For investors in alternative investments such as hedge, private equity or real estate funds, capital commitments require an ongoing liquidity strategy to fund investments on someone else’s schedule. Even those with the most significant balance sheets want to avoid harvesting investments on short notice, which can lead to the disruption of investment strategies and tax objectives.

Proactive Cash Planning

Charlotte made two capital commitments in year one, the first to a special situations fund, and the second to a real estate mezzanine finance fund. Shortly thereafter, the first of multiple capital calls are requested by the fund sponsor. Throughout this time frame she must maintain a liquidity cushion in order to ensure adequate cash to meet the next call, although she would like to stay invested in her core portfolio. Instead of selling off assets, Charlotte has established a plan for liquidity that provides the cash she needs, while also maintaining her liquid investment portfolio.

Maintaining a Full Investment Strategy

By utilizing a securities-based line of credit from TriState Capital, private equity investors can have access to considerable amounts of liquidity without derailing their carefully crafted investment strategy.

a) Create cash capacity to plan for future capital calls and invest at the same time.
b) Draw as needed with no fees; repay with no maturity dates; and pay interest only on what is used.
c) Utilize a streamlined process and robust lending platform that enables a quick delivery through an exceptional and secure digital experience.
d) Maintain a conservative approach to borrowing and provide peace of mind that capital call(s) can be met, whenever they come in.
e) Resolve short-term liquidity needs by borrowing eligible securities without using assets.
f) Enjoy the flexibility of using multiple portfolios as collateral, with individuals, entities and trusts all eligible to borrow and pledge.
g) Choose a floating rate line of credit with the flexibility to swap to fixed rate.

“ It’s a safety net that allows our clients to commit to a long-term alternatives plan and know that they have the ability to meet a capital call whenever it comes in without altering their overall investment portfolio or creating any unplanned tax consequences.”

President, multi-family office services organization

Keeping Cash Invested Over Time

A TriState Capital Bank securities-based line of credit (SBLOC) allows investors to establish borrowing capacity at the onset of a fund commitment, secured by non-retirement liquid assets. As capital calls occur, the line can be drawn on quickly to meet capital calls while continuously maintaining the balance until a liquidity event or paydown is desired.

Almost no aspect of the financial industry was left unaffected by COVID-19. The resulting hardships being faced by financial institutions, corporations, and middle market businesses alike have driven the financial industry to innovate and design new ways to strategize not only for the immediate future, but for the long-term financial health of their companies and clients.

The New Lending Trends

As we forge ahead through pandemic recovery, we’re seeing unexpected trends emerge in the marketplace. One of the most unlikely shifts we’ve seen in recent months has been the transition of revolving credit facilities from secured cash-flowbased to asset-based lines of credit (ABL). Though once thought of as typically an option for borrowers who found it difficult to qualify for a traditional bank loan or line of credit, companies experiencing operational challenges, or a way to take on more leverage in pursuit of acquisitions, ABLs have achieved a more mainstream consideration. Their popularity has only
been bolstered through the uncertainty that still affects the business sector. Having accommodative structures, ABLs have even become a more likely option for investment-grade borrowers. Structure aside, we see this trend gaining speed for other reasons as well.

Why the Shift?

The first reason we see is the fear of violating covenants. If a company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) falls below a certain level, they run the risk of breaking the terms of their cash-flow-based revolving line of credit. Because of this, many companies are taking a proactive stance by converting to asset-based lending revolvers sooner rather than later.

The second reason this trend is growing is the overall need for liquidity. ABLs typically provide greater liquidity because borrowing limits are based on margined collateral value instead of metrics like EBITDA or leverage rations, which are only used to determine creditworthiness, not borrowing limits, when it comes to ABLs.

Typically, ABL rates (i.e., the maximum percentage of the value of collateral a lender is willing to extend) are approximately 85% of the net orderly liquidation value of inventory, a methodology that provides a lot more liquidity. This is also why companies experiencing high growth and a need to fund expansion seek out ABLs.

More Sustainable Strategies

Seeing a back-and-forth shift between cash-flow-based funding and ABLs is not uncommon, especially when we consider the impact changing financial circumstances have on companies’

 preferences. But this time, we’re seeing that COVID-19 is pushing companies to choose ABL conversions proactively due to economic uncertainty and the loss of clear visibility into the future of their business.

Companies are using cautious foresight when it comes to covenant violations with cash-flow-based lending, and for good reason. Traditional methods of prediction just aren’t reliable in the wake of the pandemic. Without a clear picture of how sales will be affected, or whether they’ll be able to operate at all if their current facilities are closed, companies are opting for setting up better options for riding out an uncertain economic future by putting up assets as collateral.

The Future of ABLs

From middle-market companies to large corporate borrowers, increased ABL conversions are expected across the board, potentially having long-term effects on financial preferences. Historically, once a company is accustomed to the financial reporting conventions of ABLs, they usually find it to be a longer-lasting solution, especially with the increased liquidity ABLs provide.

The Situation

When a B2C health and wellness company based in New York City began to see massive growth acceleration over the course of 2020, they realized they needed to find a financing solution that could help them continue their rapid expansion. With the company having multiple loans across multiple big banks, a streamlined solution was in order – but no big bank could offer the consolidation they required.

Assessing the Fit

The company is a vitamin supplements distributor, selling exclusively online and directly to consumers through the largest online marketplace. After realizing they wouldn’t find the single solution they needed through any of the big banks, their broker referred them to TriState Capital. We began to assess the needs and goals of the company in early 2021. Not only were they a great fit for TriState Capital, but we saw where they were heading and knew we had the solutions to ensure they were ready to take on the exponential growth that was on the horizon.

Plan Development and Implementation

The first step in the process was to examine their existing loans. After determining a consolidation plan, the loan amount needed was $2.3M. This would allow them to not only meet the needs of their existing customer base but would also allow them to accommodate the product demand from new consumer demographics they’d only begun to reach. The plan wasn’t without urgency though. In order to stay ahead of the growth they were experiencing, the vitamin supplements distributor needed expansion financing from TriState Capital, fast. Not only were we able to provide the solution they needed, but we were also able to go from introduction to loan delivery within three months, including underwriting.

The TriState Capital Advantage

Committing to a single relationship rather than juggling the many relationships the vitamin supplements distributor had established was necessary, but it still required significant trust. Executives on their end were impressed by our nimbleness and our ability to deliver results quickly so they didn’t have to forego a bit of growth. Our philosophy of true partnership was one they’d not experienced before, but after seeing how dedicated our teams are to their success that initial referral proved to be priceless.

Solutions and Results

Where big banks failed to provide the solution needed, TriState Capital was able to deliver quickly, with an eye on the future. The vitamin supplements distributor now has the financing they need to move forward with their trajectory of growing from a $30M to a $50M company within 18 months.