Monroe has launched a new $1 billion vertical in “Specialty Finance” which will focus on exotic and alternative financing in areas like litigation financing, structured settlements, royalty streams and consumer and small business lending through tech platforms. It has 1 billion dollars in dry powder, waiting to be deployed! With such a huge war chest, it can become a major player in the alternative lending market. Monroe is looking at financing platforms and companies and is not looking to invest in whole loans directly.
Monroe Capital is one of the leading providers of junior and senior debt and equity co-investments to middle market companies across US and Canada. It was founded in 2004 and has offices in Chicago, New York, Toronto and six other leading US cities. It has over 60 professionals with a special focus on sectors such as media, healthcare, technology, retail and consumer products, specialty finance and employee stock ownership plan (“ESOP”) financing. Monroe has more than $3.1 billion in assets under management and traditionally specializes in the lower middle market companies having EBITDA in the range of $3-$30 million. Since inception, Monroe has completed more than 900 transactions for a dollar amount of over $5 billion.
During underwriting, Monroe’s primary focus is on the experience of the team and the quality of equity partners. The company, therefore, sources a lot of deals from the PE space and as a whole, 60% of the lending is to PE sponsored companies. Due to the recent emergence of alternative lenders, the company is willing to look at young and emerging startups. But it still requires a pre-deal origination of $5 million and upwards, so that Monroe can help the startup ramp up to $20 million and more. Investment types include unitranche financings, cash flow and enterprise value based loans, asset based loans, acquisition facilities, mezzanine debt, second lien or last-out loans and equity co-investments. The company is led by its founder- Theodore Koenig, a lawyer, and alumni of Kelley School of Business. Aaron Peck is the portfolio manager and managing director handling the specialty finance division. He is an alumnus of University of Chicago Graduate School of Business.
The company is closing a new fund with $600 to $700 million in capital and is looking to make deals in the range of $20-$50 million . It is keen on warehouse financing through an SPV structure for online marketplace loans as it gives the fund a cushion by providing reserves against assets. According to Aaron Peck, Head of Specialty Finance Vertical at Monroe Capital, securitization helps in generating positive alpha through better spreads and risk concentration. But to ensure competitiveness, the fund will be willing to advance up to 95% of the assets versus the 20% haircut usually demanded by financiers. Along with the debt financing, Monroe will be also looking to invest in investee companies via equity structured through warrants. This would help them become long-term partners and align the vision of the fund and the originator. The company is looking to invest $250-$500 million in the space in the next 12-24 month.
State of industry: invest when others are fearful
According to Aaron, though many investors and lenders on the platforms are turning away from alternate lending due to growing defaults and increasing competition reducing spreads, Fintech lending is fundamentally poised to increase exponentially. His investment philosophy is to invest when others are fearful. This will give the fund and its limited partners an opportunity to earn outsized returns while minimizing the downside. The company has an exhaustive underwriting model. The firm spends time and resources extensively to understand the algorithm, the lending model, customer acquisition strategies and even the regulatory landscape, which might be unique to every startup. This intensive research helps the firm bet big. In August 2015, it closed a $50 million debt deal with Channel Partners Capital, a specialty lender to small businesses. The Minnesota based Channel Partners provides working capital loans exclusively through partnerships with equipment leasing and finance companies. Aaron attests that the firm is getting great returns from the deal (which is in its seventh month) and with very little default.
Impact on industry
The alternative online lending model was pioneered by Prosper and Lending Club by their peer to peer model. It involved an individual lender lending to his peer on a fractional basis. This modus operandi has been trumped by the emergence of online balance sheet lenders like SoFi, Avant and Earnest. This has led to marketplace models embracing financial institutions like banks, hedge funds and nisurance companies. These institutions are able to fund whole loans and their speed in decision making helps marketplace lenders compete in terms of time taken to close and fund a loan versus the balance sheet lenders. Monroe Capital with a billion dollar of undrawn, committed capital can be a huge player in the industry. Its deep domain experience differentiates it from FIs willing to write a large cheque and hedge funds looking to just maximize returns. It should be able to bond with specialty lenders looking to disrupt a particular financing niche. The company’s experience in tech, media, consumer products, retail and healthcare position it uniquely for lenders targeting small businesses. Another great partnership should be startups engaged in invoice financing as it will help enlarge the invoice discounting universe from Fortune 2000 companies and governments to its network of mid-market companies. Monroe Capital’s entry signals the maturing profile of alternative lending. It also heralds the entry of financial partners for online originators who can not only contribute capital but also help them organize and structure their business on an operational level for long term success.
Author: George Popescu and Heena Dhir