5 Questions with Colbeck Capital’s Jason Colodne
"If an unsponsored company is seeking to strategically scale its business without taking on the risk of dilutive capital, securing a loan from a non-bank lender, like Colbeck, is likely the company’s strongest option.” Jason Colodne, Managing Partner
How has the regional banking crisis, coupled with ongoing market volatility, changed the way in which companies are dealing with strategic lenders?
We are seeing a significant uptick in companies turning to non-bank lenders for their financing and refinancing needs. These companies are transitioning away from their established lending relationships, which have historically been with local and regional banks, as banks seek to reduce their overall lending balance sheets by contracting their borrowing bases and not extending additional capital to companies. Indeed, at Colbeck, our pipeline has doubled in size as banks have continued to pull back from the lending market. Presently, if an unsponsored company is seeking to strategically scale its business without taking on the risk of dilutive capital, securing a loan from a non-bank lender, like Colbeck, is likely the company’s strongest option.
Are there particular sectors or regions where these banks are pulling away from the lending market?
While we have not identified any regional concentrations of dislocation, a substantial amount of loan sales that we have seen in the marketplace, and where we believe dislocation is likely to continue, is in real estate. That said, the contraction of existing businesses and a reluctance by regional banks across the U.S. to participate in current or new regular-way borrowings is really happening across the board – across regions and sectors.
Private debt can often be more expensive than traditional lending. What is the upside for companies turning to a non-bank lender, particularly in today’s market?
Oftentimes, generationally-owned companies are seeking transformative capital to grow their businesses, yet the only financing option available to them is dilutive equity. Given these companies are not of a mature enough size to achieve multiple expansion and have an aversion to dilutive equity, we have found that they are inclined to pay for what may appear to be “expensive debt.” Those who are unfamiliar with the private debt market may categorize this type of lending as “lending of last resort” or “very expensive financing,” but we actually view it as “equity of first resort.” Today, as banks continue to pull back from the lending market, we are seeing borrowers recognize the upside of private debt; they are understanding that by gaining access to this type of capital, they have the ability to gain increased enterprise value by five to 10 times. As a result, we are seeing these companies willing to pay one-and-a-half to two-times the value of the debt by way of interest fees and exit fees or be receptive to an equity kicker or a revenue royalty for a short period of time.
Given the uptick in club deals, can you share how an unsponsored, strategic lender like Colbeck puts a club deal together and what its benefits are?
As an unsponsored lender, we act as a fiduciary to the companies to which we lend. We are greatly incentivized to bring a sponsor-like approach to help the borrower execute its strategy and create value to reach the next stage of its credit cycle. So, in the case of working with a syndicate of lenders, it is critical to us to create a lender group of like-minded investors with similar strategies and pools of capital.
Can you provide examples of some of the strategic levers you may pull if a portfolio company is facing some form of distress?
First and foremost, it’s important to note that as part of our underwriting strategy, we ensure we do not make investments with binary outcomes. We always seek to ensure there are various pools of assets or pockets of recovery value so that if an investment does not go precisely as planned, we have various levers to pull on. One such lever may be pulling back on growth, and in doing so, pulling back on R&D spending. Another may be pulling back on sales and marketing efforts at the company to generate more cash flow in the business overall and near-term liquidity.