The Last of the Mohicans is a 1992 historical drama film directed by Michael Mann and stars Daniel Day-Lewis. The movie, which takes place in 1757 during the French and Indian war, is about the dying Native American tribe, the Mohicans, getting caught in a land-grab among much bigger tribes. The connection to independent non-bank, large-ticket asset-based lending (ABL) is that they are a dying breed. Eclipse Business Capital (formerly Encina), which was recently acquired, might be the last truly independent non-bank platform we see formed for a while. The simple reason is that bigger non-bank ABL (defined as facility sizes $30+ million) is going to become a product as part of a bigger platform rather than a stand-alone company. We will probably see existing multi-billion asset managers form their own ABL groups, but it’s unlikely we see another pure-play independent for a while. To clarify, this solely pertains to the upper-end of the market and not small-ticket ABLs where the opposite is probably true in terms of needing many independent groups. Big-ticket ABL has changed and look no further than the industry leaders such as Ares – Ares Management, MidCap – Apollo, Wingspire – Blue Owl, Eclipse – Barings, CIT Northbridge – CIT/Allstate, White Oak Commercial Finance – White Oak Global, Siena – Benefit Street, etc. to see how the market has already changed.
To put all this in perspective, it just means that the non-bank ABL market is following the bank-ABL market. Over the past decade ABL is and has been transitioning to become a product versus a stand-alone business within banks. It’s not fully there yet, but the non-bank trend has been going this direction and it continues to do so. The big national and regional banks now have strong platforms with product diversification including cash flow, ABL and recurring revenue. It would make sense for non-banks to follow the platform approach if you are a multi-billion asset management firm. Why own one-product when you go to market as a platform, increase AUM, create asset diversification and one-stop financing? Many asset management firms have the ability to provide the equity, mezzanine financing, cash flow lending and even ABL these days. It’s hard to see the trend stopping given the multitude of credit funds and BDCs out there. In addition, it takes significantly more capital to start and run a large-ticket ABL firm. Will there be others that launch? Probably so. Will there be a big trend of new large-scale independents launching? Probably not. Could there be a continued trend of asset managers launching their own asset-based lending groups rather than acquiring? Probably.
There are reasons bank-ABL turned into a product rather than a stand-alone business. The first one being market-size, meaning the ABL market is small in comparison to other lending markets. In addition, in larger deals ABL is rarely a stand-alone product, but rather a piece of a larger capital structure. It made complete sense for large banks to have one large sales team focused on sponsor coverage to be able to sell multiple products or provide optionality between cash flow or ABL. The dynamic for asset managers has become the same – meaning that if they are going to provide significant equity or term debt in a transaction, it might make sense for them to control the ABL portion as well. This is at least how the platform thinking goes – that more products equals more assets and more optionality across a platform. Therefore, if you are a large asset management firm, it makes sense to add more products and on the surface, ABL is an easy product to add.
There are still many asset managers out there with strong sponsor coverage teams selling cash flow loans, but not ABL. It would be quite easy for these same groups to also offer the ABL option to the same constituency. Generating the deal flow is arguably the hardest part of getting into a new product-line or business. There is also precedent for how an asset management company should start an ABL group. Wingspire is the most recent comparable company to observe. Blue Owl (formerly Owl Rock) used its brand-name and resources to recruit a team and launch a de novo group within their platform rather than make an acquisition. Yes, the upfront people investment was sizeable, but the key differentiation was their ability to leverage an existing platform rather than look for a sizeable acquisition that does not exist or would be costly, not to mention hyper-competitive. The list of multi-billion-dollar asset managers with direct lending, but no ABL, is long and includes Alliance Bernstein, TCW, Crescent and Blackstone, among others. These firms could choose to start their own ABL groups or also move to first-dollar risk-wise similar to Carlyle, Pathlight and Blue Torch. What this does is defensively stop new entrants in cash flow, and also provides asset coverage without needing the heavy collateral monitoring and reporting that comes with ABL. The acquisition of Eclipse, formation of Wingspire and success of Blue Torch provide new paths for large asset management firms with existing direct lending capabilities to contemplate.
The concept of a true independent in larger deals is less important given the consolidation that has taken place. Years ago, there was clearly a need, but can we really say that today given the strong platforms that exist? We are simply in a new era of finance and a changing landscape Non-bank ABL in many ways is starting to mirror bank-ABL from an evolution perspective, although not necessarily a sales perspective. The non-bank ABLs still need to be able to maintain their own sales forces and P&Ls for many reasons, but the big ones are all now part of larger organizations and there are several reasons for this. First reason, large-ticket ABL has become more enterprise value driven whether groups like to admit it or not. Yes, liquidations can be done, but at the scale of borrower size it’s not ideal. Second, many large ABL groups compete directly against cash flow groups so it’s fundamentally a different product. Thirdly, the structures and complexity require a significant capital need that is best served by being part of a very large organization. That fact that it’s harder to be an independent group and provide just one-product, is the end result of several years of asset management groups consolidating this space. What should be very interesting though is the possibility of an independent group forming and creating innovation that might be stifled by the existing groups now owned by larger firms.
The end of Last of the Mohicans is seminal. The good guy defeats the bad and proclaims himself last of the Mohicans. Have we seen the Last of the Mohicans in terms of independent big-ticket, non-bank ABL? Probably not, but surely big independents are a dwindling tribe. It turns out, being part of bigger tribe ain’t that bad…or is it?