The sub-$10 million ABL facility space has long been a paradox.  Over the years, new capital providers have entered only to chase too few loans, while incumbent asset-based lenders shift and migrate strategy.  This creates a shortfall of good assets, and the cycle continues.  But it’s not always that easy.  Right now, we sit in what should soon be the start of a brand new cycle thanks to Covid-19. The past few years have been brutally competitive for the sub-$10 million ABL industry given the new entrants, specialization and certain vintage firms migrating upmarket.  Top of the market, like the last few years, may seem like an auspicious time to raise capital to form a new ABL shop, but that is exactly what happened in expectation of a re-set. The difference now is that the bar is higher and the need for scale or a point of difference, whether it be industry focus, national scale or selling strategy, has never been greater.

The last set of successful ABL shops to get purchased were borne out of the last great recession.  There has been no better time than the past few years to form a new ABL shop, focused on smaller credit, if one has a point of difference or ability to build a national dream-team, given we are at the start of what should be significant asset migration and the smaller credits at banks will absolutely be the first to experience stress.  This segment is the hardest to serve given the majority of these facilities will be sub-$5 million ABL facilities that require hands-on monitoring, among other things.  These credits are challenging to underwrite given the inherent risks of lending to smaller, working-capital challenged companies.  To state the obvious, managing a portfolio of smaller facilities requires a different team than running a larger upmarket bank-ABL group.  These are smaller, tougher credits with less liquidity and less management sophistication.

In addition, one point of caution that comes up over and over again is that new ABL entrants (not necessarily any of the ones mentioned herein) which are privately owned vs. private equity-backed are typically marginally capitalized.  Many have also not lived through a downturn, have a smaller margin of error and, if push comes to shove, may manipulate information to live another day.  It takes an experienced asset-based lender to adhere to sound credit policies and procedures and notice the red flags.

Despite the known challenges, the pre-Covid-19 environment was already over-competitive. That said, there should be plenty of room for both incumbents and new entrants to grow assets as right now banks are sitting on over $2 trillion of C&I loans.  To add to that, majority of community banks are not in the ABL business and most major banks have no appetite for sub-$10 million ABL facilities so the market will be there.  What this article seeks to explore are the strategies and points of difference of a few of the new firms who seek to take share in this new cycle. It should also be noted that some of the firms listed as new entrants are listed as such due to senior management changes that brought a change in strategy or significant capabilities.

New Entrants or ABLs with new leadership additions Republic (post-merger w/ Continental), Stonegate, Black Sail, Second Avenue, Dwight, Austin, Assembled Brands, Internex, Alterna

* For avoidance of doubt, this list does not include incumbents currently in this space or meant to be inclusive of every new entrant.

For new entrants, the reason for being is all about a specific point of difference, which could include industry focus, sales strategy or tech-enabled product offerings.  Take Assembled Brands, Second Avenue Capital and Dwight Funding who are are exclusively focused on consumer, food and retail/e-commerce and backed by groups with extensive experience. These teams have decades of experience in one industry segment and found strategic capital backing that enables them to go deeper into collateral.  On the other hand, Stonegate Capital is focused on several verticals and differentiates via its industry vertical strategy and human capital. It is one of the few lower middle market ABL firms who provide credit facilities to SaaS companies by viewing the recurring revenue as an asset to lend against – expect more firms to follow.

To juxtapose industry and vertical focused approach are generalist firms such as Republic Business Credit, Black Sail Capital, Alterna and Austin Financial that were either newly formed or, in the case of Austin Financial and Republic Business Credit, recruited experienced teams through hires or acquisition to expand their product offerings.  Republic has focused its strategy on a platform approach by offering multiple products (ABL, ledger line and factoring) now that it has national reach post-acquisition of Continental.

These firms rely on strong personal connections in certain respective regions and a flat organization structure that provides them the ability to close quickly.  The point of difference is senior level decision makers on the front line, minimal bureaucracy and lightning fast closing times.  Being able to provide certainty of close and consistently doing so is a major competitive advantage in this space as the deals are often more complex and the risk is arguably higher.

The aforementioned firms are not meant to encompass each new entrant or strategy, but rather to illustrate the breadth of new entrants and their respective points of difference.  From industry and sales vertical focus to tech enabled strategies there is clear innovation taking place.  The time also makes sense as the last new crop of ABL entrants were formed during the last cycle and many have been bought with Gibraltar, Veritas and North Mill being recent acquisitions. Many of these firms have also gone upmarket after getting bought as a way to justify the premiums paid as there is only so much scale possible when booking and servicing smaller credits.

The combination of economic cycle, entrepreneurial ABL execs and plentiful lender finance capital should create an exciting time for the low-end of the ABL market.  Regardless of front-end point of difference, the most significant change from an execution perspective is going to be time to close. These new firms are aggressive, sophisticated and hungry for new business. They have also streamlined their respective organizations to be able to execute. Being able to execute is a clear point of difference and a market changer.

Expect the time it takes to close an ABL deal to start to change as we continue to see more entrants.  The competition is too good and all ABL firms are going to have to re-think how they compete and where they deploy resources.  No one competitor maintains their lead forever, but what the new entrants should do is force every incumbent to focus on sales strategy and the tried-and-true basics of servicing the customer.  At the end of the day, that’s why we all got into this business in the first place.

Link to full article here.