Since its inception in 2016, Encina Business Credit has built one of the most well-respected platforms in the asset-based lending industry, so when the company makes a move, it gets attention. In early August, the firm outdid itself, announcing a brand-new recapitalization and expanded capital base from affiliated funds of Barings in addition to a participation from the company’s own management team. The recapitalization also included a name change, with Encina Business Credit now going by Eclipse Business Capital.
Although the news attracted plenty of eyeballs when it broke, for Eclipse Business Capital (we’ll be calling it by its new name throughout this article for clarity’s sake), this was the next step in a long-term plan.
As Martin J. Battaglia, CEO of Eclipse Business Capital, explains, when he and Andy Salter, CEO of Encina Capital, launched the platform formerly known as Encina Business Credit in 2016, the plan was always to reach a recapitalization within a five-to-seven-year window. The firm, which originally had Oaktree Capital as a junior partner, hit on that plan exactly, even shading on the earlier side. In fact, Battaglia says that the firm considered completing this process last year, but, with the market a bit more volatile during 2020 and with no rush to get something done, Eclipse Business Capital waited for the right market conditions.
“It takes a bit of time to execute a transaction like this, but we started the process earlier this year with a target completion date during the summer, which is exactly what happened,” Battaglia says, noting that the transaction officially closed the week after the July 4th holiday in the U.S.
The Right Partner
In addition to wanting to wait for the perfect market conditions, Eclipse Business Capital had to team up with the type of funding source that would provide it with the permanent capital it needed. Through the recapitalization with Barings, Eclipse Business Capital has expanded its capital base by at least $100 million.
“As we continue to grow and our needs demand more, be it equity or junior capital, we firmly believe Barings entities will be there to provide that for us,” Battaglia says. “I think we’ve found an excellent partner in Barings. They like what we do. They’re leaving the entire management team intact. Nothing really changes outside of the name.”
Speaking of that name change, its genesis is more a matter of function than description or creative ingenuity. As Battaglia says, the name was selected via group decision, with the primary objective of keeping the EBC initials. That will come in handy as the firm rebrands itself, with much of that ancillary work, including UCC filings and a website redesign, still on its to-do list.
The name change was also necessitated because, with Barings’ involvement, Eclipse Business Capital has completely separated from the Encina Capital platform, with Barings now holding a majority share in the business through its various business development companies. In addition, Eclipse Business Capital’s management team’s participation includes rollover equity and new equity from previously uninvolved members.
Since Eclipse Business Capital’s recapitalization was always part of the plan, the transaction won’t meaningfully change what the business already does. All personnel will remain in their current positions and the firm’s approach and day-to-day analyzation and approval of transactions will stay the same, according to Battaglia. What the recapitalization will do for the company is provide it more flexible and, perhaps more importantly, permanent capital to pursue growth and additional market opportunities.
“It really strengthens our balance sheet. We have equitized a lot of what was sub-debt and this has given us a lot more strength and girth to continue to grow the platform,” Battaglia says, noting that Barings is playing a large role in helping Eclipse Business Capital maintain continuity. “They’re really leaving us to do what we do, which they view as a very strong platform, which is why they had made the investment they did. And it’s a real vote of confidence for the team here.”
Of course, it didn’t just take this recapitalization to get Eclipse Business Capital to find its niche in the asset-based lending industry. The firm has continually grown since its launch five years ago, and it can now handle transactions up to $150 million, a number Battaglia says would have been impossible for the firm to hold just three years ago. At the same time as its transaction scope has broadened, Eclipse Business Capital has continued to remain focused on smaller transactions as well, with a window of $10 million and up. In addition, the firm still looks for some minimum capital utilization for “a cleaner transaction,” meaning it isn’t looking to get involved with a gaggle of companies on a deal necessarily.
Sticking to its current business plan isn’t a permanent strategy for Eclipse Business Capital and its expanded capital base will only fuel its ambitions in the years to come. Much of that will be building on the foundation already in place, as Battaglia expects the business will look to expand the scope of its transaction sizes while entertaining larger positions, dabbling in newer industries and providing stretch pieces from time to time.
“We’re also looking at potentially expanding our product offering as well. A lot of transactions that we see now require this, although our ability to provide entire solutions has been restricted by our capital structure,” Battaglia says. “I think as we continue to grow and potentially have a little bit broader product offering, it may help in providing more of a holistic solution to some of the prospects and companies we deal with, but today it’s pretty much business as usual.”
In the near term, there are plenty of hurdles to overcome, especially as supply chain disruptions continue to impact borrowers and, by extension, lenders like Eclipse Business Capital. However, those will eventually dissipate, according to Battaglia.
“[In today’s economic environment, lenders need to be] very cautious to keep an eye on portfolios and inventory levels within their borrowers. Is some of this market frenzy really going to be sustainable and how do we expect borrowers will react?” Battaglia says. “It could create some stress that we haven’t seen for a while in the markets.”
To ensure Eclipse Business Capital maintains the trajectory it set when it was still known as Encina Business Credit, Battaglia and his team will aim to continue strengthening the firm’s book and add new talent (it’s currently hiring and looking for portfolio managers) while putting an emphasis on automation and environmental, social and governance protocols.
“It’s really just rounding out the things we’ve been doing for a while. We’ve been on a process to continue to automate and make our day-to-day operational tasks more efficient and we’re continuing to do that,” Battaglia says. “Longer term, it’s just expanding the product offering as well as deal sizes. I do anticipate that we will also partner with several of our competitors that we’ve partnered with in the past and with whom we have a lot of confidence.”
Phil Neuffer is senior editor of ABF Journal.