NXT Capital’s Chairman and CEO Robert Radway has learned a great deal from mentors during his more than 20 years in the finance industry.
He points out that sometimes you work with people who model the best path for success. And sometimes you can learn equally valuable lessons by observing what not to do.
“I was fairly young in my career when I started at The Finova Group. It was led by a very charismatic CEO, and I think the lesson I learned there was not to drink too much of your own Kool-Aid. And that humility is important, especially in a business like lending,” Radway says.
It was a lesson that Radway took to heart. He left Finova and moved on to Heller Financial in 1998. After GE purchased Heller in 2001, he formed Merrill Lynch Capital where he recreated the team and businesses that made Heller so successful. At Merrill Lynch, he developed a positive mentor experience with Jeffrey Kronthal.
“I worked with Jeff for many years at Merrill,” Radway says. “Jeff has a very analytical mind in terms of risk taking and risk management. He understands perhaps better than most the dynamics of being appropriately rewarded for a given level of risk while always thinking about how best to protect against the downside. He is also very astute in determining how to take advantage of the shifts that invariably occur in the credit markets during an economic cycle. Jeff really gave me some very good insights on how you change your tactics and your strategy from a lending and risk management point of view over a cycle. And he’s been a great sounding board ever since we started working together in 2002.” Kronthal now runs KLS Diversified and serves on NXT Capital’s board of directors.
After Kronthal left the firm in 2006, Merrill Lynch unfortunately bet heavily on the subprime mortgage business and was ill prepared when the housing market crumbled in 2008. Radway learned many lessons at Merrill Lynch, from the poorly timed sale of Merrill Lynch Capital in 2008, to the devastating effect of poor risk management at Merrill Lynch itself, which ultimately led to the sale of the entire firm to Bank of America in 2009. Radway was determined to have more control over the company that would star in his next act.
“We wanted to carry on. Therefore, we chose to do it with private equity backing and with a greater degree of direct control determining how we would run the business, how we would build it and the strategy that we would employ,” Radway says. “That was the motivation, and we’re very fortunate in being able to partner with a large private equity firm called Stone Point Capital.”
A Stellar Team
Indirectly, the mortgage crisis also hindered NXT’s progress. It took 18 months to raise the bank funding needed to get off the ground and for Wells Fargo to step up as NXT’s lender with a $300 million commitment. Since 2010, NXT has grown to more than $10 billion in committed capital. Based in Chicago — with offices in Atlanta, Dallas, Los Angeles, Nashville, New York and Phoenix — today, NXT provides leveraged loans to sponsor-owned middle market companies as well as commercial real estate first mortgage loans.
After working at some of the largest companies in the finance world, Radway believes a smaller, privately-held organization offers better potential for “smart” growth. It also allowed him to put together a team he is very proud of.
“My senior team members all spent time at Heller, Merrill Lynch Capital and now at NXT Capital. We go back as a team some 20 years or more. We have about 125 employees here at NXT, and over half are ex-Merrill Lynch Capital or former Heller Financial colleagues.”
But although the faces are familiar, Radway says operating without the heft of a big organization behind you creates some differences.
“As a lender we, of course, have to create the assets that generate the returns that we need. But at the same time, unlike being part of a large corporate organization like Merrill Lynch or Heller Financial, we also have to spend as much time addressing the right side, the liability side, of our balance sheet,” Radway explains.
“We are very focused on asset/liability management and raising capital for our asset management activity on a recurring basis. While loan origination, underwriting and account management are all critical success factors, we spend a lot of time on the financing side both on and off the balance sheet. We’ve now issued a series of CLOs, and we’ve expanded our bank group significantly — I think we have 20 or so banks that we borrow money from today. Over the years, we have dramatically expanded our access to capital because, as everyone knows, capital is the lifeblood of any finance company. I would say that’s probably the biggest difference. We are managing every aspect of the business, which is quite different from our experience at Merrill Lynch.”
Known for Dependability
NXT is a mainstream provider of middle market senior leveraged loans and does about $3.5 billion of new business volume per year. It has a team of 16 senior staff members who call on roughly 250 private equity sponsors to originate transactions for its leveraged lending business.
“We have a very strong flow of opportunities because of these relationships,” Radway says. “I think we are known for a high degree of dependability and well established deal execution capabilities. Our hold size capacity is also very meaningful at up to $125 million per borrower, made possible by our balance sheet and the nine active asset management programs from which we are currently deploying capital. Between very strong direct origination capabilities, well established and growing funding capacity and good day-in and day-out deal execution, I think we’ve become one of the main players in the segment of the market we focus on. We call the business Corporate Finance but, again, it is sponsor-focused middle market leveraged lending.”
NXT also has a thriving real estate business that provides acquisition financing for middle market-oriented commercial real estate transactions, including multi-family, industrial, office, hotels and mixed-use properties. Its capabilities often come into play when the buyer of a property needs a quick response to close on a transaction and is seeking short-term — typically three- to four-year financing — for the asset before either selling or refinancing it. According to Radway, NXT does roughly $600 million to $700 million annually in this business segment.
For a short time, NXT was also engaged in equipment finance, but that segment was not growing as quickly, so Radway and his team decided it was better to reallocate that capital.
Wider Market for Non-Bank Lenders
“In terms of the opportunities, clearly, as a non-bank lender we have been the beneficiary of the regulatory environment that banks have been forced to operate in for the better part of the last eight to nine years. It has created a much wider market seam for non-bank lenders, particularly in leveraged finance,” Radway says.
“Institutional investors have become very important participants in what is generally referred to today as private debt, but most of that activity is focused on leveraged lending,” Radway says. “So there has been a very significant shift away from deposit-funded bank balance sheets to institutionally funded vehicles such as commingled loan funds and SMAs through which corporate and public pension plans, insurance companies, sovereign wealth funds and endowments have become significant holders of middle market loans.”
Radway says investors, rather than deposit-funded banks, have fundamentally changed today’s loan funding process. Like others in the industry, Radway sees a point at which there could be too much capital chasing too few opportunities, but he doesn’t think the market has reached the saturation point yet.
Radway also notes that we’re in the eighth or ninth year of the current cycle and haven’t had a serious downturn since 2009.
“We are seeing signs that discipline from a credit point of view, in particular, is eroding, more so than pricing discipline. Overall, credit standards are slipping with some players being overly aggressive. I think it’s a problem driven both by the fact that we haven’t had a downturn in so long and because we’ve had a lot of new investors and platforms enter the space. You need to be very thoughtful around how you manage that because you just can’t pick up your marbles and go home. You have to participate, and you have to be smart about it.”
Being smart about it means realizing that what goes up will very likely come down.
“We see a lot of folks doing deep unitranche transactions in the market today against cash flow or company characteristics that we don’t think are as predictable as that leverage level would suggest,” Radway says. “So we are staying focused higher up in the capital structure, maintaining discipline around our credit boxes and not really succumbing to the temptation to believe things will always be good.”
“Because,” he adds philosophically, “they won’t.”