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November 12, 2021

Specialization is Key – SG Credit Partners Sets its Sights on Middle-Market Asset-Based Lending

SG Credit Partners recently announced its acquisition of Stonegate Capital Holdings (“Stonegate”) and its entry into asset-based lending with a focus on high-growth consumer and recurring revenue verticals.

The acquisition of Stonegate establishes SG Credit Partners as a leading lower middle-market credit platform delivering a complete range of credit solutions and provides a market leading position in the consumer vertical, and revolving capabilities throughout the SG Credit platform. The acquisition also strengthens SG Credit’s product platform which includes the ability to structure senior and junior debt as well as provide both cash flow and asset-based loans.

Marc Cole, Co-Founder and Chief Executive Officer of SG Credit Partners met with Michael Toglia, Publisher of ABL Advisor to discuss this strategic acquisition and how it uniquely positions SG Credit Partners to expand their platform to offer specialized solutions in the middle market.

ABL Advisor: The recent announcement signals SG Credit’s entry into the ABL space. To begin, why is SG entering the ABL space?

Photo of Marc Cole - Co-Founder and Chief Executive Officer - SG Credit Partners, Inc.

Marc Cole: Great question Mike and one that I have been asked a lot recently. We are entering what we call the specialized ABL space for two reasons. Firstly, this acquisition and resulting revolver capabilities strengthen our platform. We raised institutional capital a few years ago with the sole purpose of building a broad credit platform focused on the lower middle market, specifically entrepreneur-owned businesses. We now have an institutional credit platform focused on loan sizes up to $10+ million in a part of the market that is severely underserved. What makes our platform unique is our ability to structure deals around a broad set of borrower types, use of proceeds, and situations. No other platform serving the lower end of the market has our team, reach or capabilities.

The second reason and just as important is that our business evolved, and we recognized the need to be a thought-leader in key verticals. Stonegate was a first mover and thought-leader in providing ABL solutions to sponsor-backed, high growth consumer businesses and SaaS businesses. Stonegate’s SaaS capabilities focused on sponsor-backed companies are purely additive as SG Credit has completed approximately fifty SaaS financings to mostly bootstrapped companies. I started my career in private equity providing growth equity for SaaS businesses and very much understand the needs of founders in this sector.

The opportunity to obtain revolver capabilities across our platform, diversify sourcing channels to work with sponsors and become a market leader in highly sought-after verticals was too much to pass upon. It’s also important to say we ultimately did this because of the team at Stonegate. What we did not want to do was directly compete with the broader ABL industry – who we still very much view as our partner. We never considered entry into that market as that shipped sailed as conventional ABL is becoming mature and a race to obtain scale.

ABL Advisor: Why Stonegate? To clarify, what made the Stonegate business and team so attractive to SG Credit?

Cole: The team, their track record and clear, differentiated approach to the market. Our entire business and strategy are based on differentiated products, genuine people and markets we can lead. The consumer vertical, just like the SaaS vertical, is starting to get a lot of attention from the lending community. These specialized industries require deeper understanding of collateral, similar to other specialized industries such as healthcare and traditional retail. We get excited about verticals where we can be a true market leader and we can now say that about consumer and SaaS. In addition, the team at Stonegate is fully onboard and these opportunities are few and far between to work with a like-minded team who treats a business like it’s their own. This stems from the fact that Stonegate was founded by a beloved industry visionary in Darren Latimer, who hand-picked an incredible team that remains in charge. We never take the people aspect for granted.

We ended up getting the trifecta of people, platform and market leadership that also provides our combined company with national reach and scale.

ABL Advisor: Please tell us about the market you will be pursing in the ABL space. For example, company revenue levels, transaction ranges, credit profiles, industry focus and ABL transaction types.

Cole: Key priorities are high-growth consumer facing businesses as well as emerging SaaS businesses. Secondarily, we will pursue true special situations that don’t fit the box of traditional ABL and that provide premium pricing. Typical non-SaaS revenues range from $10+ million to over $100 million and facility sizes range from $2+ million to $10+ million. SaaS revenues typically range from $3 million in ARR to $10+ million.

The credit types are typically transitory in nature in that these companies are typically trading profit for growth and highly focused on creating exponential equity value. Stonegate has terrific relationships with the consumer and SaaS investment communities who prefer a lender that understands their industries and can underwrite growth. Stonegate became a preferred partner by being able to strategically make IP or enterprise loans to complement their ABL structures.

I also believe it is important to say what we don’t want to do, which is to compete in what we call generalist ABL defined as the traditional manufacturer, distributor and service businesses. There is simply too much competition in this market with the industry leaders having dominant positions.

ABL Advisor: Tell us a bit about how the SG Credit team will work with the Stonegate team and how the two will “attack” the market to achieve greater market share? In other words, does “1+1 = more than 2”?

Cole: Firstly, we are now one company. The best way to think about our go-forward strategy is one national originations team, but two separate business units with dedicated leadership, underwriting and portfolio teams. Much like how many groups use one team to market factoring and ABL but keep underwriting and portfolio separate for both. Ultimately, the core products – ABL and cash flow – are very different and we recognize the need to keep underwriting and portfolio as separate business units.

The 1+1=3 comes into play for clients that have a larger term component than ABL and it makes sense for SG Credit to control the revolver. Vice versa, Stonegate plans to go deeper into its verticals, and often many of these companies need IP or enterprise value term loans. What won’t change is the core product offering and special DNA that each company possesses. We believe Stonegate’s industry expertise combined with SG’s non-ABL product expertise provides for significant opportunity to deliver complete solutions to the market. The same folks underwriting and managing credits will still be doing so, only now they will have more capabilities to offer clients and the market.

One thing we want to make clear is that SG Credit’s partnership approach to working with other lenders hasn’t changed. ABLs and banks should still call us anytime they need a partner. The core SG business has expanded over the years but partnering with banks and ABLs is still a critical component of our business strategy.

ABL Advisor: How will the businesses interface? Will the leadership team at Stonegate remain in place and how will the two teams (SG and Stonegate) work to create a cohesive approach to the market?

Cole: The leadership team at Stonegate will absolutely remain in place. Planning has already begun for a cohesive approach to the market with the goal of simplifying messaging and educating referral sources. Acquisitions are never easy, but the core Stonegate team has been there from the beginning, so the only difference is that we are super-charging their originations. The companies have a common culture so putting them together is not that difficult. The senior executives have known each other for many years and in some cases have been colleagues.

ABL Advisor: Competition is certainly fierce today among bank and non-bank lenders. What can the market expect to see from SG in the coming years and what do you see as a major trend in the coming 12 months?

Cole: The market is fierce, which is why we and every market participant should be re-thinking their business. There are three major trends happening right now: Consolidation, Scale and Specialization. For us, it’s all about specialization. We are very strong in several verticals with a focus on loan sizes below $20 million. These verticals are consumer products, SaaS, high net worth and special situations. Our strategy is to have three to five direct competitors within each vertical where we can get premium pricing rather than fifty direct competitors in conventional lending opportunities.

Consolidation and scale have transformed the ABL industry and now more than ever you need specialization as a point-of-difference. We compete and go after specialized industries where we know the market and know where we can go deeper as part of getting premium returns. Now that many other platforms have achieved scale, we believe the next battleground will be consolidation of specialized verticals. Recent market comps including Stonegate suggest as much.

ABL Advisor: Thank you for joing me today Marc. Do you have any parting thoughts?

Cole: It’s an exciting time to be in this industry. We are in the midst of constant change whether it be M&A, technology or leadership change. We started the predecessor to SG Credit back in 2015 and it’s almost unrecognizable how far we have come. That said, we believe we are still in the early stages of what we can become as we continue to add like-minded talent and evaluate expanding into new businesses.

Link to article here.