Asset-based lending is going vertical, from an industry specialization perspective, and little can stop it. The industry is in the first inning of what will surely be a double-header of industry specialization. Specialization is most likely the next driver of ABL evolution and expansion. The past ten years have been all about building national platforms with scale, so the natural extension of that is specialization. There is truly no end to specialization when you think about it: retail, software, healthcare, staffing, branded consumer, transportation, government, equipment, lender finance, aviation, art, litigation, maritime, digital media, etc. The list goes on for wherever specialization can be applied, and this trend will be pervasive across both bank and non-bank ABL groups. With consolidation comes scale and with scale typically, but not always, comes specialization.
The next level of innovation is going to take place before our eyes with how ABL platforms start segregating into specialized industry groups. To avoid doubt, the largest divisions within both banks and non-banks will still be generalist groups serving basic industries such as manufacturing and distribution, among others. The point of specialization is that the basic industries are frankly over-banked thus driving a need to achieve new growth at premium pricing. This is going to happen as outside of economic cycles that drive bank kick-outs, there are not too many ways to organically expand ABL platforms. This trend is very much underway already. Solar Capital (now SLR Capital Partners) to highlight a name, owns Gemino (now SLR Healthcare), Fast Pay (now SLR Digital Media Finance) and Nations Equipment (now SLR Equipment Finance) to name a few. White Oak has approximately twenty or so verticals including government, lender finance, media, and consumer to name a few. eCapital owns groups that specialize in consumer products, staffing, and transportation, among others. If you want to own a vertical, then you better own the team that owns that vertical. The best way to recruit a team is to provide a platform with scale. The industry has clearly evolved to this point.
Ironically, industry competition will be for both human capital and industry specific assets. Platforms need to hire teams to compete for assets and the need for teams will be just as frenzied as the need for assets. This trend is already playing out – whether it be portfolio acquisitions to get a team or acquihires to get into specific verticals. The benefit of a platform is scale, which means knowing that all industry verticals are not equal and while some will be home runs, other might not be. It’s more team dependent than anything else, which is why the war for talent in this next cycle will be just as brutal as the race for assets. Acquihires might prove more popular than portfolio acquisitions given the challenges and competition when it comes to portfolio or business acquisitions. The best teams have the best relationships and will be able to continue to build their businesses. This is also true for the generalist ABL groups.
The trend to expand to vertical industries is not new, but the number of new industries being targeted is. For many years, retail, healthcare, and lender finance were several obvious industries that required specialized lenders either due to regulatory or specific liquidation knowledge. BackBay Capital, which became Crystal Financial, ended up as part of Bank of America through acquisitions and spawned a literal industry and corresponding diaspora of retail lenders that exists today. Wells Fargo’s lender finance group did the same. These are both industry examples that started very small and today are their own stand-alone industries with career specialists. It would be naïve to think that there are not more industries that deserve talented career specialists to provide the financing required to expand these industries. To that end, the non-bank industry would not exist were it not for the expansion of the lender finance world.
Scale brings specialization, which in turn helps grow industries. Right now, we are in the early innings of several unpenetrated verticals including branded consumer (separate from retail) software and digital media to name a few. Several industries including retail, healthcare, branded consumer and lender finance have attracted significant capital and others are starting to do the same. The typical cycle is for independents to raise capital, and once the market demand is proven, the acquirers start to show up in force.
Well, the specialized independents are starting to show up so it’s only a matter of time before we start to see more wide-scale industry expansion by some of the bigger platforms out there.
It should be noted that history does tend to repeat itself as GE Capital did this same thing in the 1990s. At its peak, GE had verticals including industrials, energy, retail, healthcare, and media, among others. They also happened to be one of the largest lenders in the country at that point, which created the need to move toward specialization. The parallel to today is that many of the bigger platforms to name a few, but to avoid doubt not all including Ares, Wingspire, MidCap Financial, SLR, Hercules, Benefit Street, etc., have the scale, capital and desire for growth that mandates specialization. The industry is going vertical, and any groups left behind will be watching from the horizon while their competitors soar.