In March 2012, TCF Bank expanded into the commercial banking business by launching TCF Capital Funding to specialize in cash-flow and asset-based lending (ABL) to lower middle-market companies across the United States. TCF built other national niche businesses over the years and had been looking to start an ABL group for quite some time.
As part of this expansion, the executive team brought Joseph P. Gaffigan, who had 26 years of experience in banking and lending, on board as president of its new division. From his initial meeting with senior leadership, Gaffigan thought there was a good fit. He was drawn to TCF because of the quality of its people and its strong interest in building a national business in the lower middle market.
“We were all on the same page in wanting to grow a profitable, national business that helps lower middle-market businesses with their ABL and cash-flow secured lending needs,” he says.
Banking Family Background — With a Twist
Gaffigan could not escape the banking business growing up. Both his father and uncle were bankers in Chicago. Two of his five siblings went into banking — sister Cathy Kulkin is a risk assessment & loan policy head at Suntrust Bank in Atlanta and brother Mitch is a vice president with Fifth Third Bank in Chicago. Another sister, Pam, went into retail is a general manager at Bloomingdale’s while brother Mike works as a transportation operations manager for Caterpillar. Baby brother Jim became a very successful stand-up comedian/actor/author.
“It has been a real blast to witness his success,” says Gaffigan. “It’s always fun when people connect the dots and realize that he’s my brother.”
Although several members of his family worked in banking, Gaffigan didn’t foresee this as a career path. “I can remember saying that the one thing I was not going to become was a lender,” he recalls with a laugh. “I told myself that I would try banking and then move onto my real career.”
That was 26 years ago. After earning his undergraduate degree in finance at Georgetown University and then his MBA in finance at the University of Chicago, Gaffigan spent the next ten years at American National Bank in Chicago with most of that time running an ABL division. That is where he fell in love with the lower middle market.
He then left to start a leveraged lending group at Old Kent Bank, which grew nicely and a few years later was acquired by Fifth Third Bank. Gaffigan grew and led Fifth Third’s Chicago Structured Finance Chicago Group to over $1 billion in assets. He left in 2005 to form a new leveraged lending company in Chicago for the Pohlad Family called MFC Capital Funding where the company completed over $600 million in commitments. In February 2012, TCF came knocking on Gaffigan’s door.
Growing a Profitable Business
Gaffigan says that he and his team found a great home at TCF Bank. It was personally fulfilling that nearly everyone the bank hired at TCF Capital Funding worked with him earlier in his career.
“I learned early in my career to hire smart people and to let them do their job,” he says. “Together, this group has done a lot of business together. We literally got the band back together at TCF, and it has been a lot of fun.”
After making the decision to join TCF, Gaffigan says that he and his team were deliberate in their actions. They spent the first six months becoming more familiar with the bank and letting the bank get to know them better. In fact, they agreed to initially locate their office in Burr Ridge, IL where the bank has its Illinois headquarters so they could become better acquainted with the bank and its staff. Later this fall, TCF Capital Funding will move to new office space in downtown Chicago.
“We feel comfortable in the TCF culture, and we’re glad we took the time to get to know each other before trying to grow our book,” says Gaffigan. “We put in place our procedures, installed systems and worked together refining our multi-year business plans. We intentionally took our time and worked hard to avoid any tactical mistakes.”
From the start, Gaffigan says that the focus has always been on building a quality portfolio for the long haul and the market reception has been fantastic. TCF Capital Funding’s niche is borrowers with less than $100 million in sales and with $2 million to $10 million of EBITDA.
“A typical commitment would be $15 million, and we will hold up to $25 million,” explains Gaffigan. “We also have the ability to underwrite larger deals by bringing in a banking partner.”
As a result, TCF Capital Funding can support its customers’ growth as they look to expand their platforms. The company works with private equity groups, mezzanine funds, private family offices and entrepreneurs that are buying and refinancing lower middle-market businesses.
“We also spent time and money building our brand and hired a marketing firm to create our marketing plan,” says Gaffigan, adding that the company’s tag line is “It’s the little things.” “We sell responsiveness and customer service and you can only do that well when you focus on the little things.”
At its core, TCF Capital Funding is interested in financing privately held lower middle-market businesses that are leveraged for what Gaffigan calls “good reasons.” Typically a company is experiencing fast growth — one that has gone through an ownership transition or looking to buy a competitor or refinance its growing business. “We’re great in those situations,” he says. “We view ABL and cash-flow lending as being very similar but with a couple distinct differences that need to be acknowledged and managed.”
Gaffigan says that he is also proud of his group’s account management processes. The company’s long-term success is built on the foundation of an active portfolio management practice that assists it in monitoring their borrowers’ performance on a close and consistent basis.
“We’re not a good fit where someone finds themselves leveraged due to losses or other turnaround reasons,” he says. “We’re not a turnaround lender. Others do that well. We look to bank the stronger companies with the stronger management teams but that still have leveraged balance sheets. We utilize the disciplines of ABL and couple them with the disciplines of cash-flow lending.”
When TCF Capital Funding does an ABL deal, it performs detailed analysis of a borrower’s historical and projected cash-flow including multiple downside scenarios. Likewise, when it completes a cash-flow deal, it still analyzes a borrower’s collateral position, liquidity and working capital cycles.
“Your first source of repayment is always cash-flow but you cannot forget that a cash-flow deal with no liquidity is just an ABL deal that is not fully collateralized,” says Gaffigan. “In an ABL deal, you have to be aware of your liquidity position at all times. You have to be proactive not reactive in a cash-flow deal.”
Targeting the Lower Middle-Market Space
There are several reasons why TCF Capital Funding is targeting the lower middle-market space, according to Gaffigan. First, it’s what his group knows. His team members have spent their entire careers in the lower middle-market space. Second, and more importantly, they believe that this space offers the best risk and return. “Yes, these are small companies, but many of them are very well run with great diversified customer bases and a great history of consistent performance,” Gaffigan says.
The biggest reason why TCF Capital Funding likes the lower middle-market is basic supply and demand. “No one dominates the lower middle-market, and most banks gravitate upmarket since the perception is that small deals don’t move the needle,” says Gaffigan. “Generally demand outstrips supply in the lower middle-market, so if you pick the right deals, you can do well and get a risk/return that makes sense.”
Gaffigan says they have done larger deals in the past where they would be one of ten lenders in the syndicate. But the reality is that they had a very small voice in that type of deal and getting ten people to agree on anything, especially a challenging credit, can be difficult. “Plus it wasn’t as much fun as helping a small company management team buy a lower middle-market business that they have been building for years,” he says. “In that situation, you are helping that management team get a deal done that might financially change all of their lives forever. My group and I have been lucky enough to be involved in many of those transactions in our careers.”
Providing Experience & Responsiveness
Partnering with TCF Capital Funding gives a borrower many advantages. “You get a partner who is part of an $18.4 billion organization with balance sheet capacity for growth and you get a partner who is a national lender that sees many deals,” he says. He adds that they pride themselves in being both thorough and responsive.
“We’re also relationship-focused and not volume-oriented,” he says. “When we propose a new deal, we provide an exhaustive proposal letter that clearly outlines what we are proposing to do. Borrowers want responsiveness, experience, an understanding of liquidity and an understanding of amortization — we provide that. We’re working hard every day to build a business for our customers, employees and TCF Bank that is recognized as the go-to national leveraged lender in the lower middle market.”
He is also a firm believer that a big part of working hard is working smart. “Smart to us is working with people you enjoy spending time with and who together share your purpose,” says Gaffigan. “Success to us will be defined by having fun with people each day that you like and respect.” And so far, Gaffigan and his team are having a lot of fun.
Daniel Casciato is a professional business writer and contributor to ABF Journal.