When Patrick Dalton and John Ho formed FrontWell Capital Partners, a private credit fund that delivers debt financing to companies in transition, they knew they could be successful because of the opportunity they saw in the marketplace. However, their own experiences and the trust they share has been just as important.
“If I ask John to do something, I don’t have to worry about asking a second time. In fact, John tells me things he’s going to do before I even ask, and I really appreciate that,” Dalton, who serves as CEO of FrontWell Capital Partners, says. “The trust between us is very, very strong.”
The tight connection between the two held exceptionally well during the first 10
months or so of FrontWell’s history, as Dalton was forced to work primarily remotely from Connecticut due to the COVID-19 pandemic, leaving him hundreds of miles from the company’s headquarters in Toronto.
“John was really my eyes and ears and hands around the business, so I could build a really strong relationship of trust and loyalty to the business,” Dalton says. “I’m always confident John will always do what’s best for the business.”
For Ho, who serves as CFO of FrontWell Capital Partners, Dalton’s leadership style is an important part of not only their business partnership but the business in general.
“[Patrick] sets a very high standard for everybody here. First by leading by example and holding not just himself but others accountable as well,” Ho says. “This is a reflection of his personality but also his experience at running successful firms in the past, and I truly believe this creates that partnership mentality.”
Both Dalton and Ho have tremendous amounts of experience in the specialty finance world. Dalton, the previous CEO of Gordon Brothers Finance Company, also worked for JPMorgan Chase, Goldman Sachs and Apollo before spending the last few years consulting and working with firms like Callidus Capital and Fifth Street Finance. Meanwhile, Ho, a certified public accountant, held roles at Ernst and Young, Brookfield Asset Management and Barrick Gold Corporation before becoming a CFO for an asset-based lending company from 2014 to 2019.
Of course, Dalton and Ho didn’t just launch FrontWell because of their impressive resumes and strong working relationship. Perhaps an even greater catalyst for the company’s launch was the opportunity the duo saw in the Canadian market.
“Canada is less mature and less competitive and we think that there is a real market leadership opportunity for us to step up and become the market leader in Canada for an asset-based lending business,” Dalton says, noting that FrontWell will also set its sights on the greater North American market as the company grows.
In addition to the opportunity present in Canada, Dalton and Ho both thought that it made sense to enter the market due to the timing in the credit cycle, although their initial conversations occurred before the COVID-19 pandemic. Now, with some of the pandemic-era government assistance falling away, FrontWell expects to be there to provide working capital to companies looking to survive and grow in the economic wake of the ongoing pandemic.
“I think you’ll see more of a natural selection of companies that will be less protected by the government and/or the banks seeking alternative sources of capital,” Dalton says. “Our competition usually is equity because the banks aren’t willing to do what we’re willing to do. We’re much more bespoke.”
Science and Art
Dalton describes asset-based lending as a time-tested product but one that is more of a science than art. FrontWell’s approach is built on combining the science and the art of the business by being both creative and selective, something it can afford to do because, as a new company, it is working with a clean balance sheet.
FrontWell’s target borrower base is the lower end of the mid-range of the middle market. The company makes investments between $5 million and $50 million and Dalton says the firm’s sweet spot is somewhere between $10 million and $30 million. Dalton also says that FrontWell looks for borrowers in transition, whether that means those needing capital to fund rapid growth or those in distress.
Regardless of the financial standing of a potential client, FrontWell really wants to do business with asset-centric companies. This approach allows it to help a borrower get as much benefit as possible from the assets on its balance sheet by looking at all of the borrower’s assets.
“When we make an investment, we’re in it for the long haul through the life cycle of that investment,” Dalton says. “It really puts an onus on us to do a deep dive on due diligence and structuring and negotiating a transaction.”
Taking an exhaustive approach to structuring and negotiating goes hand-in-hand with FrontWell’s selective philosophy, especially when it comes to credit.
“We don’t want to make a mistake here as we launch our business,” Dalton says. “We’ll be competitive; we have to be on pricing, but we’re not going to compromise credit.”
“I’ve always been a big believer in proper processes, procedures and controls, and having worked at the large institutions that have always had such strong process and control, I believe that smaller firms like ours sometimes lack those,” Ho says. “It is my responsibility to make a really big emphasis on having such process and control at the same time as having that entrepreneurial mindset that we’re promoting here.”
Being selective is not just reserved for evaluating deals. FrontWell currently has a full-time team of 12 employees and a three-person advisory board. Dalton and Ho are currently recruiting for four positions and expect to grow the firm to about 30 people by the middle of 2022.
“Every person we hire, it’s a thoughtful process, it’s deliberate, it’s one person at a time, making sure they’re the right culture, the right fit, the right experience and the right incentives,” Dalton says. “We all want everyone in our team to behave and think like owners.”
In addition to remaining patient, FrontWell is making a concerted effort on the environmental, social and governance (ESG) front.
“As more institutional investors begin to mandate that the firms that they invest in have an ESG policy, we believe that having these policies in place for FrontWell opens the doors, more so for potential investors to invest in firms like us,” Ho says. “On top of that, from an underwriting and portfolio management perspective, an argument can be made that the assets from non-ESG compliant companies, such as traditional oil and gas and coal companies, will deteriorate as the overall ESG movement moves money away from these assets. We think that our policy really does align with our investment objectives as well.”
Speaking of investors, FrontWell launched with $350 million in seed capital from institutional investors, which, according to Dalton, has given it the working capital needed to build the business and its portfolio.
Taking the Lead
FrontWell officially opened in September of 2020, although it soft launched a few months before that. Now, roughly 12 months since its official unveiling, it is entering what Dalton calls “a bit of a relaunch,” as its staff is now primarily back in the office and working on building out relationships with potential clients, partners, referral sources and more.
However, that’s not to say the company has been quiet during its initial months in business. Since launch, the firm has seen more than $2 billion of opportunities and closed on multiple deals. At the same time, due to the nature of some opportunities that have not fit its mandate, FrontWell has shown a willingness to let the wrong deals go.
“There’s been a handful of deals that we’ve really worked hard on. And sometimes we’ve had to let go at the last minute because the competition did something that we felt was not in the best long-term interests of the client and was not going to end up in a good resolution at the end,” Dalton says. “We have to be prepared to walk away.”
In addition, FrontWell has had to navigate the challenges of the pandemic, whether that means hiring and interacting with employees entirely through Zoom or figuring out ways to complete field exams and appraisals without traveling. But by being patient, the company has put the right people in place to succeed both in the near and long term.
“Our plan for FrontWell is to deploy the capital that we currently have, judiciously raise other sources of financing and capital and, ultimately, within the next five years, there’s no reason for us not to be the leading middle-market ABL lender in Canada,” Ho says.
Phil Neuffer is managing editor of ABF Journal.