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Forging Success: Hercules Brings Gibraltar Business Capital into the Fold

Date: Apr 04, 2018 @ 07:00 AM
Filed Under: Company Profile

In early March, Hercules Capital – a leading Business Development Company (BDC) with more than $7 billion in commitments – announced that it was entering in the commercial finance sector through the strategic acquisition of all of the outstanding equity of Gibraltar Business Capital.

Since its inception in 2010, Gibraltar Business Capital has become a household name in the commercial lending space, providing working capital to small and mid-market businesses through its asset-based loan and factoring solutions. The company has underwritten more than $325 million in total credit facilities to more than 170 borrowers, and has the support of lenders such as Wells Fargo Capital Finance.

As part of the transaction, Gibraltar will become a portfolio company of Hercules, continuing to operate as an independent senior secured asset-based lender under the Gibraltar Business Capital brand. The Gibraltar deal marks the second major acquisition for Hercules in under a year. Last November the firm announced it was acquiring select venture loan assets from Ares Capital Management for approximately $125 million to reinforce its position as the largest BDC in the United States.

Photo of Manuel Henriquez - Founder, Chairman and CEO - Hercules Capital

ABL Advisor recently caught up with Manuel Henriquez Founder, Chairman and CEO of Hercules Capital, for a first look at the strategy behind the move into asset-based lending.

ABL Advisor: Thanks for taking the time out to speak with us following this major announcement. Hercules Capital has become one of the largest BDCs in the U.S., focused on venture lending for entrepreneurs and their venture partners. Why did you decide to enter the more traditional ABL and factoring sectors focused on small and middle-market companies at this particular time?

Manuel Henriquez: Hercules’ long-standing track record of success exemplifies its core strategy – to provide cost effective growth capital to some of the most innovative and disruptive technology and life sciences companies in the U.S. at key stages of their business cycle. As these promising companies transition from development stage companies to where they start to generate revenue and build assets, they seek lower cost financing alternatives typically offered by banks in the form of asset-based loans, and generally secured by accounts receivable. Hercules didn’t have this capability or access to this type of financing opportunity until the Gibraltar acquisition to offer our portfolio companies. Gibraltar, as a portfolio company, allows us to potentially extend our capital offering and relationship with our portfolio companies as they continue to progress in their own development and maturation.

At this critical juncture of their business development, crossing the chasm from development stage to revenue generation and customer adoption, our portfolio companies have earned the ability to seek lower costs of capital to further finance the growth of their business that better reflects their own maturing risk profile. We wanted to help our companies gain access to this type of financing without the requirements and obligations that a typical commercial bank may impose on the company.

Prior to acquiring Gibraltar, Hercules offered very limited access to ABL financing solutions that were typically not as competitive as what Gibraltar can offer today, Also, by not being able to offer complementary financing solutions to our existing term loans to our maturing companies, such as an ABL add-on solution, we started to witness a higher level of early pay-off activities occurring in our loan portfolio. Hercules can now introduce its revenue-generating and maturing companies with more traditional balance sheets to Gibraltar where they (Gibraltar) can potentially offer these companies asset-based lending solutions. I can envision, over time, where existing Hercules’ portfolio companies maintain their current term loan with Hercules while also seeking to access this important additional financing of an ABL add-on, since their overall new combined cost of capital would be lower.

ABL Advisor: Why was Gibraltar Business Capital the best acquisition choice for Hercules among the many ABLs and factors across the U.S.?

Henriquez: We have been seeking and evaluating many ABL lenders over the past few years, but we never were quite able to find what we were looking for until Gibraltar. When we came across Gibraltar, it became very apparent to us that we shared a very similar and common credit culture and discipline. Their strong credit discipline, their outstanding company culture and employees, and their size all made the decision simple. We have a partnership and the fit is a good one, and although it’s early in the relationship, so far, it’s exceeding our expectations.

As to why an ABL and Gibraltar, given what we have been witnessing over the past four years (a larger and larger portion of our “portfolio running off”) we started to investigate some of the reasons why this was occurring. One of those reasons was obvious. Years earlier we invested in development stage companies, and now they are maturing and revenue-generating companies with different financings needs than when we first came across them. They evolved as part of their natural development, and we didn’t have a product offering for them.

By acquiring Gibraltar and having them continue to operate as a separate but 100 percent wholly-owned company of Hercules, they can continue to do what they do best: asset-based lending. And we will continue to do what we do best, which is venture lending to cash-flow negative, high-growth, disruptive companies by offering term loans. Over time we believe will be able to offset the rise in early loan payoffs while also keeping our term loans outstanding longer and developing longer relationships with our partners companies as they grow and we grow with them. Gibraltar’s long, successful history culminates from their investment style and discipline, which closely mirrors Hercules’ “slow and steady” growth objective while never compromising credit quality for the mere sake of growth. Of the many companies I have evaluated, Gibraltar was also a perfect cultural fit with our own.

ABL Advisor: What synergies will Hercules and Gibraltar capitalize upon as they strategically enter small- and medium-sized ABL and factoring sectors?

Henriquez: Many of the Hercules portfolio companies represent future potential candidates for an asset-based loan facility, which we anticipate introducing to Gibraltar for further evaluations and consideration as potential ABL clients. As many of these companies have already passed the stringent Hercules “screen” and have proven credit history, Gibraltar can potentially leverage that history and performance as they evaluate each company.

ABL Advisor: How will the acquisition of Gibraltar Business Capital impact Hercules’ go-to-market and portfolio strategies in the coming years?

Henriquez: For both Hercules and Gibraltar, each company’s go-to-market and portfolio strategies will remain the same, slow and steady, while maintaining a very high standard of credit underwriting.

ABL Advisor: The press release announcing this acquisition mentions that this investment in Gibraltar will provide Hercules the ability to access systems utilized in managing asset-based loans, and to potentially expand the types of financing options available to Hercules’ current and future clients. Please explain why the acquisition of such a platform is an important component of Hercules’ business strategy?

Henriquez: Since its founding, Hercules has been an avid user of technology and continuously evaluates and adds new technologies to its operations. It has also built its own proprietary loan-management and tracking systems tailored to monitor multiple key factors and metrics, which allow us to make real-time assessments on the health and progress of our growing portfolio companies.

Our systems are designed for high-growth venture backed companies, while Gibraltar’s management system is designed for ABL and factoring solutions to small- and medium-sized profitable middle-market type companies with EBITDA. As a reminder, the vast majority of Hercules Capital companies do not generate EBITDA given their stage of development and high growth mission. Although Gibraltar is an independent but wholly owned company of Hercules, I can see a point in the future where each of the respective tailored systems may benefit each other, as our fundamental objectives are the same ? sound and prudent credit underwriting.

ABL Advisor: Scott Winicour and his team will remain intact and continue to operate under the Gibraltar Business Capital brand. Please tell us your impressions of Scott’s leadership skills and his team.

Henriquez: We really liked the culture of Gibraltar and the long-storied history of how they evolved since its founding as Gibraltar Financial Corporation in 1951. What immediately attracted me to Scott and Gibraltar was his disciplined investment demeanor and attention to detail regarding his business. Gibraltar’s culture is virtually a mirror image of Hercules, meaning our investment styles and financial return objectives are one in the same.

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