The Asset Based Lending Masterclass Part III of III. Raising Debt Capital for your Specialty Finance, Fintech Lending, or Alternative Lending Platform with Special Guest and Asset Backed Podcast Contributor Matt Edgar, Founder & CEO of Edgar Matthews
Disclaimer about the episode. Nothing contained herein is or shall be relied upon as a promise or representation as to the past or future. This conversation has been prepared solely for informational purposes and is not to be construed as a solicitation or offer by or sell any securities or related financial instruments. Viewers and listeners should not construe the contents of this conversation as legal, regulatory, tax, accounting, or investment advice, or a recommendation. Viewers, listeners, readers should consult independent counsel, tax, and financial advisers as to legal and related matters concerning any transaction.
Andres Sandate:Welcome everybody to another edition of the asset backed podcast. This is your host, Andres Andate, and I am, glad to have, for the 3rd time, Matt Edgar of Edgar Matthews and Co. Hey, Matt.
Matt Edgar:How's it going?
Andres Sandate:Good. Good. Hope you, had a good end of the summer. I know, you just got off talking about the US Open, so that that to me always means in New York, like, the fall is is here. So, hope you had a good summer, though.
Matt Edgar:Back to school weather.
Andres Sandate:Yeah. That's right. And football weather. And football weather. Well, you know, the first couple of, shows that we've done here, on asset backed have really been focused on, you know, helping originators and folks that are maybe newer to the debt capital markets process for, lack of a better description.
Andres Sandate:Those first couple shows helping those originators and teams really understand, the dynamics, what's involved, how to get ready, the kinds of things that they should be thinking about in terms of, putting together their data, their their loan tapes, etcetera. Today, on this 3rd and final episode of this 3 part series, we're gonna talk about, you know, briefly about the the launch initial and growth stages of of firms and kinda the transition, I guess, you'd say those firms go through, as they start to build loan tape, as they start to, get beyond, maybe that first warehouse facility or beyond that first, forward flow facility, we're gonna spend some time talking about securitization. We're gonna spend some time, talking about what that process looks like, what issuers and originators can expect as they go into the, the the ABF market or ABS market, to to put it more specifically and precisely. And then, you know, specialty finance is all over the place. Everybody's talking about it.
Andres Sandate:I think there's some key things that we can cover there. And then sort of end this part 3 discussing some trends, you know, and what can we expect over the next year or 2. Obviously, we we saw an announcement from the Fed out of the Jackson Hole conference, regarding rates and that environment. So lots to cover. Let's start though with, with this first question.
Andres Sandate:You know, as firms are going from that formation, initial and growth stage, they're building loan tape and they've tested controls, they've refined their underwriting, they demonstrated a capacity to originate, across maybe now in some new verticals. I'm gonna kinda ask you, what would be some of the advisers that these folks are gonna encounter in in this next stage? I know this is an area that you guys were born to sort of support. So, so I really you know, I'm curious, like, what are the markers? What are the hallmarks of firms that are beginning to go to that next stage, in the debt capital markets process?
Matt Edgar:Yeah. Sure. No. I think it's a good logical place to start this discussion. So I guess one overarching sort of thought or comment on this topic is that specialization from advisers is required here.
Matt Edgar:There are, you know, myriad numbers of investment banks and law firms and other advisers who will often claim to have experience in private asset based finance, or this in the space holistically. But it's really critical to, I think, stay away from more sector agnostic shops. You know, down the fairway, cash flow based financing is a completely different animal versus, anything asset based, and it becomes very apparent very quickly. I think which advisers have, you know, the experience to execute transactions at an acceptable pace and quality. And, frankly, not choosing an expert will undoubtedly result in higher cost, less efficient execution, and probably more surprises and bumps along the path to to executing.
Matt Edgar:So, as we think about the different pools of advisers, I mean, it's really, 3 probably not too surprising, groups, bankers, lawyers, and accountants with accounts probably to a lesser extent than the other 2. For investment banks like ourselves, Edgar Matthews and Co, yes. You, you know, of course, incur fees working with a shop like ours, but we try to be, you know, very fair with fees. I'll disclaim, by saying that. But, we do spend an enormous amount of time with our clients from start to finish, and that is everything from determining the correct credit and marketing story to be told to investors, to filtering the correct investors, to, actually target on a given execution, to getting into the finer and more commercial points around documentation and actually closing and funding a transaction.
Matt Edgar:So we do think having an adviser, whether it's us, whether it's someone else, is is paramount, especially for management teams that are doing this for the first time. We also do think that, yes, it costs fees to bring on a shop like ours, but we typically earn those fees back by getting better execution, better terms, and better economics at the end of the day. So we think that's, you know, something important. And oftentimes, investors from the buy side that are working on a transaction where a management team is trying to do it themselves will get us involved in situations and say, hey. These guys need some help from an adviser.
Matt Edgar:Why don't you get in there and sort of work with them? So, I think that just shows, the importance of of having a financial adviser involved with some of these transactions. I think the second and equally as critical, team to have involved is is good counsel with strong structure finance, specialty finance, asset based finance, however you wanna call it, but experience executing these types of transactions. You You know, typically, it's prudent to bring these folks in earlier than later. I'd say a bulk of the billable work that counsel will do is probably between signing and closing, where they're really running point on document creation and building, you know, closing checklists and things of that sort.
Matt Edgar:But having them involved earlier, rather than later, I think, helps mitigate some risk of, you know, unforeseen legal issues or asset transfer issues or other SPV structuring points that is, you know, often good to get flushed out ahead of time. And I think, lastly, just to round that out, from a accounting and audit perspective, admittedly, you know, issuers typically, in our experience, use their sort of income in in house, while firms plus or minus some tax and structuring experts. We see this more often in cross border or international transactions where there's more finer points around, you know, tax structuring and other, sort of nuances to be aware of, but generally involved, but less so than a investment bank and law firm in these transactions.
Andres Sandate:Yeah. That's that's awesome. As a as a as a preview to what I wanna talk about next, which is, you know, just the sort of broader, securitization opportunity. So this series, we set out to sort of talk about originators and, you know, lenders, right, who maybe were at the very beginning of their life cycle. Right?
Andres Sandate:They were initial credit facility. Maybe it was an asset based loan from a non bank lender. Maybe it was a warehouse facility. From there, again, we could accelerate to maybe a forward flow facility. These are natural gradual steps, and every firm is gonna be different for a lot of different reasons.
Andres Sandate:But we're gonna spend the bulk of today talking, about securitization because that is, like you just described, a much more, nuanced, specialized, different investor base altogether. You really gotta get this right, but I also wanna ask you before we jump in and talk about securitization. It feels like these firms are gonna be bigger. They're gonna have more loan tape. They're gonna have maybe multiple verticals that they're specializing in.
Andres Sandate:Yeah. What do their teams look like? What is the finance, capital markets team at one of your you know, whether it's a real client you wanna talk about or or an example sample client, what does that look like? Because I know one of the early conversations for a lot of firms is, do I need a VP of capital markets or not? You know, if I'm if I'm getting my first $100,000,000, you know, can it just be the the founder and an adviser, you know, or do I need a full time person?
Andres Sandate:So what's it look like when you're at this more mature stage?
Matt Edgar:Yeah. And I think I said it in in jest partially, in in an earlier episode that the the more mature the company is, the less, involved the CEO is in regular way sort of capital markets executions. And I think that really range true, but, look, I think folks that are toying with and or preparing with, or preparing to hit the securitization market for the first time typically do at least have some sort of chief capital officer, head of capital markets type sort of in the seat. And as you build into a more serial issuer into that market, I do think it is important to have a pretty built out capital markets team. Obviously, partnering with, different warehouse banks and investment banks to actually place the securitizations themselves is very important.
Matt Edgar:So there is a relationship management aspect of that, but I still do think having a team sort of in the ground managing the cap stack day to day is really important because things can get quite complex very quickly when you introduce securitization and you're dealing with, you know, third party trustees and all the other infrastructure that sort of set up to manage the securitization vehicle.
Andres Sandate:Yeah. Yeah. So so you have so many, transactions, you know, from, you know, from from your firm already, being in existence a short period of time, but also just prior to that, from your time, in the business, as a banker at Goldman Sachs. What are some of the markers? I I guess I'd call them or or indicators that we as an organization, as an originator, can start looking at accessing lower cost of capital.
Andres Sandate:Ultimately, that's one of the benefits of going to securitization market. There's others. But we wanna drive down our cost of funds, cost of capital. We wanna access different pools, bigger pools of capital. What are some of the things that we're gonna start to experience as as a as a firm?
Matt Edgar:Yeah. So I think the the important things to get a handle on and look at as an issuer and something that we as a a banker or placement agent on these transactions spend a lot of time is is a few things. And I would sort of summarize that in in in track record, institutionalization of the platform, and reporting data quality, I think, are some of really the the key drivers of going upmarket. And I'd say most successful securitization issuers, ideally need to show some sort of multicycle track record, which this can be developed much quicker in shorter duration product, things like, you know, unsecured consumer, like, you know, real estate bridge type of products, but can take longer and more, you know, commercial lines of business like equipment or ABL or other even longer data lines of business. And I think it's also helpful, not required, but helpful to be in a more, mature asset class.
Matt Edgar:So is there some there there's some, consistency across broader data and other issuers and how other comparable securitizations have performed? For example, unsecured consumer loans, you know, very built out datasets in the public domain, very vibrant active securitization market. And investors, even if it's a new issuer coming to market, can kinda take a view pretty quickly on, hey. I like originators a, b, c. I like vintages 1, 2, 3.
Matt Edgar:I have worst views on this vintage for this reason and sort of, you know, square their level of interest and or allocation much more quickly. And I think that often helps things, especially for more nascent or emerging, securitization issuers. And I think also to my point earlier on the institutional caliber of securitization, we might get to this later, but pricing and securitization is a very credentializing business. You need to get through a lot of constituents to get that over the line, which is one of the benefits, by the way. It is, you know, credentializing, to use that word again.
Matt Edgar:But my point on institutionalization and you kind of, I guess, led this with a, your question around, what what a capital markets team looks like for a securitization issuer. And just having the infrastructure to set up to make sure you're running waterfalls properly and you have, you know, trustees and, you know, if you have you need backup servicers and, you know, sort of other, pieces of the infrastructure to manage the securitization setup. That takes time, dollars, and energy to to monitor if nothing else. So I think being prepared for that is also, you know, really important. And to sort of round that all out, I think, you know, the whole playbook and, you know, access points will mature with the business going from, you know, as we've discussed sort of the the non bank ABL market to the bank ABL market to hopefully getting to what many issuers look at as the holy grail of securitization market, but it takes time and focus on sort of those key aspects that I laid out to get there.
Andres Sandate:Yeah. I mean, if if we had, infinite time, we could talk about some of the step steps, if you will, where you go from an ABL to a bank ABL facility and, you know, the warehouse lender becomes a a mezz position in the loan. Yeah. There's a lot a lot more to explore, but we're gonna focus more on securitization. So you did a great job of explaining, you know, the team, the dynamics, what you've probably are experiencing.
Andres Sandate:Talk about some of the talk about some of the things that are motivating folks to go to the securitization market. Yep. Yep. Is it is it capital that wants to be put to work in this asset class or across these asset classes? You know, is is it demand and they're pulling more folks into the space?
Andres Sandate:Or is it is it more push and, like, you're creating securities and you're putting more securities out in the market? What what are the factors that are driving it?
Matt Edgar:Yeah. Well, it is it is two sided, I think. And what I will say from the, demand side or the investor side is you're gaining access to an incredibly deep pool of capital, which is attractive for a number of reasons, of course. So I think it is 2 sided, but from the issuer's perspective or our client's perspective, I think it's, you know, efficiency of access, efficiency of pricing, and, like I said, that sort of credential building, milestone based aspects to it as well. You know, I think from an access perspective, capital markets enable, you know, platforms to become serial issuers over time, which once an issuer is seasoned, you know, transactions in size can be executed in in weeks, not months.
Matt Edgar:And that opens up the aperture for, you know, diversifying your providers of capital or number of investors in each sort of transaction, but also give some, you know, better predictability about, you know, capital availability. I think also from, you know, a a pricing perspective, which arguably is probably among the strongest motivators, but given the rated aspect of these deals, you're attracting a lower cost of capital. So it's, you know, a a a lot of work to do, but often subsidized through that sort of lower and more predictable, capital over time. And like I said before, I mean, I'll repeat it because I do think it's important. Pricing and securitization tells the market you've gotten through and passed the test of multiple constituents.
Matt Edgar:And I think if nothing else, that's a a strong milestone and shows that, you know, you're a real platform. Yeah.
Andres Sandate:So I
Matt Edgar:think that's sort of the, you know, collection of all those points and, good reason why so many platforms sort of strive to, build that capability from a from a capital formation, perspective.
Andres Sandate:Yeah. I mean and look. I mean, that that's why I wanted to launch this show in part because I I wanted to be a resource for those issuers that maybe were in the 1st 2, 3 years. Right? But, ultimately, they believe they've identified, a differentiated way to originate, borrowers and to service them in some unique way, whether it's through technology or whether that's through, a a different approach to, I wanna say underwriting, but just a a unique way to source, those borrowers and then service them.
Andres Sandate:Right? To provide a good customer experience. And we've seen quite a bit of innovation on, you know, financial technology, but at the end of the day, you've gotta have good underwriting. You've gotta have good risk management. You gotta have great data.
Andres Sandate:You've gotta have good, collateral manage I mean, all these systems. So you brought it up, not me, but we couldn't talk securitization without talking rating agencies. What we're not gonna do is talk specific about any one rating agency, but the importance overall of the rating agencies to the securitization process. So let's let's kinda step back for a second and just talk about what's the purpose of the rating agencies. Again, folks that have been in the, you know, the the the the asset backed finance and securitization market for decades, this is probably gonna feel a little bit more elementary.
Andres Sandate:However, now those folks are looking for new clients too. So understanding the importance of terminology and level setting so that when, you know, that issuer that's ready to go is thinking about who do I hire, how do I get expertise, and what am I about to encounter over the next 6 months, or maybe it's 6 weeks if I'm a repeat issuer. When you say rating agencies, in the securitization context for what we're talking about here on asset backed, what what does that entail?
Matt Edgar:Yeah. So I guess at at an elementary level, the rating agencies are important because a significant portion of investors in securitizations are regulatory balance sheet driven. So their balance sheets are structured to hold only certain amounts of certain types of securities, and those certain types of securities are typically, broken down or characterized by by credit quality. And a rating agency is a third party unbiased agency that effectively provides a stamp of, credit quality that is nearly universally accepted. Now investors take their own view on credit, obviously, but oftentimes, investors will view securities with the same credit rating sort of within the same general bands of risk, and that helps inform capital allocation for their balance sheets and to meet their sort of regulatory requirements.
Matt Edgar:So we can probably spend another 3 episodes discussing, you know, the history of rating agencies and the Right. Exact capital charges and the regulation of the rating agencies. But nonetheless, that's sort of the the high level. And, in terms of of why they're important, or what their involvement sort of looks like in
Andres Sandate:Yeah. What are they doing? I mean, I'm curious. Like, what are the what are the analysts at the rating agencies doing? Is it a is it sort of a replication of maybe what these, issuers have gone through, but in a different way with, earlier stages of their firm?
Matt Edgar:Yeah. So I think I think that's a pretty good characterization. Like, the actual analytics being run probably isn't all that dissimilar to what an underwriter would do or what a buy side investor would do as part of getting smart on a deal. But often rating agencies, depending on the asset class or what the issuer looks like, they'll have, you know, myriads of sort of, methodologies focused specifically on consumer credit or auto finance or equipment finance. So and these are all publicly available for the most part.
Matt Edgar:So you can kind of go in and understand, what questions are going to be, asked on the test, if you will, beforehand. So they typically follow that fairly stringently. And without getting into too much detail, it's a mix of both qualitative and quantitative sort of factors and, again, really cater to a specific asset class. But if we view a stool of securitization having, you know, 3 likes to it, you know, from an input perspective, it's really the issuer's desires, the investor's desires, and maybe not the credit rating agencies' desires, but their sort of framework that they require. So they're definitely a critical input into the equation.
Matt Edgar:And as we're diligent in deals, preparing to launch transactions, preparing to pitch for transactions, it's definitely calls that we like to have proactively with the agencies to get sort of their initial views on how they would think about a given opportunity or asset class, because their their input and sign off really is, required before you go to market and sort of market a transaction with a given rating. You wanna make sure that everyone has conviction in that rating.
Andres Sandate:Yeah. So maybe to drill in specifically to some of the the things from an advisory perspective, that you're doing with clients when when they are in the securitization, market or endeavoring to get into the securitization market, whether it's their first issuance, second issuance, or perhaps they wanna give, another firm a role in a in a future issuance. Right?
Matt Edgar:Yep.
Andres Sandate:The, you know, the giant banks that you hear about with Wall Street are not the only firms that can do this work, clearly. So talk about what your focus is. I mean, because you've talked about auto finance. You've talked about consumer finance. But I'm familiar with and had a guest on, you know, that that's in real estate.
Andres Sandate:Right? And they're doing, like, second lien mortgages, you know, or or, more esoteric areas are are starting to emerge, like aircraft and aviation. So where do you all focus within the private securitization market, and how do you guys go about, kinda getting up to speed with these different, types of collateral?
Matt Edgar:Yeah. Well, when we think securitization, I mean, I'll I'll I'll disclaim everything by saying not every asset class is ratable, fortunately, or Yeah. Unfortunately. It does get tough when it's either a mixture of methodologies or a methodology just doesn't exist, frankly. So I think there, you know, is probably a little bit more selectivity with, you know, just the types of asset classes that can be securitized versus, you know, financing more esoteric off the run type of assets in, you know, the private ABF or ABL market.
Matt Edgar:So so just to make that clear. But, I mean, in terms of where we specifically play, within specialty finance, I mean, we're fairly subsector agnostic. So we've looked at and done consumer. We've looked at and done equipment. Some of the more esoteric areas, again, provided that it is ratable, we have certainly participated and looked at some of those situations.
Matt Edgar:So we kind of traverse across, you know, each bucket, I would say.
Andres Sandate:Yeah. Makes sense. As, you know, as companies are going through these different stages of their life cycle, like episodes 1 and 2, again, we talked a lot about maybe that earlier stage kinda growth stage company. They're on their 1st or second facility. Maybe they've started to explore something like a forward flow partnership.
Andres Sandate:Today, we're focusing a lot more on exploring kind of the the the the ABS space. When when thinking about that with respect to these originators, do you like to see that they've had a track record of success? I mean, obviously, their loans have to perform, the papers perform, but do you like to see that they've worked with specific, law firms or specific banks or they've got different relationships with different, you know, firms on the on the private credit side. Does does that at all have any kind of any indication about how they're gonna be received in the in the, in the market state, in the securitization, market?
Matt Edgar:I I I I think so. I mean, if nothing else, like, we we certainly have our views on, hey. They've gotten their credit facility from this bank or this private credit manager. We know how these guys work. Some lenders might be more difficult to secure financing from.
Matt Edgar:So if they were able to do that, that's probably a good sign. But I think it it it probably I mean, we try to approach everything with a blank canvas, but I do think, probably most pertinent is is the equity sponsorship of the business. Seeing, you know, a well capitalized sponsor, an insurance company, or, you know, a strong history even of, you know, keeping residual earnings in the business and, you know, obtaining a strong equity base, I'd say is, probably most apparent in what we would spend most time on from, like, an outside in basis, but I would emphasize we do try to be objective when, you know, speaking with a client for the first time, I guess.
Andres Sandate:Yeah. And then, you know, before we pivot over to talking specialty finance, because that was another area that we wanted to talk about today on on part 3, there's so much that's happened in the, Fintech area or or in the technology area to support, issuers, to support, you know, private credit firms Yep. And and others that are active in this space, around things like managing data, right, or managing the collateral. Yep. Structuring, analysis, reporting.
Andres Sandate:Like, you talked about being able to manage, just a simple draw request. Like, being able to manage multiple, pools of capital as a growing firm, maybe 10 years ago, it was a lot more manual. Now it feels like there's more and more, software and and purpose built debt capital markets solutions, all the way through to sort of workflow management. I wanna ask you, when you look kinda under the hood, at these organizations or maybe is that part of your underwriting? Because I know that was something that you talked about, Edgar Matthews.
Andres Sandate:You guys spend a lot of time underwriting, if you will, the actual issuer before you take them to market. Yep. It's not so much as just smile and dial, right, to oversimplify it. Yeah. When you look at all that infrastructure, have has the business come a long way over the last 3, 4, 5 years with the proliferation of of some of these technologies and capabilities to make the issuers more prepared?
Matt Edgar:Yeah. So I'd I'd say generally speaking, yes. But it's also depending on what stage we become sort of involved in a client, we'll often be a significant part in getting their data set up, to an acceptable level for an institutional audience. And that's typically somewhere in the, you know, non bank ABL sort of stage of the playbook that we kind of mentioned before. So the the market's come a long way, but clients come a long way as well, I guess, is way that I would sort of think about it.
Matt Edgar:But I completely agree. I mean, by the time folks are ready to seriously look at tapping into the securitization markets to your point, there's, you know, asset class and and sector specific, reporting software is available. Once waterfall sort of are set up, I mean, oftentimes, you know, your in house sort of accounting software can account for things, but there's, you know, specific capital markets type of software that helps, you know, make things less manual. But I will say if it's new to the issuer, getting all those things set up and understanding the right sort of vendors to consider and what, you know, reasonable prices for the software sort of look like, that sort of takes time, obviously, to get smart and implement. But once it's set up, as I mentioned before, you can grow into, you know, serial issuer, with with pretty great efficiency, operationally.
Andres Sandate:Yeah. Yeah. Okay. Let's, let let's let's let's go to specialty finance. I mean, I feel like every once in a while in in in the asset management, financial markets, like, something takes, you know, the sort of world by storm.
Andres Sandate:And there's there's always, areas that are in vogue, and everybody seems to be talking about them, whether in the trade bags, at conferences, etcetera. And and especially finance, I think, can be broadly defined, and and we could also spend some time to narrow it in. And I would love for you to talk about with respect to Edgar Matthews more specifically, here and and just selfishly, when you hear that word and when you think about it in the context of your work and your team and the deals, what does that specialty financing entail?
Matt Edgar:Yeah. So I'd say broadly speaking, it's really any lending activity that happens outside the confines of a traditional bank. I just made that up, but I think that seems like a pretty good definition.
Andres Sandate:I think we could use that. Yeah. Yeah. But And that that means it's a gigantic market.
Matt Edgar:Exactly. Exactly. Yeah.
Andres Sandate:And
Matt Edgar:it's just and it's only getting bitter and bigger. And when we talk about, you know, some some trends and expectations, I think, to close this out, like, you know, we can sort of, hone into that a little bit more. But, I think that's a good general framework to think of it through, but we also sort of, segment the market, I'd say, into, like, 3 major food groups, consumer finance, commercial finance, and esoteric finance. So consumer is, you know, unsecured students, auto finance, any, you know, b to c type of lending, commercial being b to b, things like equipment finance, small business finance, you know, different flavors of asset based or factoring, would also fall into that. And then, in the Esoterix bucket, which is arguably one of the more growing areas because the other two buckets have been around for a while.
Matt Edgar:They're growing at a very healthy clip, but they've been around. Whereas things like litigation finance and, you know, other, you know, specific derivatives of consumer lending or commercial lending, I think, are popping up all the time. I mean, other areas of good example that a lot of folks have been speaking about recently is, home equity investments or HEIs. Right? Right?
Matt Edgar:Technically, that's a consumer finance product, but I would probably argue that's a little bit more on the esoteric side of things, plus it's, you know, a developing more nascent sort of securitization market. So that being said, that's how we sort of, you know, look at the world across all three of those, you know, areas, if you will. And as a firm, we do our best to sort of spend time in all those. I'd say right now I mean, it's probably a pretty even mix, but we've always been getting a lot of inquiries, more so on the, commercial finance side of the equation. That's for a number of probably specific reasons, but, nonetheless, we try to, you know, cover the space pretty comprehensively and, you know, spend time pretty equally across those, those 3 buckets.
Andres Sandate:Yeah. And, you know, I think as we talk about some of those buckets, let's talk about 23, the the commercial side and then maybe, you know, the esoteric side. I I am, I you know, I'm really curious when you think about the investor side of the equation, you know, the folks that are buying these securities, when there's a new issuance. Are they I'm always fascinated by the is it is it a, demand, you know, supply supply demand. Is it because there's investors that want more yield, and therefore, you know, Wall Street and the issuers can create that yield?
Andres Sandate:Right? Or is it, there's just a lot more insurance companies? There's still a lot more annuities that you have to find, you know, good assets to, you know, fund those annuity payments to retirees? Like, what's driving that esoteric side, for example? Is it the I know I'm throwing a lot out.
Andres Sandate:Is it the banks they've pulled back? Is it all of a sudden there's just a desire for more litigation funding, or more of a desire for these more esoteric areas? I'm curious. Like, what are the what are the what are the drivers behind this real explosion in specialty finance, particularly in these newer areas?
Matt Edgar:Yeah. Yeah. I mean, I I I think it's generally related to the the bank, you know, retrenchment or or pullback. Right? But I think it's also just innovation figuring out ways to, you know, offer, appropriately priced product to, you know, businesses that may fall off the radar of, you know, you know, a traditional bank or even non bank.
Matt Edgar:And I think also just given a lot of the non bank sort of private credit type of investors are unregulated or at least less regulated depending on their their LP types, than than a bank or other financial institution, their risk box and compensation for that risk is just higher. Right? So I think that really invites a larger capital or, yeah, a larger pool of capital available to these more esoteric type of originators where certain, you know, asset classes that I would describe as esoteric, it won't pick on anyone in particular. We just know that banks won't won't touch it for, you know, no reason other than having gotten their arms around it or, I don't wanna say understand it, but just haven't spent time trying to understand it, which I think
Andres Sandate:Yeah.
Matt Edgar:Is becoming more easily financials again given the volume of private credit managers that are seeking to deploy capital into, these asset backed strategies.
Andres Sandate:Yeah. And then before we go into kind of our final piece where we're gonna talk about sort of trends and and what it looks like over the next year or 2, in in asset base and asset backed finance area, I wanna ask you to talk a little bit about because you you alluded to this a moment ago, the, that that that second area of commercial, maybe small, medium sized businesses. One of the one of the things that I learned about this whole space over the last, you know, 10, 15 years is we could be in an interest rate environment where, you know, rates are have historically been high here of late, and we could be in an environment, maybe we will be in 2 or 3 years, where the rates are gonna look a little different, maybe a little bit lower. Regardless, companies always need capital. It's just capital makes the economy, at least in here in the US, go round.
Andres Sandate:So, can you talk about that commercial side, this SMBs, and maybe there's other areas. And what are some of the what are some of the things that, I guess, cause you to get excited about the market opportunity for you all there?
Matt Edgar:Yeah.
Andres Sandate:Is is it just business confidence and therefore more market participants, therefore, they need capital market solutions? Is it innovation? Is it more private credit is available? Like, what what are the drivers?
Matt Edgar:Yeah. So I I could spend a lot of time speaking about this. So, I I I think it's, it it's it's a few things. My comment before when I mentioned we're getting a lot more inbounds around commercial finance, I actually think that's a product of what I call traditional private credit, cash flow based direct lending, becoming so, popular, higher allocations, tons of capital being formed around that, but that also breeds competition. So a lot of the larger asset managers that have raised significant capital indirect lending or cash flow based lending strategies are now looking at asset based as a diversifier, a less competitive space potentially, and potentially a higher yielding space versus what they're sort of seeing in, sponsor backed direct lending.
Matt Edgar:And, you know, a perfect example of this is looking at the m and a markets recently. Yeah. You know, Brook Brookfield bought a stake in Castle Lake. Janice recently, announced a a stake in, buying Victory Park. Blue Owl announced acquiring Adelaya.
Matt Edgar:And Yeah. All of those asset managers, the the targets are, you know, managers with extremely strong heritage and capabilities within asset backed credit. So I think that should sort of indicate and tell you where the market's going. And, of course, those guys sort of invest across the 3 subsectors that I mentioned, but it is sort of pointing to private credit getting into more ABL. And I think that sort of comes back to credit managers and asset managers inquiring about, you know, buying into an ABL or equipment platform or some other commercial line of business because it's a little bit closer to home to, I guess, what they're already doing.
Andres Sandate:Already doing. Yeah.
Matt Edgar:Yeah. Financing consumer lenders, you're, you know, finance financing Main Street. You're financing consumers, right, which I think is often very different for, for a lot of folks. So I think, that's one piece of it. But, look, I think also to to answer your I think your question a little bit more directly, when you look at how, you know, I think the public BDCs are probably the best sort of proxy for this because they, you know, file everything publicly.
Matt Edgar:If you look at sort of how loan performance has been for a lot of the public BDCs, for instance, middle market loans have have been performing quite well. I'd say better than, you know, better than how a lot of folks were sort of expecting them to perform. And I think in terms of, you know, the, Fed outlook and the macro outlook, not to, you know, disclose our views or, make a, call on that, but I think it is expected to improve, which is further further supporting underlying credit performance. So I think, that has sort of proved that, you know, this nonbank private credit product, you know, can exist and perform well. And then when you think also comparatively about how asset backed strategies have performed, relative to cash flow, they've meaningfully outperformed because you're actually facing a hard asset at the end of the day.
Matt Edgar:So businesses that are asset heavy, machinery businesses, equipment businesses that have leverageable collateral are realizing that they can secure much, more efficient financing, frankly, versus what they would otherwise get, from, you know, only lending on their their EBITDA or cash flow. So took that in a couple of different ways, but hopefully that sort of No.
Andres Sandate:It's it's a great I mean, you tee you tee me up. I'm you're gonna be replacing me soon. I can imagine, because you you did a great job of of giving a a a perspective, which I wanna get back to here in a second, and that was, m and a. But I wanna transition. Last few questions, you know, talking trends, talking sort of outlook.
Andres Sandate:We, you know, we've covered a lot in the ABF asset backed market over these three shows, and I would encourage listeners, depending on where they're at in that cycle, I think there's content that's relevant to them. Whether you're ready to go the securitization market or you've been in the securitization market, I think this particular episode, I would argue, selfishly, it probably highlights a lot of interesting things. If you're newer and maybe at the earlier stage thinking about that first warehouse facility, maybe ready to go get a 4 flow facility, I think there's a lot of rich content, I would argue. I don't like to talk my own book. I wanna let you answer the final few questions.
Andres Sandate:What do you expect out of the private ABF market? You know, we talked about securitization. We talked a little bit today about specialty finance. We've seen some of the growth in the esoteric. But what are you expecting to see over the next 24 months?
Andres Sandate:To, you know, to to sort of encapsulate where the market opportunity is? And then, obviously, you started your firm amidst this backdrop. Right? And, you know, if you wanna share how that's progressed, I I know you have on prior shows, but you start this firm amidst this backdrop. And so I'd love to kinda get inside your mind for a second and sort of Yeah.
Andres Sandate:What are you thinking?
Matt Edgar:Yeah. Yeah. I mean, I I I would say that the, the the the launch of our firm, while we're riding some nice tailwinds was intentional, but as with a lot of things in life, some of it's luck. Right? So Yeah.
Matt Edgar:Yeah. That that certainly helped. But look. I mean, in terms of, you know, in terms of our general expectations, I mean, there's been this, structural change occurring, I'd say, within specialty finance, really dating back to, the financial crisis. But I think that's been accelerated, even in in recent years months.
Matt Edgar:I mean, I think, you know, over the past couple of years, all of the, you know, volatility we've seen in the community banking sector, is a pretty important development, I think, in the general history of specialty finance and private ABF because I think that has even more solidified the non banks providing lending services or products, in, replacement of those banks. So I think that is going to continue. I mean, I I read a report recently that, you know, folks are expecting the private ABF market to grow to, you know, 7 and a half to 8 $1,000,000,000,000 in market size over the next 3 years, I believe, which I, you know, generally agree that that trend will sort of continue because from our perspective, we don't see banks getting back into the space, in a meaningful way. And, you know, the asset managers are picking up a lot of the the slack that the banks have left, which I think I've mentioned in other shows, which m and a is a good, data point to sort of prove out that psychological stance of a lot of those guys. But also from the bank perspective, you know, we don't have to get into it on the show, but all these, you know, synthetic risk transfers and other, portfolio sales that banks are undertaking right now shows they're, I don't wanna say necessarily in defense, not offense, but they're seeking to reduce risk to noncore, business lines and reemphasizing traditional banking type of activity.
Matt Edgar:So I think that really tells that, you know, ABF is here to stay. It's really a question of composition, what areas will grow quicker than others, and, what developments from a, capital markets technology perspective are really, going to evolve. But look. I mean, I think to to round that out, the asset managers have been a really important piece of the equation as have insurance companies. Insurance companies have long been participants in, securitization type of markets, but I see I think you're really seeing the proliferation of of private securitizations and more strategic and clubby type of deals where it's a small handful of insurance companies sort of trying to do something with an issuer, more discreetly and more directly, which is, I think, paramount to our business, frankly.
Matt Edgar:Most of the transactions that we work on, sort of look like that. So I think that's definitely going to continue. You know, we say asset managers like financing planes, trains, and automobiles. I think it's still a new concept to some, but the interest will certainly continue, because I think also folks are really understanding and getting their arms of how the risk profile of private ABF is far superior to, you know, arguably far superior of this claim, relative to some of the other activities they're already doing in credit. So we think that really sets up, a pretty powerful tailwind for the space that we expect to continue.
Andres Sandate:Yeah. Okay. I'm gonna ask you one more question, Matt. This 3 part episode, I mean, it started out on this jury, right, where we we'd talked about your your, you know, doing your first $100,000,000. And I feel like now we're talking about insurance companies, and we're talking about, you know, these big m and a deals.
Andres Sandate:It's quite humbling, but, there's not a lot of content out there. I mean, believe it or not, I mean, there's great reports. There's agencies. There's banks to take nothing away from them. But for the, you know, for the executive, the founder, the builders, the ones that are sort of in the weeds, in the trenches, the whole point of the show, again, was to provide, you know, insight information, education through giving voice to experts, right, you know, to to be quite candid.
Andres Sandate:So here's here's the last one. I was on the phone with a group. I can't name who they are, but I was on the phone with a very reputable, group that are active in the, you know, the asset based finance space. They're they're very well funded, institutionally funded. Their view, and I'd love to get your reaction to this.
Andres Sandate:Their view is that with all the m and a activity, with the, you know, the the the now publicly traded alternative asset managers, you know, and from the Ares to the Blue Isles to the Blackstones, and there's probably a dozen. Maybe there's 15 of them globally. You've got these monster firms that are continuing to grow. They're buying insurance companies. And then on the other end of the market, and we're specifically talking about just the credit part of their business, you have originators that we're, you know, sort of talking about here, where they're doing a 100,000,000 a year, 500,000,000 a year.
Andres Sandate:Eventually, you wanna get to that $1,000,000,000 a year of origination. And you had firms that were in that ecosystem, Victory Park, Adelaiya, you know, and others that were, I would say, kind of the they were the infrastructure for those firms. And I'm not saying those firms are gonna go away, but when you look at the overall origination capacity, these really big firms that are, you know, now multi $1,000,000,000,000 shops, they can't go down market and write checks for 30,000,000, 50,000,000 as effectively as the smaller firms, you know, the smaller credit firms can in supporting those originators. And then you have a whole bunch of groups in the middle that are running 10,000,000,000, 20,000,000,000 to 50,000,000,000. Those could be great candidates to get acquired as we've seen over the last year.
Andres Sandate:When you think about that landscape of of those 3 size firms that can provide capital and liquidity and support, and this is obviously groups that you're gonna be dealing with or are dealing with already on a daily basis, And then you throw in the insurance market. It's a lot of folks to cover, and it's a lot of folks to understand what are their preferences, what are their mandates, what are their needs. But I'd love to ask about the origination side because that's really, you know, important. If we don't have that, a lot of this capital can't get put to work. What do you see as the landscape when you look out 3 5 years?
Andres Sandate:Does it look like something different than those chess pieces I just described, or do you see this m and a thing kind of really continuing and you wanna be you know, if you can't be one of the top twenty, you wanna be in the middle and you wanna be originating. What what what's your advice for those groups?
Matt Edgar:No. I think I think you set it up pretty well. And, frankly, I mean, you know, the the the favorite part of of of my job often on, you know, m and a and other strategic discussions is figuring out, hey. These guys do this really well. These guys, you know, want to do this, but aren't doing it so well or don't do it.
Matt Edgar:So being able to put folks together either via formal m and a or just through partnerships, I think, will undoubtedly continue, and we'll see, you know, a significant pickup in that, which we are already seeing. But it's funny because you obviously see a very popular trade that has been, you know, asset managers partnering with insurance companies. But then I think once you add specialty finance platforms and specialty finance originators into the equation as well, that creates a very robust marketplace for strategic activity. So I think now without getting into any specific firm, of course, but I think now, generally speaking, a lot of the larger asset managers who may or may not have a very built out credit presence already are partnering with smaller firms generating small balance, small ticket type of stuff in a number of different ways. We've seen, you know, joint ventures come sort of back into vogue, I'd say, over the past, you know, 18 months or so where, you know, there's some sort of origination partnership that comes with capital being set up.
Matt Edgar:As I mentioned, there's tons of firms that are just providing credit facilities, directly to these, you know, types of managers, which, you know, continues to be a significant market. Lots of capital being raised around that. I think outright m and a will continue, but I will say for some of the larger guys, I think the bar is a bit higher from a scale and TAM perspective, really.
Andres Sandate:Yeah.
Matt Edgar:You may have a great product, but if it's a short dated product that constantly recycles and the market itself just isn't large enough, then I think that's probably less interesting unless you can build it to, you know, a 1,000,000,000 plus type of, type type of book in a realistic amount of time. So I think that's, you know, the general, feel for it. I'd say the other thing I'd throw in, which I would could characterize under, lending or JV, but also, whole loan purchases, particularly with, asset managers that may have, you know, an insurance LP or insurance SMA or partnership as well. We're seeing, you know, those structures be put together more efficiently. So, you know, all of that together, like I said, just sets up a very robust, you know, partnership strategic environment, which we're very excited about.
Andres Sandate:Yeah. And I I wanted to kinda ask you that because I know that we've spent a lot of time talking about structure and going to market and raising capital, but I know a whole another side of your business. You know, is like most investment bankers. Right? Advice, strategy.
Andres Sandate:Yep. Building partnerships. Right? And and just because this world is so there's so much creativity and there's so much, opportunity. You know?
Andres Sandate:Some people estimate this market, let's call it specialty finance, asset based finance is a 20,000,000,000,000. I've seen numbers as high as 50 or 60,000,000,000,000. And then within that, you've got 5 and $10,000,000,000,000 markets like you said. Speaking of, you know, the the private, securitization market. So I I think there's a lot of stuff to cover, but I'm glad that, you know, we could do these 3 shows.
Andres Sandate:For those of you that are listening, we're gonna put all the the details of all three shows out on, you know, the asset backed, podcast website. I know that, Matt, you know, people would love to get in touch with you. So I'm gonna give you the kind of second to last final word because, I'll wrap this up. But how do people get in touch with you, and how do people learn more, about you and the things you guys offer?
Matt Edgar:Yeah. So I think, listening to these three episodes should be a good a good starting point, of course. Yeah. But, but, you know, fortunately or unfortunately, my contact information is on my website. I do get a lot of spam calls, but that being said, that's probably the best way to, get in touch with our firm.
Matt Edgar:And, yeah, we're we're happy to speak to, you know, platforms of all sizes on anything capital markets, but also strategic related. So, I really appreciate this. You know, I think this podcast is is great. It's, curated. It's informed.
Matt Edgar:So we've really enjoyed, you know, participating in these last three episodes and look forward to, hopefully, some more conversations down the road.
Andres Sandate:Yeah. We'll we'll do that. And, hopefully, I'll get a chance to, you know, to get up to your neck of the woods to New York here in the fall and and visit you at one of the conferences or one of the events or, at your offices. But, folks, Matt Edgar, Edgar Matthews and Co, really, enjoyed having you here over the last, three episodes on the asset backed podcast. I think we covered quite a big ground.
Andres Sandate:There's clearly a lot more to discuss, but, but we're gonna leave it there for today. So thank you for joining me, Matt. I wish you the best here as the fall gets rolling, with, with those Jets. I know you're a Jets fan. I'm hoping for a 3 p because I'm a Chiefs fan.
Andres Sandate:You can't really see the the red helmet in the background, but, but it's always fun to talk, sports and football with with somebody who's, you know, who's who's clearly followed, all the sport for a long time. So with that, I hope you enjoy the rest of the week, and, look forward to putting this out to the community. And, if you have comments or questions about the asset backed podcast, please drop me a line, and let me know what type of content and what type of shows, you'd like to see in the future. Thanks so much, Matt.
Matt Edgar:Thank you.
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