In mid-September, commercial finance professionals learned that industry veterans led by Darren Latimer launched Chicago-based Stonegate Capital, a diversified specialty finance company. Industry readers no doubt remember Latimer from his days at Gibraltar Business Capital and Wells Fargo Foothill. Today, backed by Chicago-based Bridge Investments, Stonegate’s board includes Peter Schwab, former Chairman and CEO of Wells Fargo Capital Finance and Bob Goldberg, founding partner of the law firm Goldberg Kohn.

As the industry has witnessed the entry of more than a few non-bank commercial finance companies in recent times, ABL Advisor reached out to Latimer to better understand the unique approach Stonegate Capital brings to the market. In the following Q&A, Latimer explains Stonegate’s approach and shares his views on the current obstacles that he sees asset-based lenders face in today’s changing economy.

ABL Advisor:  Darren, tell us what compelled you and your colleagues to launch Stonegate Capital given today’s highly competitive environment.

Darren Latimer:  Let me begin by saying we believe that the traditional, privately held ABL business is flat to stable to no growth and will continue to be so for a period of time. Furthermore, there are only four or five banks that currently dominate the space. It became obvious to us that while the economy has changed, so have ABL borrowers and quite honestly, we see the market stuck in a rut. By that I mean, many of today’s borrowers are privately held generational businesses that offer few prospects for growth.

That’s the old ABL model – but today, the investor base has changed and their growth strategies are completely different. These investors have an ability to produce superior gross margins. Our strategy, and in fact, our culture at Stonegate is to take the product and react to these changes. We want to finance private equity-backed, institutionally owned companies that have a strategy to grow, produce margins, make acquisitions and sell their businesses in three to seven years’ time.

The borrowers we’re seeking don’t need plain vanilla LIBOR +350 asset-based loans, they need more than that – they need what I call creative and opportunistic “ABL plus” capital. While they need traditional ABL structures, they also need someone to believe in the enterprise value of their businesses. Stonegate was launched to provide that “ABL plus” capital.

ABL Advisor:  Can you say a bit more about the constraints you see that traditional ABL shops are facing and the opportunities that Stonegate seeks to take advantage of as a result?

Latimer:  I think the banks are severely constrained by the regulatory environment, which is always volatile and threatens only to get worse. This will serve to reduce banks’ appetite in investing in the ABL market. When it comes down to it, asset-based lending is tough to manage, consumes a lot of capital and regulators hate it. Regardless of the outcome of the upcoming presidential election, banking and lending regulations are going to continue to increase. As a consequence, I expect that fewer banks will be interested in investing in the ABL space.

To be frank about it, the regulatory environment is our friend at Stonegate Capital in the fact that it will continue to put pressure on regulated lenders either to stay away from ABL all together or to lend only to their best borrowers at the cheapest rate. This, in turn, will cause asset-based lenders to shy away from creative and opportunistic collateral lending opportunities.

ABL Advisor:  Tell us about what a typical Stonegate transaction will look like from the standpoint of deal size, structure and the industry sectors you will target.

Latimer:  On the most basic level, we will be structuring deals in the range of $2 million to $10 million on a nationwide basis. We think that deals over $8 million are over-banked and underpriced and we really can’t compete with our strategy there. At the same time, we don’t want to do deals that are too small because they require a lot of labor for very little revenue. Our sweet spot is $3 million to $7 million private equity-backed or institutional capital-backed businesses.

As far as the profile of our borrowers, I can tell you this – we aren’t interested in financing businesses that merely provide day jobs for say, three brothers. I’ve seen too many crummy three-brother owned businesses in my day. We want to look at high-growth businesses as well as some mature businesses. We really like software and will consider selective re-discounting to other lenders if the situation is right. And we are very partial to high-growth consumer product businesses that are figuring their way through the market.

ABL Advisor:  Please share about company’s board and its relationship with Bridge Investments.

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