2016

Not Your Father’s ABL: Stonegate Capital Targets PE-Backed Businesses

Former Gibraltar Capital co-founder and CEO and Wells Fargo Capital Finance veteran Darren Latimer launched Stonegate Capital Holdings this year with the intention of bringing improved products primarily to private equity-backed businesses in the lower-middle market. Latimer catches up with ABF Journal to discuss Stonegate’s all-star team and its creative and opportunistic strategy.



Darren Latimer, Co-Founder & CEO, Stonegate Capital

Darren Latimer, Co-Founder & CEO, Stonegate Capital

After leaving Gibraltar Business Capital in November 2015, Darren Latimer sensed change in the traditional asset-based lending market.

Before co-founding Gibraltar in 2010, Latimer was an executive vice president at Wells Fargo Capital Finance where he led origination offices lending more than $500 million a year. But over time, he noticed that the types of borrowers seeking asset-based loans, their investors and growth plans had changed ahead of the ABL market.

“After studying the news around several BDCs’ dividend cuts and increased bank regulations, I felt that there was a real hole to provide optional and flexible collateralized credit to underserved but deserving customers,” Latimer says.

As a result, Latimer and a small team launched Stonegate Capital Holdings in Chicago this year, intending to provide $1 million to $10 million asset-based loans to lower middle market, private equity-backed companies with plans to reinvest, scale and eventually sell.

Stonegate received significant votes of confidence by way of investments from Bridge Investments and MBB, and attracted former chairman and CEO of Wells Fargo Capital Finance Peter Schwab to its board of directors.

One of its first deals was a loan to a vintage media company that Stonegate executives believed many other lenders wouldn’t touch, considering the publication’s negative debt trend and limited future in print. It took a little creativity, close observation and multidisciplinary experience to make this deal work — including when and how to wind it down when the time comes — but that is exactly how Stonegate was designed.

Where Banks Aren’t

Latimer isn’t shy about Stonegate’s strategy as a creative, first lien, opportunistic, collateral-backed business lender.

“The thesis around Stonegate is that ABL is tired,” Latimer says. “It really has had little transformation or creativity over the last 20 years, even though the investor base in these businesses, the margins they produce and the styles of businesses that need the capital have changed.”

Latimer says ABL opportunities have grown beyond funding public companies with large inventories or private, multi-generational companies with slower growth. Private equity-sponsored companies with high-growth strategies that aim to increase margins and sell the business within a few years are also in search of ABL products, but these companies often come with risks that might disqualify them from more “vanilla” ABL services.

Stonegate’s lenders start with the idea that these companies are looking for more than just asset-based loans. They need what Latimer refers to as “conforming ABL products plus a little something extra,” usually in the form of optional capital investments.

For example, Stonegate is working with a pet food maker. Although the company has $25 million in equity invested and is almost breaking even, it would likely struggle with traditional lenders. “The equity holders are saying, ‘You guys are growing, but we’ve got a lot of dough in this thing. Go out and find some senior debt.’ The company is still losing money. They need an A/R and inventory loan and something else to buy machines to put in one of their factories,” Latimer says. “This is not your father’s ABL.”

Latimer thinks these types of transactions with institutionally-owned businesses will eventually make up around 80% of Stonegate’s loans. He says having investors completely aligned with this mission will allow them to serve this space and might be what keeps large institutions away.

That’s not to say Stonegate is without competition. Instead, Latimer thinks the niche is more likely to attract smaller private players that are able to manage the risks associated with this type of borrower more closely.

“The beautiful thing about our space is that there’s not a lot of capital dedicated to it,” Latimer says. “These are small loans that all have a little story that take very weathered and seasoned collateral lenders to manage.”

Weathered and Seasoned Crew

Latimer says his time at Wells Fargo and Gibraltar created the “perfect storm to compile the team, the senior leverage provider and the referral source” at Stonegate. In addition to expanding upon the philosophies of both companies, Latimer used connections from each to source Stonegate’s leadership.

First on board was co-founder and COO Tim Gottfried, who Latimer says was a “hybrid lender” at Cerberus Capital before becoming treasurer at CDW, a public company in suburban Chicago with $13 billion in revenue.

“What we needed there was somebody who understood the strategy around growth and credit, but someone who also could be great at IT, operational capacity, cash management and treasury,” Latimer says. Finding a person with those skills is usually a difficult task, but Latimer was lucky — the right person just happened to be in Chicago.

Managing Director and Head of Underwriting Tony Cappell has a diversified pedigree. As an auditor at Wells Fargo Capital Finance, he gained collateral and liquidation experience. Well versed in Gibraltar’s creative underwriting process, he also learned underwriting in the regulated space during his time at First Midwest Bank.

The final piece was Business Development Officer Andrea Hedrick, who Latimer says was a “rock star” with private equity firms at Wells Fargo where he hired and helped to train her in sales.

“Andrea is completely turn-key. She understands our product and knows how to sell it, understands why borrowers need it and who to call on,” Latimer says.

Finding a Friend in Volatility

Latimer says Stonegate is designed to be at home with the volatility in both the public equity markets and the federal regulatory environment that determines what type of borrower banks and large lenders are able to fund.

“We like the (increasing) regulatory environment. It will make it harder and harder for the $500 billion banks, $200 billion banks or even smaller banks to be in our space,” Latimer says. “Banks will retreat from our market and will make fewer ABL loans, since they will no longer have the expertise to do it or just won’t have the tier-one capital ratios that the government requires of them.”

Schwab agrees that size is an advantage for Stonegate, noting that when he entered the industry in 1972, small entrepreneurial companies like Stonegate were the norm. Though ABL eventually became a mainstream industry, Schwab says big banking institutions still balk at committing to this particular market, given the amount of capital dedication and risk management required.

“During my 37 years in the industry, the market Stonegate is trying to capitalize on…has always been an underserved market because other lenders always split in and out of that market,” Schwab says. “So if you could be consistent in that market and have a mission to take those types of transactions, there’s always been an abundance of those loans there.”

It’s within this unstable, increasingly-regulated environment that Latimer thinks Stonegate can grow its equity value by three or four times and build a portfolio with more than $500 million in loans within 10 years.

“I’ve been through a lot of cycles in this space (over the last two decades), including big bank mergers, new companies and unaligned investors,” Latimer says. “The team … is really well rounded, and I think we’ve built a really good strategy to grow and scale over the next decade.”