Taking Over Where Banks Fall Short

Banks are not equipped to lend the way small platforms are, and a lot of platforms are hamstrung by the regulatory environment. Monroe Capital, LLC, launched their specialty lending vertical a couple of years ago to provide funding for other lending platforms. Aaron Peck, managing director and co-head of the Specialty Finance Vertical, said four years ago the company had two specialty finance vehicles designed to meet the needs of those platforms. Now, they have 11, and all of them are current yield.

“That’s rare for a fund,” Peck said, “but we look at performance. A publicly traded vehicle pays 90%, so we are trading quite well. All our funds pay hefty dividends.”

Since 2004, Monroe Capital has been a lower mid-market lender, providing funding for businesses with $3 million to $30 million in cash flow. Headquartered in Chicago, they’ve managed more than $4 billion in assets through origination offices in Boston, New York, Atlanta, Dallas, San Francisco, Los Angeles, and Toronto. Their specialty finance division, however, is not a typical marketplace lending platform; rather, they see themselves as a hybrid model looking for growth capital. Peck is one of nine partners.

How Specialty Finance Works at Monroe

Monroe’s typical customers are diverse: near-prime and sub-prime consumers, small businesses, pre-settlement litigation finance, medical receivables, sub-prime auto, structured settlements, and medical royalty. They usually look for platforms with a longer history and lower finance rate and can scale up to $200M for an individual company.

“Banks max out at 80%,” Peck said, “but we can go deeper, so the platforms have to raise less equity.”

For example, a small business looking for capital to put up a warehouse facility approached Monroe. They had a track record and could put up equity (in a pool of assets) enough to support the warehouse up to $100M. “We looked at loss rates to see what we thought was sustainable,” Peck said. “We did a detailed analysis of third-party data with our tech-enabled underwriting and became comfortable that full legal and regulatory due diligence were performed.”

Once Monroe does all that, they get back to the company and set up the SPV structure. This sets up unique criteria the platform needs to meet based on its business model. If it comes out of compliance, which is rare, they can take assets to get their money back because it traps cash in the vehicle to protect the loan.

“We don’t approve individual loans,” Peck said. “We support the platform and let them do what they do best.”

Looking for Platforms That Fund Their Own Assets

Monroe is very interested in the technology aspect of any platform they fund. That’s why they stick with those that can fund their own assets.

“If you don’t have tech, it challenges us to believe you can grow,” Peck said. “On our side, tech-enabled lending makes sense. It’s difficult to scale without it. It won’t completely replace the human underwriter, and key underwriting elements will always be key underwriting elements. But technology makes it quicker to provide data so good decisions can be made.”

Monroe has dedicated an entire team to this aspect of their business hoping it will grow. As the marketplace lending industry grows bigger, there will be more opportunities for Monroe to choose platforms that can meet their criteria.

More similar articles on Lending Times.

Authors:

Allen Taylor, Nicki Jacoby.

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