In this installment of our series of “Executive’s Corner,” featuring articles from guest writer Charlie Perer of SG Credit Partners, the author sits with Marty Battaglia to understand his views on leadership, market conditions and the changing competitive landscape, among other things.
Charlie Perer: You founded Encina less than 4 years ago. Has the Company grown to your expectations?
Marty Battaglia: Generally speaking, yes it has. We have been fortunate to enter the market at a time when the non-bank ABL space was a bit less overcrowded. I also attribute this to having a great capital provider in Oaktree, which clearly understands distress as well as a very good team.
Perer:What made you go the non-bank route when many of your peers stayed in traditional bank ABL?
Battaglia: Having exited the bank ABL space in 2008, I was able to observe all the changes that occurred within the bank ABL groups from the outside. I could not see myself functioning to the best of my abilities within a bank ABL group given all the structural and regulatory changes that have occurred in that space. Having worked outside banks in the past, I believe the non-bank route was the best course for me. What I did not fully appreciate at the time was how difficult and time consuming a start-up process would be.
Perer: Can you talk about the current scale of Encina?
Battaglia: It would be my pleasure. Our main office is in Chicago, which houses all credit, operations and legal functions. We also have a significant number of our underwriting team in this office as well as a couple new business officers. In Connecticut we have a smaller staff that includes underwriting, marketing and marketing support. Other locations, primarily new business, include New York, Boston, Atlanta, Charlotte, Detroit, Houston, Los Angeles and San Francisco. With 14 individuals involved in new business and marketing in various locations throughout the country, we believe we are well positioned to see market opportunities as they arise. We also have the support staff to properly administer our portfolio and deal flow. At this point our commitments total just under $1 billion.
Perer: Can you please talk about the team you have assembled? I am not sure the market truly understands the national scope of talent you have assembled from coast-to-coast.
Battaglia: We have a seasoned team of professionals across all functions of what would be considered a traditional ABL shop. This includes new business, underwriting, credit, operations as well as legal and field exam. Most of our functional leaders have 25+ years of experience and are well known in the industry. The same is true for our business development officers who, as referenced above, are in offices throughout the country. Our philosophy is that our business development officers must thoroughly understand our product and our credit appetite as they are the “tip of the sword” to the market. This makes it imperative that we have seasoned industry professionals who can deliver. We make every effort to really understand a company and their needs up front and to be as transparent as possible about our process, concerns and requirements. When we issue a proposal, we fully expect to deliver on those terms.
Our current team consists of 40 professionals and continues to grow. As we continue to expand our team, we will look to add experienced business development officers in areas or markets that are complimentary to our existing coverage. We will also add to our credit, underwriting and operations staff to meet our growth. We believe in training and promoting from within.
Perer: How do you hire; and this may be an unconventional question but how do you decide who to fire? Too often people focus on recruiting versus exiting and it’s a key skill to have.
Battaglia: Finding people with the personality and work ethic who will fit well with an existing team and who possess all the technical skills required for a given position is a real challenge and one that most find very difficult. When selecting a candidate, we make every effort possible to explain the position, requirements and culture of our group. We also have several individuals interview every candidate and discuss as a group before proceeding.
We tend to provide continuous and immediate feedback when we see subpar performance. We will also make every effort possible to improve this subpar performance with training, both internal and external, and more feedback. We have found that in most cases, an individual will seek other employment opportunities in situations where they are not meeting the requirements of their position.
Perer: What is the barrier to entry to competing in the large ($20 million+) non-bank ABL market? Anyone off the street can obtain a warehouse line, so what is your moat?
Battaglia: Well if only that were the case. Attracting equity or junior capital is quite a bit more challenging that a warehouse line. While there may be a significant amount of capital available in the market today, my experience leads me to believe most junior capital providers are very leery of start-ups costs and are unwilling to risk significant levels of capital with an unproven platform or team. While there have been, and I’m sure will continue to be, groups that enter the market, most assemble a very lean or inexperienced staff to keep costs low. This coupled with the pressures to grow a book of business can lead to problems and in many cases cause them to fail. I believe we have taken a very different approach. We also understand that what we offer is dependability, consistency and flexibility. Anyone can issue a term sheet or proposal, but will they deliver?
Perer: Do you think there is too much competition from non-bank competitors and if so what will be the result?
Battaglia: Have you ever heard someone saying there isn’t too much competition? We have seen more new entrants during the past 24 months. I believe this plus increased aggressiveness from banks has led to an overall reduction in pricing as well as more aggressive loan structures and advance rates. This is all part of the current cycle we are in and something we have seen in most past cycles.
Perer: How many market cycles have you been through and will the next one be different?
Battaglia: Too many! But seriously each has its own attributes. I believe the last cycle took the greatest toll on real estate and related exposures. My view is the next will impact commercial loans to a much greater extent. While the ABL product is generally contrarian, which would indicate stronger new business, we will also need to contend with our own portfolios and capitalization.
Perer: Has your leadership or views on strategy changed over time or hardened based on past success?
Battaglia: The market is constantly changing and to an extent our strategy has and should change with those conditions. While we generally follow tried and true ABL credit principles, in order to remain relevant, I do believe we must consider market conditions and adjust accordingly. That’s not to say we ignore our operating guidelines and principles but when the market becomes very competitive, we tend to look at each deal on a case by case basis and determine our appetite to deviate where necessary to win a deal. Sometimes we simply pass.
Perer: Lastly, tell us something you are worried about that the rest of the market has yet to figure out.
Battaglia: I really don’t have a crystal ball although I do believe a market downturn is around the corner. As a non-bank ABL, we should experience an increase in new business opportunities during a market downturn. Our challenge is that we too are subject to contracting credit markets. Without sufficient excess credit line capacity and capital to deploy we could miss opportunities. This is a bit of a balancing act as nobody wants to pay for excess capital capacity they don’t believe they will utilize in the near future although attempting to raise this capital during a market downturn is very difficult and most likely very expensive. While one solution is to look to syndicate more, our syndication partners could experience a similar contraction.