The Rise of Bank-Owned Asset-Based Lenders that Act Like Non-Banks

Charlie Perer outlines an emerging trend of bank-owned asset-based lending divisions conducting business in a fashion similar to non-bank asset-based lenders while gaining an advantage due to the ability to price like a bank. 

Forming the Third Tier of ABL Pricing Options

The lower end of the ABL market has never been more competitive as competition converges and many firms now have national reach. BDCs and the general consolidation of ABLs has enabled lower pricing, national reach and scale. This is a recent trend, as it took both BDCs entering the market and regional banks with specialty finance ABL groups expanding nationally. In addition, new lending market entrants with specialization, including new lenders focused exclusively on the consumer products industry or non-traditional ABL such as intellectual property, real estate, and machinery and equipment, have created more options and competition. New firms, new products and more options has been great for advisors and borrowers but is clearly causing some market friction for lenders. The end-result is clear: increased competition and compressed margins. However, the market changes are not always easy to spot upfront.

The Advantages of ‘Non-Bank, Bank ABLs’

A few years ago, just a handful of ABLs had national reach and the ones that did were non-bank ABL groups that were purchased by banks. Many banks clearly have paid attention to this trend and taken the step of hiring executives and business development officers around the country to attain national reach. Many of these groups are run by former non-bank lenders themselves, which allows them to achieve success with minimal write-offs. Write-offs kill the channel immediately and can lead to a quick demise of a startup ABL group at a bank. When done right, however, the risks are minimal, but the returns are very high. There is a reason why this market has become very competitive while banks with specialty finance groups take national share from the non-banks. Previous to this constituency, the non-bank ABLs just competed with each other rather than a disruptive group of out-of-town specialty finance bank ABL groups.

This trend is here to stay — especially as banks start to exit clients — and should play a meaningful market role for years to come given we are just entering a new cycle. The evolution of the market and shift in credit appetite and deal structures should make for an interesting demarcation in terms of risk appetite for each constituency. However, it is unclear if the market leading non-banks and banks with specialty finance groups have the capital and fortitude to stick with the strategy through a tough cycle. The majority of new entrants obviously entered the market and expanded nationally well in advance of COVID-19. So it remains to be seen what the push-pull within banks will look like when liquidations and potential losses start to occur. The dynamic between many banks and their specialty finance groups is going to be tested as most banks work-out versus liquidate because they don’t have a choice. The specialty finance ABLs certainly have a choice and, make no mistake, there will be liquidations. The tide is going to go out soon enough and we will all find out which new entrants are here to stay.

Charlie Perer is the co-founder and head of originations of SG Credit Partners. In 2018, Perer and Marc Cole led the spin out of Super G Capital’s cash flow, technology and special situations division to form SG Credit Partners. Perer appreciates feedback and can be reached at charlie@sgcreditpartners.com.