The management of Celtic Capital, an asset-based finance company located in Santa Monica, CA, recently purchased the company back from Pacific Western Bank (PWB). PWB acquired Celtic in April 2012. This represents the fourth transaction Celtic has gone through during the past 10 years. A review of the company’s history provides an interesting look at the journey of an independent finance company.
Celtic was founded in 1982 by my father, Bron Hafner. I joined my dad at Celtic in June of 1985, a year after graduating from college. The company was very small, with total outstandings of $1.5 million in 1985. Our average loan was $75,000. My dad and I grew the company through the ensuing years but were always limited by our lack of capital. The company was founded with minimal equity and subordinated debt held by various family and friends. After 10 years with the company, my father elevated me to be his partner in 1995.
By the late ’90s we decided to shift our market from the under-$1 million deal size to our current market of $500,000 to $5 million. To do this, we began hiring sales people, retooled parts of our internal staff, updated our policies and procedures for a different level of borrower, and implemented a more robust accounting and monitoring software system. We fully leveraged the business with the growth that ensued.
Frustrated by the capital constraints we constantly faced, my dad and I sold the business in 2005 to small, San Diego-based bank Discovery Bank. The bank recapitalized Celtic, immediately improving our income statement. My father retired, but I stayed on and ran the company with our executive vice president, Alex Falo, whom we hired in 1995.
We had a nice three-year run with Discovery, during which we had record years of profitability. In late 2007/early 2008, the bank ran into some issues and decided to pull the capital within Celtic back into the bank by selling Celtic. Alex and I were introduced to Pine Tree Equity, a private equity group based in Miami, who we partnered with to take Celtic private again.
In December 2008, despite our concerns as lenders during the most challenging economic market I had seen, we bought the company back from Discovery with Pine Tree’s assistance. With the proper capital structure and room to grow, the private equity group challenged us to see where we could take the business. Banks were not lending at the time, which caused record years of new business for independent asset-based lenders. Celtic expanded geographically, hiring sales personnel across the country and tripling the business during the next three years. Our lines of credit exceeded $100 million for the first time in 2011. Our expansion took us to Dallas, Houston, Minneapolis, Cincinnati and Pittsburgh, which added to the markets we had been in for years, Southern California, Denver, Phoenix and Seattle.
Deciding to Sell
With an extremely positive trend line in asset growth as well as profitability, we determined it would be an opportune time to either continue our expansion by adding an East Coast office or testing the marketplace to sell the business. We opted for the latter and were introduced to the senior management at Pacific Western Bank in early 2012. PWB already owned two other asset-based finance companies focused on smaller borrowers like Celtic, so their understanding and knowledge of the business was very strong.
We completed the sale to PWB in April 2012. The bank was very supportive from the start and helped make the transition smooth. Celtic continued its business model of providing asset-based capital to small and mid-sized companies nationwide up to $5 million.
PWB was an outstanding bank to own a historically independent finance company. Integrating our information technology systems, payroll, benefits and payables was made easy thanks to the expertise level of the people on the bank side. Celtic was able to focus on growing our business and maintaining our credit standards. The business continued to flourish.
In April 2014, PWB closed on a significant merger that doubled its size. Although an outstanding combination for the bank, it left Celtic feeling rather insignificant in terms of our assets contribution to a bank that now exceeded $15 billion. While the bank was an outstanding partner, we longed for the days when we were independent and could dedicate our energy and time to the small borrower — our bread and butter — rather than focus on goals aligned with being part of a larger public company. Independence was in our blood and the environment in which we were happiest.
The three finance company subsidiaries of the bank determined the best approach would be to consolidate operations and shift our joint market to pursue a larger transaction size in order to facilitate continued growth of the bank’s asset-based lending group. Part of the consolidation plan was spinning Celtic off so that Alex and I could take it private and realize our dream of being independent again. We approached senior management of the bank and found them supportive of the plan. They even offered to provide our senior line of credit to facilitate the transaction.
Repurchasing the Company
Alex and I pooled our capital with that of Pine Tree Equity again and closed the deal July 11, 2014. The acquisition was seamless to our clients as well, with no disruption to their business due to the ownership change of their lender.
Being private again allows us to continue to focus our attention on assisting non-bankable borrowers with lines of credit up to $5 million. Alex and I regained full control of our credit approval process, streamlining deal approval. Celtic’s sales team reports directly to me, and I review every deal before a proposal goes out, increasing our ability to quickly close on what we propose. and to close quickly.
If you own and manage independent finance or factoring companies and are contemplating the right time to sell, here is a piece of advice: Sell only when you have a compelling reason. Our 2005 sale was to recapitalize the business to reduce the cost of capital and to cash out our family- and friend-subordinated debt holders. The 2008 repurchase was to exit Discovery Bank, which was having issues internally, and to provide more capital to fuel the growth we knew we could realize.
The sale to PWB in 2012, which became effective April 2012, was designed to take the next step as an organization, reduce our cost of funds by replacing our senior lender with the bank’s cost of funds, and to realize on the investment made due to the track record we had developed. This current repurchase was to get back to the basics of the business and regain our independence. Without a compelling reason, there is no reason to sell.
A Perfect Fit
Looking at Celtic’s various ownership structures over the past decade, the one we have now is best for us. It gives us the flexibility to react quickly in the market, the strength of a strong equity backer coupled with management’s equity stake, and the ability to stay independent indefinitely. The plan is for Alex and me to continue running Celtic with our new ownership structure until we are ready to retire, which, being in our early fifties, is many years away.
Closing in on 30 years with Celtic, I have been very fortunate and being independent again has given me another shot at the American dream.
Mark Hafner is president & CEO of Celtic Capital Corporation.