In 2003, following GE’s acquisition of Deutsche Financial Services and Transamerica, John Schmidt, Mike Gallagher and Chuck Lillis saw the opportunity for a new entrant in the niche technology finance space. Together they founded Castle Pines Capital to design and manage channel finance programs for technology equipment manufacturers and distributors that provide short-term financing for the vendors’ customers. After Wells Fargo’s acquisition of Castle Pines Capital in July 2011, Schmidt and Gallagher became senior managing directors of the Channel Finance Division of Wells Fargo Capital Finance, where they continue to serve the marketplace.
The Birth of Castle Pines
Castle Pines Capital’s relationship with Wells Fargo dates back to early 2005, when it received its first bank financing from the Lender Finance Division of Wells Fargo Capital Finance. In 2007, the two companies entered into a strategic alliance that included a small, minority equity investment by Wells Fargo. Because the leadership at Castle Pines Capital and Wells Fargo Capital Finance knew each other’s businesses so well and their strategic visions were similarly aligned, the acquisition was a natural progression of their relationship.
“As we were growing, Wells Fargo was very focused on meeting our needs as a customer. They had a small equity investment in our business, but the real merit of the alliance was finding a way for us to continue to fuel our growth in originations with financing from Wells Fargo. We continued to grow and expand the business model outside the initial set of partners. In 2008, we launched our international programs with strategic technology vendors. In mid- to late –2010, we started discussions about the next steps, and our partnership with Wells Fargo led to discussions and the ultimate acquisition of the company in 2011,” Gallagher explains.
Prior to Castle Pines Capital’s launch in 2004, Schmidt was a corporate officer with Transamerica focused on developing technology channel finance programs and had built relationships with large partners such as Cisco Capital. Schmidt, a 25-year capital finance veteran, was quite familiar with the business opportunities available to the specialty financing niche that is channel finance. Gallagher’s background is in finance business development, and he was working in private equity prior to Castle Pines Capital. Both men, who have two sons the exact same ages, met on the soccer field, where Schmidt was a coach. They eventually developed a plan that would partner Gallagher’s private equity and business development experience with Schmidt’s established technology channel finance knowledge.
A Natural Progression
At the time of Wells Fargo’s acquisition of the business, Castle Pines Capital was managing about $2.5 billion of commitments, employed 60 people, had 150 different technology reseller customer relationships, and had financing programs with various technology manufacturers or vendors in more than 30 countries. And with the company’s success and projected growth, the Castle Pines Capital partners recognized the benefits of joining Wells Fargo Capital Finance.
Schmidt remarks, “The obvious advantage is the scale and footprint of the broader bank itself, and, clearly, the financial strength and stability that comes with the brand that is Wells Fargo. We’d been doing business with Wells Fargo Capital Finance since launching our business, and had the opportunity to develop very strong and solid working relationships. Along the way, as a customer, we saw firsthand the culture and can-do business attitude that is Wells Fargo Capital Finance. And that’s a large part of why the acquisition made sense to us because we knew exactly what that culture felt like. Wells Fargo Capital Finance has always been creative and innovative in finding ways to help us continue to grow, with the acquisition being a culmination of the process. The less obvious advantage is this alignment in culture in keeping the customer first and finding solutions that create capacity and enable customers to grow.”
In addition to the cultural fit, the parties saw similarities in their product offerings and financing.
The financing facilities in the Channel Finance Division’s programs are shorter term and constantly revolving, similar to a credit card receivable. The division finances technology products on a short-term basis, financing the product through the sales channel.
“What made the acquisition possible was that our product suite and financing was very similar and aligned with Wells Fargo Capital Finance. If you look at the organizational chart, you’ll see that the product responsibility is in Lender Finance, more of a function of our relationship with Andrea [Petro, Wells Fargo Capital Finance’s executive vice president and manager of the Lender Finance Division]. The product suite itself, providing working capital solutions exclusively focused on technology vendors and resellers to purchase more equipment and services, is nicely aligned with other product lines offered by Wells Fargo Capital Finance,” Gallagher affirms.
Competition at Home and Abroad
Just as GE Capital’s consolidation of the technology financing specialty market prompted the birth of Castle Pines Capital, the company remains the primary domestic competitor of Wells Fargo Capital Finance’s Channel Finance Division. The other major domestic player is IBM’s captive finance group, which usually finances only IBM products and resellers, but from time to time will enter the greater marketplace. Internationally, the competition includes GE Capital, CitiBank and Deutsche Bank.
Explaining the difference between finance programs within North America and outside of the U.S., Schmidt says, “In North America, our programs are designed to serve multiple vendors within the same facility, and outside the U.S. it’s more a direct relationship between the vendor and the reseller and the finance company. For example, in Europe, we’re financing the sale of Cisco equipment to certain resellers. In the U.S., we are financing the sale of that equipment to the reseller, but that reseller is most likely also purchasing from any one of a number up to 15 different additional technology manufacturers. When you are putting a financing program together in North America, you have one customer relationship with multiple technology manufacturer relationships. The system capabilities become very important. It’s our system capabilities that differentiate us in the marketplace. There are a small number of companies that have made the required investment to build the full system capabilities that the supply chain within technology is accustomed to. Outside of the U.S. it’s more of a specific financing relationship, and that’s why there are more banks competing with us.”
System Capabilities — The Key Differentiator
The key differentiator Gallagher refers to is the technology platform called “Triad,” Latin for triangle, symbolizing the three-way relationship between the Channel Finance Division as the finance partner, the purchaser of the product (the reseller) and the technology manufacturer that sold the products.
“It’s the system capabilities and the differentiation that we created in the market of driving efficiencies to that supply chain to make it easier for the customer to order and procure the product from the technology manufacturer, and at the same time making it easier for the technology manufacturer to sell that product. Obviously, the financing of that product is a very key component of the overall solution. It’s more than billing and solutions. It’s driving efficiencies throughout the supply chain from the time of ordering through the ultimate collection of the receivable by the reseller,” Gallagher remarks.
The Team Today
Schmidt and Gallagher work out of the division’s main office in Englewood, CO, just south of Denver, which houses the operations and portfolio teams and channel finance operations with about 40 people in that office. Also servicing the division is a dedicated technology unit in an office of seven people just outside of Boston. The international operation, which began as a Latin American portfolio and has since grown into parts of Western Europe, is a six-person group outside of Miami. In addition, there are ten to a dozen people, mostly in development roles, working out of their home offices throughout the country.
As Schmidt and Gallagher continue to expand Wells Fargo Capital Finance’s Channel Finance Division through specialized technology financing, they stress the combination of their technology platform and transaction processing solutions.
“The piece that distinguishes channel finance from other forms of financing and other types of financial products is that to drive the growth and create the efficiencies that can maximize the capacity that you are providing to your customers, in our case technology manufacturers, you have a highly automated, integrated transactional processing system that’s going to enable you to perform in a much more efficient fashion as provider of capital and drive those same efficiencies into the supply chain to differentiate yourself,” Gallagher concludes.