In our debut installment in a series of “Executive’s Corner” articles from guest writer Charlie Perer of SG Credit Partners, the author sits with Michael Sharkey, President of MB Business Capital, to learn about Sharkey’s history in the ABL industry and his views of the current lending environment. In August 2018, Sharkey was named to head Fifth Third Business Capital – the combined national asset-based lending businesses of Fifth Third Bank and MB Financial upon the completion of the bank merger in 2019.

Charlie Perer: Thank you for your time, Mike. To begin, I must ask: Is relationship banking in Chicago dead due to consolidation and competition?

Michael Sharkey: No. Relationships are more important than ever. Our business is referral based. Virtually every deal we win in or outside of Chicago is won because of a relationship or past experience that we have had with someone in the referral and decision making chain. That could be at the company, the private equity sponsor, the sub-debt or second-lien shop, depending on the nature of the deal. In today’s middle market you are not winning deals on price; you are winning them based upon your deal structure, your reputation and the advocacy of those individuals involved in the deal.

Perer: Take us to the past and describe what it was like starting the ABL Group at Cole Taylor and then merging into MB? You joined Cole Taylor after an incredible run at LaSalle and ended up building it up to $1.5 billion at the time of the merger with MB.

Sharkey: I have been involved in numerous startups over the years. In 1980 I went to Manufacturers Hanover Commercial Corp. (MHCC) with some senior folks from GE Capital to help them start up an office in Chicago. With Manny Hanny’s reputation and resources we quickly established a strong presence in the market. From there I went to Standard Chartered where Martin Battaglia helped me to start up Stanchart Business Credit, which we ended up running for 10 years before we sold it to LaSalle. At LaSalle we grew the company into a national powerhouse until it was sold to Bank of America. Cole Taylor was the easiest startup of them all. We already knew the national market inside out and we knew who to hire. We had built a national reputation for fairness and reliability, and we had an approval process with former LaSalle bankers that gave us a strong story to tell. We started up in 2009 when there was no liquidity in the market and we had fresh capital. It was a great time to start up an ABL. Virtually the entire market looked like one big ABL opportunity.

Perer: Can you draw on any of those lessons learned over the years to gain insight into what lies ahead?

Sharkey: The Fifth Third merger gets us right back to where we were at LaSalle. The bank is a top-tier bank in asset size and we will no longer be constrained by the realities of a relatively small local bank. We can’t wait to start selling their broader capabilities and working with the bankers in their footprint. That should open up our new business funnel nicely.

Perer: How much team continuity do you have since your days at LaSalle?

Sharkey: Our team is a mix of the best and the brightest in the industry. Again it boils down to reputation. We have a history of growth and success. Our employees know that they have stable employment with good potential growth and career opportunities. Anyone who has ever worked in a shop that wasn’t growing or that was experiencing credit losses appreciates the value of a strong and stable work environment.

Perer: The Midwest is full of ex-LaSalle alumnae who worked for you. What do you think about when you look back at all that talent that came out of LaSalle and now are counted as competition?

Sharkey: I like to think that we are all still friends and that we all share a high level of mutual respect. We couldn’t accommodate everyone when we moved on and quite frankly many of them were up for new challenges elsewhere. I know that we all wish each other well and have fond memories of our time together.

Perer: What do you look for when recruiting and promoting employees?

Sharkey: The key traits that I look for are honesty, transparency, professionalism, technical ability and a strong work ethic. For years our motto was work hard, and play hard. At my age now it’s more like work hard and let others play hard! I get my eight hours of sleep a lot more regularly now. As far as promoting people, we tend to promote the people who do a good job, are constantly looking for ways to make the company and themselves stronger, are hungry and want it. People with those traits tend to rise to the top in most organizations.

Perer: Can you talk about leadership and loyalty?

Sharkey: The term that I use most regularly in reference to both my customers and employees is fairness. To me relationships boil down to honesty and fairness. If you establish clear expectations and you combine that with empathy and openness, then people tend to feel like they have been treated fairly. An atmosphere of fairness is crucial to avoiding long term resentment or discontent.

Perer: Who was your mentor and what impact did that person have on your lending strategy?

Sharkey: That’s an interesting question. At MHCC my liaison officer in New York was Larry Marsiello. I learned a lot from him and he was a great credit coach. At Standard Charter, where I was President for almost 10 years, I had a boss named Hal Greene and no matter what was going on with the portfolio or the bank, he never had a bad day in his life. He was always upbeat and jovial. I learned a lot about attitude from him. My head of credit, Marty Battaglia and I were both in our 30s and we kind of mentored each other. When LaSalle bought us I was 39 and their ABL head, Walter Macur, an old Heller executive was in his early 60s. At the time we thought: “OK now we will see how it’s really done”; We quickly discovered that we had been doing it right all along!

Perer: Do you worry about the younger generation of ABL talent not learning fundamentals like your generation did?

Sharkey: Yes the blocking and tackling of true what I call “bare knuckle” ABL is at risk to some degree. Many firms aren’t even double posting cash to the loan and collateral anymore. When I entered the business companies like GE Capital and Heller were formally training the young people in the industry. Those young trainees started as field examiners and progressed into credit underwriting and ultimately sales. I don’t think that exists today in any meaningful way. Having said that, a lot of lessons are likely to be learned during the next downturn. The companies with the most experienced staff that have been structuring and monitoring their deals in the traditional fashion should be fine. They should also thrive by restructuring and picking up the pieces on other lenders’ broken deals.

Perer: How has your lending strategy evolved over time?

Sharkey: The way I loan money has changed very little from how I learned to do it over 40 years ago. We may seem aggressive at times as we may have learned some lessons on collateral or industries along the way and we may seem too conservative at other times for the same reasons.

Perer: Let’s talk about innovation; where do you see it the most and how is it going to change?

Sharkey: Obviously the big change over the years has been in technology and the way that we not only monitor our loans and collateral but in the way that we track trends and borrower performance. Advances in technology have also drastically changed the way that we market and communicate in the marketplace. We spend a great deal of time building our brand and soliciting business online.

Perer: We are in a period of credit funds entering the ABL business. Do you see the strategic fit and how will this end? What advice would you give to a credit fund looking to get into ABL?

Sharkey: We are seeing a large influx of funds and alternative lenders. These entities have high cost of funds and, consequently, high return requirements. The risks that they take to provide an adequate return to their investors is heightened from what you would normally see in a bank ABL. They gravitate towards opposite ends of the spectrum - cash flow lending to the better companies and turnaround financing for the troubled entities. Both have their issues. Lending to turnarounds is a difficult model which should only be undertaken if you have seasoned professionals with exceptional technical abilities and the discipline and knowledge to operate in that sector. In distressed investing, we tend to see companies come and go within the space. Cash flow lending is a different animal and I don’t regard that as ABL.

Perer: How do you compete when price is not the determinant factor?

Sharkey: We do tend to get squeezed between the cash-flow lending on the better deals and the distressed lending to the riskier credits. We do believe that with our years of experience we can pick our spots to be competitive on structure and win our fair share of deals.

Perer: Has your SOFA product and strategy changed at all given many other bank-ABLs are starting to offer it?

Sharkey: Our SOFA product has been very successful and our experience with them has been good. SOFAs tend to be offered to our best prospects. You have to have discipline when offering them because every prospect would like to have one, and offering them increases your probability of winning the deal, but very few actually qualify. If there is a problem with a credit, that is the first thing that you worry about and the last amount that you are likely to collect.

Perer: Lastly, tell us something you are worried about that the rest of the market has yet to figure out.

Sharkey: Split-lien deals. Doing the revolving loan without a first lien on intangibles is a formula for disaster.