Articles / Industry Insights

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.

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.

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.

Nathalie Butler is managing director at SG Credit Partners and is responsible for structuring, underwriting, deal execution and portfolio management of SG Credit’s collateral-based lending division.  Nathalie joined SG Credit in 2020 to formalize and grow SG Credit’s collateral-based lending platform to lower middle-market businesses.

Nathalie has more than 20 years of experience in asset-based lending, portfolio compliance, special assets, asset valuation and asset disposition. She began her career at Buxbaum Group where she appraised and liquidated inventories and other assets for ABL lenders and was ultimately promoted to vice president of their asset appraisal and advisory group. Nathalie then transitioned into lending in 2010 as one of the first employees of GemCap, where she led the underwriting, funding and compliance of asset-based loans secured by accounts receivables, inventory, equipment, real property and intellectual property and served as senior vice president. 

Nathalie received her Master of Business Administration in finance from the Argyros School of Business and Economics at Chapman University. She lives in Orange County, CA with her husband, two sons, and blue heeler dog. Outside of work, her interests include gardening, cooking, yoga and traveling. 

What advice would you offer to women just starting out in the industry?

There is a lot to learn in secured finance and college or university alone will not fully prepare you for the job. I would tell women starting out in the industry to take every opportunity to learn by asking lots of questions and participating in conferences and workshops.  Try to attend continuing education whenever offered (and if not offered, let your supervisor know that attending these will increase your contribution to the firm). Take on as much as you can handle, for example by volunteering to help on projects outside of your job function. Start networking early. Networking will expose you to the different roles in secured finance and will provide you with a broad picture of the industry. Consider your strengths and what interests you. Focus your career early on towards what you are the most passionate about.

I would also advise women starting out to make sure you share your point of view and ideas. Women can bring different and new perspectives on an issue, and research has shown that firms with women executives outperform those that don’t. It can be a little daunting at first to speak up but, if you don’t participate in the conversation, you are less likely to be noticed and get ahead.

How do you balance work/personal time? 

My work/personal time balance has adjusted over time and will continue to change. I focused on my career right after college, but later I chose to leave the workforce for a couple of years after my first son was born and pursue my MBA. I was able to spend time at home during the day with him, and then his brother, and attend classes at night. Although my days were full, I greatly enjoyed networking and the opportunity to expand my finance and management skills. Now that my children are a little older, I have more time and flexibility for work. It is never a perfect balance, and you cannot be present all the time, but it helps to know that having a working mother has many positive outcomes on children when they become adults. Time management and planning ahead is also key for me and, although I don’t do it enough, it’s important to schedule some “me time” and recharge.

What do you enjoy most about your role? Least? 

One of the things I enjoy the most is being able to provide funding to companies who need it and which may not otherwise be able to obtain credit from traditional financing. It is very rewarding to see a client I funded succeed and achieve their goals, even if it means that we eventually get refinanced out. I also love learning about different industries (some that I didn’t know existed), and businesses: how they started, how they operate, and what sets them apart. Helping people and learning something new every day are some of the main reasons why I love doing what I do. The thing I enjoy the least is…inaccurate financial reporting.

SG Credit Partners has started a collateral-based lending division and hired Nathalie Butler to be Managing Director, Underwriting to lead this group. Butler has over 20 years of experience including asset valuation, disposition and most recently lending. Previously she was part of the senior team that built a leading specialty finance company. This new group was formed to fill the void left by the lending community unable to finance illiquid and esoteric assets or other situational bridge needs up to $10 million in loan size.

The goal of the collateral-backed lending group is to provide liquidity solutions across a wide variety of collateral including inventory, real estate, equipment, intellectual property and high net worth assets.  “Our collateral based product is still meant to complement our bank and ABL partners providing revolvers and in certain cases to provide a comprehensive, one-lender solution for speed and efficiency to close,” said Charlie Perer, Head of Originations.

“There is a real need in the market for a firm focused on the lower end of the middle market to be able to finance multiple forms of collateral in a transaction as well as on a stand-alone basis. Today marks the start of SG Credit being able to provide a full suite of complementary solutions to the ABL community by focusing on non-conforming and esoteric assets,” said Andrew Hettinger, CIO of SG Credit.

“We are pleased to welcome Nathalie to the team. Her addition gives us a unique spectrum of collateral-based liquidity solutions to both businesses and business owners. This new line of business coupled with our national reach positions us to lead the market in financing both business and high net worth guarantor assets,” said Marc Cole, CEO of SG Credit Partners.

SG Credit Partners announced Spencer Brown and Oren Moses have each been promoted to Managing Director, Carlos Tan has been promoted to Principal and Daniel Looker and Gerardo Mora have been promoted to the role of Associate.

Both Spencer and Oren joined SG Credit Partners as founding team members and today’s announcement formally recognizes their years of hard work. Spencer moved to Denver to open an office and run a critical region. Oren joined as an underwriter and now heads all of Portfolio Management. “Building a strong time has been my top priority as CEO and I am very proud to announce these promotions,” said Marc Cole, CEO of SG Credit.

Carlos Tan heads new business development and leads deal execution for the South East region. “Promoting Carlos to Principal is a natural evolution of his transition to business development from underwriting and a clear sign of his accomplishments this past year,” said Charlie Perer, Head of Originations.

Daniel and Gerardo joined as analysts and dedicated themselves to becoming strong credit professionals.  “We are all excited to support them in their next phase of development,” said Nick Seraydarian, Managing Director.

Charlie Perer outlines an emerging trend of bank-owned asset-based lending divisions conducting business in a fashion similar to non-bank asset-based lenders while gaining an advantage due to the ability to price like a bank. 

Small and regional bank asset-based lenders that operate like non-bank asset-based lenders are shaping the lower end of the ABL market. To be clear, these are banks with specialty finance divisions that operate just like non-banks but are still under a bank’s umbrella and therefore price like a bank. This group of ABLs includes UMB, First Business, Crestmark, TAB Bank, MidFirst Business Credit, Cadence Business Finance (formerly Alostar Capital Finance) and Sterling National Bank, among others. Frequently, these ABLs are priced 30% less than the traditional lower middle market non-bank ABLs. They can do this while providing the same structure as the non-bank ABLs given their cost of funds. Many of the aforementioned are either industrial banks or set up as a subsidiary of their parent bank to avoid regulatory hurdles. In any event, these bank ABLs truly think, act and execute like a non-bank ABL and are becoming a national market force.

Forming the Third Tier of ABL Pricing Options

These bank-owned specialty finance ABL groups are typically priced in between traditional, larger bank ABLs and non-bank ABLs, thus creating a three-tiered pricing menu in most markets: large bank ABLs, specialty finance bank ABLs and non-bank ABLs. Advisors and borrowers now have three clear and delineated options to pursue in each market, although the credit quality and minimum funds employed are much higher for larger bank ABL deals. The void that non-bank ABLs used to fill with no competition has now become competitive on a national basis. Historically speaking, the market was two-tiered, as many of the specialty finance bank ABLs did not have national reach, while many of the non-bank ABLs achieved national scale and efficiency through acquisition. National reach and scale are the two best friends of a finance company and this has clearly not been lost on the ABLs that were acquired by business development companies and banks with specialty finance divisions. This has led to reduced pricing across the board by both constituencies, especially given the lower cost of funds that result from the BDC structure, which utilizes access to public markets to achieve cheaper capital.

The lower end of the ABL market has never been more competitive as competition converges and many firms now have national reach. BDCs and the general consolidation of ABLs has enabled lower pricing, national reach and scale. This is a recent trend, as it took both BDCs entering the market and regional banks with specialty finance ABL groups expanding nationally. In addition, new lending market entrants with specialization, including new lenders focused exclusively on the consumer products industry or non-traditional ABL such as intellectual property, real estate, and machinery and equipment, have created more options and competition. New firms, new products and more options has been great for advisors and borrowers but is clearly causing some market friction for lenders. The end-result is clear: increased competition and compressed margins. However, the market changes are not always easy to spot upfront.

That said, the primary market changing trend here is the proliferation of regional banks with specialty finance ABL groups expanding nationally rather than just regionally. These firms are focused on the lower end of the market and are not looking to go head to head with the national bank ABL groups. Rather, they have very good business plans, which hinge on leveraging their national reach and lower cost of funds to take share from the non-bank ABLs. They also can happily fund the smaller deals that larger bank ABLs avoid or are unable to complete. In this way, these firms have filled the void in the market that the larger bank ABLs used to fill by doing smaller deals. These specialty finance bank ABL groups clearly recognized this void and have been aggressive in addressing it.

The Advantages of ‘Non-Bank, Bank ABLs’

Why wouldn’t they when their value proposition is the same product at a lower price? It’s just like the saying: “Everything you can do, we can do at a lower rate.” This is the message the bank specialty finance groups are sending nationally, as these groups are a clear bright spot for their bank owners in this low rate environment. Another reason regional banks have expanded their specialty lending groups is not just to build a broader footprint and gain higher yields, but to gain treasury management income from clients that they would not have seen otherwise. While the non-bank ABLs have achieved a level of scale, it still does not match these bank ABLs that can act like a non-bank while pricing like a bank. The key change in this market is the national reach of these banks with specialty finance ABL groups.

A few years ago, just a handful of ABLs had national reach and the ones that did were non-bank ABL groups that were purchased by banks. Many banks clearly have paid attention to this trend and taken the step of hiring executives and business development officers around the country to attain national reach. Many of these groups are run by former non-bank lenders themselves, which allows them to achieve success with minimal write-offs. Write-offs kill the channel immediately and can lead to a quick demise of a startup ABL group at a bank. When done right, however, the risks are minimal, but the returns are very high. There is a reason why this market has become very competitive while banks with specialty finance groups take national share from the non-banks. Previous to this constituency, the non-bank ABLs just competed with each other rather than a disruptive group of out-of-town specialty finance bank ABL groups.

This trend is here to stay — especially as banks start to exit clients — and should play a meaningful market role for years to come given we are just entering a new cycle. The evolution of the market and shift in credit appetite and deal structures should make for an interesting demarcation in terms of risk appetite for each constituency. However, it is unclear if the market leading non-banks and banks with specialty finance groups have the capital and fortitude to stick with the strategy through a tough cycle. The majority of new entrants obviously entered the market and expanded nationally well in advance of COVID-19. So it remains to be seen what the push-pull within banks will look like when liquidations and potential losses start to occur. The dynamic between many banks and their specialty finance groups is going to be tested as most banks work-out versus liquidate because they don’t have a choice. The specialty finance ABLs certainly have a choice and, make no mistake, there will be liquidations. The tide is going to go out soon enough and we will all find out which new entrants are here to stay.

Link to article here.

SG Credit Partners today announced that Spencer Brown has been promoted to Managing Director and has opened a Colorado office. In this role, he will continue leading the coverage efforts for originating and closing structured cash flow, collateral based, recurring revenue, high net worth and special situations credit facilities in the Rocky Mountain and Southwest regions.

“Our team has continually grown and the addition of an office in Denver will strengthen our capabilities as a nation-wide credit fund,” said Marc Cole, CEO of SG Credit. “Spencer has been with the organization for several years and is well known in the market – he will significantly increase SG Credit’s regional brand awareness.” “The Rocky Mountain and Southwest regions are an integral part of our strategy and we are now positioned to continue our expansion in those key markets”, said Charlie Perer, Head of Originations.

Brown, who earned an MBA from University of Colorado at Boulder, joined SG Credit from Super G Capital with its other co-founders. Prior to Super G, Spencer worked at FirstBank and Noodles & Company (NDLS).

Link to article here.

It’s only a matter of time before SaaS lending enters mainstream ABL.  Lending to SaaS, which stands for Software as a Service, differs from traditional software in that it is deployed and made accessible to users over the internet (or in the “Cloud”), and is going to be the next ABL battleground.  Today it remains a niche lending vertical conducted mostly by tech-focused banks and nonbank credit funds.  However, this is going to change meaningfully as the SaaS industry continues to mature. There are an estimated 10,000 private SaaS companies, the vast majority of which are early stage, generating less than $3 million in annual revenue.  To put this in perspective, companies such as the wildly popular Zoom and workforce tool Slack utilize SaaS models.  The U.S. economy is well into a transformational period where many business tools are moving to the cloud.

The ABL world needs to adapt to this new vertical as the ongoing rise of the SaaS industry isn’t just anecdotal.  According to Gartner, worldwide market revenues from SaaS companies could hit $151 billion by 2022.  Eighty percent of businesses already use at least one SaaS application. These trends are only going to grow exponentially as most businesses transition from traditional, on-premise software to the Cloud.  The industry is going to experience growth, maturation and more sizeable businesses that portend great lending clients.  Interestingly, most banks classify SaaS in their ABL groups with the argument being that the recurring contracts are tantamount to a receivables-based deal.

Many of the typical ABL underwriting principles apply – multi-year contracts, customer concentration, end-customers, margins, liquidity and wind-down.  The seminal difference is understanding software contract values as opposed to hard asset values, which is still foreign to most ABLs. How would you like to lend to a mission-critical software company with 100+ clients, multi-year contracts, 80% margins and no concentration?  However, deferred revenue is often created as many, but not all, contracts actually pay upfront, which is a real concern as the service still needs to be provided. The lending metrics are also wildly different from traditional ABL – try a multiple of Monthly Recurring Revenue (“MRR”) rather than percent of AR.

When structured properly, mission-critical software provides for very attractive, low-risk opportunities even with meaningful leverage.  These businesses are already getting really aggressive leverage in the market.  Small, bootstrapped SaaS businesses are typically getting 5 to 6x MRR and bigger, PE-backed SaaS businesses are getting much higher multiples. The larger SaaS businesses truly do get treated differently given the size, scale and backing which allows them to support unheard of leverage, even for an ABL deal.  These business have strong, multi-year contracts and in a wind-down scenario these businesses should generate cash as a maintenance support is required to service existing customers.

Try winding down a SaaS business compared to an old-line manufacturer with customer concentration and aged trade.  No driving 100 miles outside of a metropolitan city to liquidate M&E, converting WIP to finished goods and dealing with unions.  Unlike many fixed-cost businesses, a good SaaS business can become cash generative overnight in a wind down by cutting out sales and marketing. What this might do is spur a new tech-oriented workout group rather than the traditional folks who are more comfortable in a tier 1 auto supplier plant than a data center.  The same principles also apply – wind downs and liquidations –but instead of a landlord waiver to get equipment or inventory it will be an Amazon Web Services waiver to keep lights on in the Cloud.

Rest assured, this market has been red hot for the past ten years, but it has not been mainstream.  The proliferation of SaaS businesses, strong lender-static pools and industry maturation is catching the attention of mainstream lenders, both bank and non-bank, SG Credit included.  Lending to SaaS has always been a hallmark of SG Credit and SaaS diversification provided a safe harbor during the COVID shutdown. As the industry continues to mature, the lending market is going to migrate from tech-focused lenders into mainstream ABL.

Today,  the larger banks in this space classify SaaS lending under ABL.  These groups are first-movers, play upmarket in the bank SaaS market by partnering mostly with brand-name private equity funds.  The market leaders operate within their own tech finance verticals within larger ABL umbrellas, meaning, each has its own dedicated underwriting, credit and portfolio management groups.  These groups need to operate independently as there are a number of clear and other metrics to consider in SaaS finance that are different than traditional ABL.  The underlying businesses at true private scale require significant industry and market diligence to determine obsolescence and other elements of technology risk, among other things, so in that sense it is quite different from traditional ABL.

To contrast, the large sponsor-focused SaaS lenders banks such as Bridge Bank, Sterling National, Signature Bank NY, Stifel, CIBC, Avid, PacWest (formerly Square 1), are firmly ensconced in the lower end of the middle market.  These banks typically work with venture-backed companies as opposed to private-equity backed, which varies greatly from the large banks.  Silicon Valley Bank deserves its own mention as many of its alumni went on to start the tech lending groups at the aforementioned banks.  Most of these banks primarily focus on SaaS companies with some type of VC or institutional backing, unlike many of the non-bank lenders such as SG Credit, Runway Growth and Accel-KKR, which have a strong focus on financing bootstrapped or earlier stage SaaS businesses to provide a financing bridge to a bank, significant equity round or acquisition.

As we sit here today, there is significant competition in several market segments – small bootstrapped to large sponsor-backed.  Competition should change as the SaaS market continues to grow, driven by companies transitioning to the Cloud. Banks are taking notice of this shift and there is a reason that SaaS has been housed in ABL groups.  This trend should continue and we are in the early innings of what should be a multi-decade industry expansion.  We are all going to be spectators in watching this industry growth transform the tech-lending landscape as mainstream ABLs start to venture into SaaS lending.

Link to article here.