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In this installment of our series of “Executive’s Corner,” guest writer Charlie Perer of SG Credit Partners sits with Scott Winicour. CEO of Gibraltar Business Capital, to understand his views on building an asset-based lending shop, national expansion, ABL consolidation, working for a BDC and the competitive environment, among other topics.

Charlie Perer: Please tell us about the history and legacy of Gibraltar prior to selling to Hercules Capital, especially how Gibraltar transformed from a factor to a respected ABL shop.

Scott Winicour: Gibraltar started in 1951 in Chicago as a factor and small ABL shop. My father, who grew up working for Heller Financial and had his own leasing business, bought Gibraltar in 1991. I started working for my father in 1995 and worked my way up to running the business. I bought out my father with the help of private equity in April of 2010 with the goal of focusing on ABL as opposed to factoring. The desire to focus on ABL stemmed from the fact that factoring yields were compressing quickly, combined with the fintech movement that I saw as a potential disruptor to factoring. In addition, we had some aggressive growth plans and we felt that focusing on larger ABL loans would allow us to grow the business more rapidly.

Perer:Hercules bought Gibraltar about two years ago. What led to the sale and how transformative has the acquisition been?

Winicour: The business really started to take off starting in 2016. We knew that we wanted to continue growing at a rapid pace and, therefore, we needed an investor that had deep access to capital and also understood our business. Hercules’ track record of success, its solid understanding of our business and its ability to raise capital was the right combination for our business model. We closed on the sale in March of 2018 and have more than doubled in size in the first 18 months since the sale. They have been phenomenal partners to work with.

Perer: Do you see more ABL acquisitions on the horizon given the counter-cyclical nature of the ABL industry?

Winicour: ABL continues to be an attractive business for a lot of different investor groups, especially with increasing banking regulation. I do not think the M&A market for ABL will slow down in the short term. Most of the stronger platforms have been recently acquired in the last few years and so it will be interesting to see what happens to valuations.

Perer: Where do you compete in the market and where do you see competitive opportunities?

Winicour: We compete primarily in the lower middle market, offering ABL facilities from $2 million to $20 million. I think our competitive advantage as a service business is our people and our focus on building long-term relationships. We pride ourselves on listening to referral sources and borrowers to understand their pain points and come up with creative structures that enable all parties to achieve their goals. I am very lucky to be surrounded by such a phenomenal and experienced staff.

Perer: Has your market position changed significantly post-acquisition?

Winicour: We were previously competing in the $1 million to $10 million credit facility space prior to being acquired by Hercules and we have leveraged the increased access to capital to go upmarket in our loan offering. As our portfolio continues to grow, I would expect us to continue to go upmarket.

Perer: How has your strategy/team evolved as Gibraltar has moved more upmarket?

Winicour: We built a very comprehensive go-to-market strategy back in 2016 that enabled us to focus on going upmarket. Part of that strategy involved a greater focus on working with financial sponsors in order to position Gibraltar as a the preferred ABL partner to lower middle market businesses backed by financial sponsors. We also spent a great deal of time on building out our culture and values. That has enabled us to attract some of the best talent in the industry.

Perer: You now have a national presence in the ABL market. How hard is it to recruit and build a national team of strong professionals in today’s market?

Winicour: Finding the right people can be just as challenging as finding the right client — maybe even harder! Fortunately, my senior management team and I have been in the industry for quite a while and have built long-standing relationships with people across the country.  Having a strong culture, extremely healthy balance sheet and a track record of success has allowed us to attract extremely talented professionals.

Perer: What is your management style and has it changed as Gibraltar has grown?

Winicour: In the early days when I bought the company, I could not afford to bring on all the talent that I wanted. Therefore, I wore many hats. As the company started to evolve and we brought on more people, I had to let go of the reigns a bit and trust my people. That was difficult at first. Today, I spend the majority of my time on new business, strategy and stakeholder satisfaction. Again, I’m very lucky to be surround by such great people and especially my senior management team of Mark Stoeberl (CCO), Anthony DiChiara (Head of Sales) and Jessica Moyer (Head of Marketing & Operations). They really run the day-to-day operations of Gibraltar.

Perer: What is it like to be offensive-minded as a CEO with institutional capital rather than defensive-minded as an independent where there is no margin for error?

Winicour: Honestly, I run the business the same way as I did when I was with my father. I’ve always managed a strong credit discipline while being aggressive and opportunistic in chasing new business. The difference is that now I have strong capital partners in Hercules and my continued long-lasting relationship with Wells Fargo Capital Finance.

Perer: How much did you worry about capital as an independent and what’s it like to not have to worry about capital being owned by a BDC?

Winicour: As an independent, capital was always on my mind. Fortunately, capital never became an issue. However, not having the balance sheet I desired did restrict our growth in the early days. Now, having Hercules Capital behind us has really allowed me to focus on continuing to evolve our strategy without worrying about whether the capital will be available.

Perer: A whole host of independent ABL shops have started on both the lower and upper ends of the market. Where do you think the industry is in terms of consolidation?

Winicour: It’s hard to say as access to capital is still abundant. The new smaller players might be competitive regionally but could have challenges competing against more established national ABL lenders like Gibraltar. I don’t think we will see much consolidation until access to capital starts to dry up.

Perer: Many smaller-ticket ABL shops are thinly capitalized. Should the new and existing independent small-ticket ABL shops be worried about when the often-talked-about market correction happens?

Winicour: I hope that every ABL shop, large or small, worries about a market correction.  Staying proactive is one of the many keys to success in this industry.

Perer: How do you see this playing out as the barriers to entry are low, but the barriers to continually raising capital are high?

Winicour: The key word you used in your question is continually. I think it’s still easy to raise the initial round of capital. Having deep access to continually raise capital is what really gives you the ability to scale. The industry has never been as competitive as it is today. Therefore, I think it’s going to be a challenge for newer shops to scale outside of their region.

Perer: How much do you worry about your clients’ liquidity during the next downturn given your primary focus is serving the lower middle market?

Winicour: I’m always worried about our clients’ liquidity, whether there is a downturn expected or not. It’s one of our keys to success. We plan to be out in front of that and prevent a fire before it starts.

Perer: How do you see the next downturn affecting your market?

Winicour: Our industry is one that can grow even during a downturn. In a downturn, banks will most likely exit more facilities and decline more new opportunities than they have in the past. That can be a great opportunity for ABL shops with the right credit philosophy and strong balance sheet to take advantage of the market and grow their book.

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

Winicour: I am extremely curious how a downturn in the economy will affect the fintech lenders that have yet to go through a full credit cycle.