on single products. This is why SG Credit has been able to successfully expand to a credit platform – we solve the voids created by this small-ticket consolidation and standardization.

ABL Advisor: Looking back and now looking ahead, what do you anticipate seeing over the next ten years in the ABL market?

Perer: The past ten years were all about the traditional ABL becoming mainstream and consolidating. The next ten years should be about innovation to better support traditional products. As I stated at the beginning of this interview, Bob Dylan famously said it best, The Times They are A-Changin.

Andrew joined with the goal of bringing his upmarket sophistication and breadth of experience to the lower middle market with the goal of helping SG Credit build a broad credit platform. On Monday, May 24, SG Credit Partners announced the extension of its comprehensive credit platform exclusively serving lower middle market entrepreneurs and new website illustrating its expanded capabilities. 

What was it about this new role with SG that attracted you?

What led me to SG Credit at this stage of my career was most importantly my desire to be part of a great culture and to build something truly unique.  I got to know the people at SG as well as their new investor group and was offered the opportunity to join the senior management team.  In my role as CIO, I felt I could pair my credit experience with the already successful lending niche at SG to build a differentiated and scalable credit platform that could solve funding gaps in the lower middle market.  What I also felt was unique about SG is that it plays in the lower end of the market where the majority of lenders are focused on a singular product. SG, on the other hand, has a broad lending appetite, which is perfectly positioned to partner with traditional lenders and/or provide a full-debt solution when necessary.  I also liked that SG already had an established history of being a good partner to banks and ABL lenders, which is critical in order to be successful in the lower middle market.  A big part of my job at SG is making sure we have the necessary platform of products to be a leader in the market while maintaining a solid credit profile.

You have been successful at much larger firms. Can you compare and contrast between firms making larger loans vs. firms focused on loans under $10 million?

In addition to underwriting credit, you are truly making significantly more concentrated bets on management teams given the inherent risks in lending to small businesses.  Another difference is that there is rarely a back stop in place that may be willing to invest liquidity into a situation if things aren’t going well.  As such, I feel it is especially important to choose industries and business models wisely and attempt to stay away from binary risk given the higher margin of error.  In addition, smaller businesses are just more susceptible to exogenous shocks, whether it be issues with key vendors, key executive departures and/or industry disruptions.  We have learned the hard way to be hyper-focused on liquidity so the business is positioned to survive surprises.

The enjoyable part of the lower middle market is that it is more relationship-based with the business owners as there is a clear dearth of capital, and even at premium pricing, the majority of folks value the relationship.  These transactions are incredibly meaningful to the small business owner, which is obviously a positive dynamic.

You joined as part of an institutional investment to lead credit and build an innovative credit platform meant to fill market voids. Can you give us an overview of the platform and how it fits into the marketplace?

SG was historically focused on financing stretch pieces, which was a great business, but faced cyclical and single-product risk.  With the new investment, we have taken the opportunity to expand and diversify our debt offerings to meet what we see as opportunities to fill voids in the market.  Our current credit platform spans five key areas: 1) recurring revenue/SaaS lending; 2) cash-flow lending; 3) collateral-based lending; 4) high net worth lending; and 5) special situations (including DIP loans).  Our goal is to be the clear market leader in providing structured credit solutions to solve the funding needs of small and medium sized businesses that cannot be met through more traditional lenders.

Our platform was designed with key referral partners in mind.  The majority of traditional banks have distinct segments such as commercial banking, asset-based lending, private banking, software lending and special assets that all line up with SG’s product offering.  Our structures can be senior, junior or split-lien across these buckets, and we are capable of tailoring each solution as part of a larger facility or on a stand-alone basis. 

You’ve spent your career in lending and restructuring. Where do you see the opportunities for SG in the current challenging market environment and where do you see SG’s role in the eventual downturn? 

There is currently a tremendous amount of liquidity in the market given all of the capital that has been raised in the private debt market.  Despite the pandemic and an economy late in the cycle, this liquidity continues to create a highly competitive debt market, providing attractive refinancing alternatives for capital constrained companies.  In addition, we continue to see more traditional lenders stretching on transactions to meet aggressive budgets in an effort to maintain portfolio levels.   Despite this environment, we continue to believe that SG is well positioned. The vast majority of private debt lenders are focused on sponsor-backed or larger deals, which means there continues to be a dearth of lenders focused on special-situation type transactions in the lower end of the market. 

While we  continue to evaluate and close quality transactions, in the current competitive market the opportunity for SG is often driven by factors such as a short closing fuse or other complexities making it challenging for more traditional lenders.  We have also been increasingly active in developing a niche where we underwrite assets owned by high net worth guarantors who control businesses that may be challenging to finance on their own.  While no one can predict the timing of the eventual downturn, we believe SG will be uniquely positioned to partner and/or provide full takeouts when banks decide to pull back and lower middle market borrowers have to seek non-bank capital.  We also believe there should be a significant opportunity to purchase loans or debt portfolios and/or provide smaller DIP facilities, which is a newer offering for us and often hard to source. 

Rumor has it that you’re a big Atlanta Braves fan. Tell us about that.

I have been a big fan of the Braves since the mid 1970s, as they were the only option for a kid growing up in Central Florida at the time.  It has been a great ride, and the next few years should be a lot of fun given all of the young emerging talent.

Bio:
Andrew Hettinger is the Chief Investment Officer of SG Credit Partners, Inc (“SGCP”). He joined the SGCP team in September 2019 and is based in the Atlanta office.

Prior to SGCP, Andrew was a Senior Managing Director of Crystal Financial and was responsible for originating and structuring new investments. Andrew has over 20 years of experience working with middle-market companies as a cash flow lender, asset-based lender, and an investment banker. Prior to joining Crystal, Andrew was a Managing Director of Cerberus Capital Management and was responsible for originating and managing new debt investments. Prior to Cerberus, he was a Director with Houlihan, Lokey, Howard and Zukin and was responsible for providing private placement, mergers and acquisitions, and restructuring advisory services. Prior to Houlihan, he served as a Senior Vice President of Deutsche Bank and was responsible for originating and structuring senior and mezzanine loans to private equity groups and middle-market companies.

Andrew began his career with Bank of America and served 10 years as a commercial lender and asset-based lender in the Southeast and Northeast markets. Andrew received a B.S. in Finance from Florida State University.

Link to article here.