Finding Nemo is a 2003 American animated comedy-drama adventure film about a fish (Nemo) who gets caught by scuba divers while searching for blue ocean. Now compare this to modern day large-ticket asset-based lending (ABL) and every group is looking for Nemo (i.e., more blue ocean away from competition). What many are finding is that it’s not more blue ocean they need, but rather more product innovation or industry expertise to sell through the same set of referral partners. The problem as it pertains to bigger firms looking to write bigger checks is that there are simply fewer referral partners to call on and everything is via a process. Proprietary referral sources are few and far between given the multitude of options today. Sponsor calling, investment banks and large turnaround firms all know how to run a highly efficient, wide-ranging and competitive process. To make matters worse, competition for larger deals is now essentially three dimensional with the proliferation of private credit. This just means that nowadays most processes contain competition from 1) non-bank ABLs, 2) private credit cash flow and 3) banks (ABL and cash flow). Without creating differentiation, the majority of firms out there will simply never find Nemo!

To proverbially find Nemo, firms now need to have a real way to add value within the confines of smart credit and product innovation. Most processes now contain a multitude of offers including stand-alone ABL, stand-alone cash flow, first-out/last-out and then banks. There are not only more options, but more sophisticated options across different asset classes than in the past. Little reason exists for companies to engage in one-off conversations when the supply and demand of capital is so strong in their favor. Furthermore, the bank exit process has become incredibly political these days with banks first starting with financial advisors (i.e.. turnaround firms) before the client  engages an investment bank. This is simply the reality of most large ticket ABL transactions. It’s really the same when it comes to a new sponsor acquisition or a bank refinance process as both are equally competitive. Both of these situations are run by skilled groups looking to run a wide-ranging market process. The market is at a point of efficiency where even sponsors are taking note, with the few small variables often being pricing and amortization requirements pertaining to a stretch term loan – assuming  there is one.

The parallel side to the proliferation of large-ticket ABLs and private credit funds is the consolidation and expansion of debt capital market groups within investment banks and turnaround firms. Cycles tend to work together and there has been a lot of change in the investment banking world with many groups forming via M&A or organic growth. There are just fewer mid-market investment banking groups with significant expertise and deep calling lists. In addition, while there are still a number smaller and single-shingle firms out there, it is hard to cover all of them and these groups also tend to know which five banks and non-banks to call. Large-ticket ABL is but one of many options in a large-scale debt process, so these folks are competing against each other and a cadre of new and existing cash flow lenders now aptly called private credit.

There are just fewer smaller boutiques out there and more larger firms that want to run broad processes. It’s now common for debt advisory shops to receive 20-plus term sheets, and very large sponsors that have their own debt capital groups run equally strong processes that typically include lender grids. Ironically, while there has been consolidation in ABL, it just shifted the market to the upper end. The groups that used to be smaller-ticket ABLs got acquired and promptly moved upstream. They had little choice because their owners, who are typically asset managers, have gotten so big they have to generate more ROIC to justify the existence of the platforms. So, there are now fewer referral sources to call, but many well capitalized lenders. This gets back to a different type of blue ocean – new products or verticals. Products (First-Out/Last-Out), new verticals (healthcare, consumer products, etc.) and structure ( EV ABL) do create differentiation in a crowded market and provide a clear way to add value.

In simpler times there were more small turnaround and advisory shops, but economies of scale have forced many to grow or consolidate. Recent examples include Cascadia Capital’s formation of a debt group and Intrepid’s expansion of its debt group to include special situations. Combine these with many regional players increasing staff, and the consolidation of intermediaries in many ways mirrors the expansion of capital providers including banks that have now partnered with private credit funds.

The end of Nemo is a happy one where Nemo gets back with his family and realizes that the ocean is not as blue as he thought it was and that he does not have to go far at all to find what he was looking for. Right now, in lending, the groups who are winning are not the ones searching for proprietary referral sources, but rather the ones focused on providing product innovation. The other groups can keep swimming, but they run the risk of not finding Nemo when he’s right in front of them.