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January 23, 2018

Monsters of the Midway

Link to article here.

Chicago is the best lower-and-middle market asset-based lending (ABL) city in the country. There has never been more ABL talent across different firms than in the city of Chicago, and the surrounding communities, including Cleveland and Detroit, that comprise the Great Lakes region. It has been 10 years since Bank of America bought LaSalle Bank to become one of key the market leaders in Chicago and the greater Midwest. That merger was a hallmark event that changed the Chicago market for the better by inspiring teams of professionals inside and outside of LaSalle to join or start new firms. The saying goes: it takes 10 years to become an overnight success…the result is that 10 years later the Monsters of the Midway are back and competing nationally. It’s no longer about Chicago and the Midwest, it’s about national expansion.

The Chicago Bears initially got that nickname in the 1940s based on their ferocious defense, and then resurrected it in the 1980s when they won the Super Bowl. This also happens to be when many of today’s current leaders cut their teeth in the ABL industry. Chicago is also one of the few markets in the country with as many privately held banks that manage at least $1 billion in assets, because market consolidation by Bank of America, Chase and BMO left few buyers willing to pay an outsized premium. Many of these would-be acquisition targets instead became the hunter, or grew organically via smart hires.
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Chicago’s market has transformed in the decade since commercial banking was dominated by LaSalle Bank (now part of Bank of America) and Bank One (now part of JPMorgan Chase). At the time, Chicago was dominated by three main banks: Bank of America, Chase and BMO Harris. That made it difficult to see the smaller firms taking market share. But that is in fact exactly what happened. MB Financial, Wintrust Financial, CIBC/Private Bank and First Midwest, among others, hired talent and grew at the expense of the market leaders. Firms such as PNC should also be mentioned; although it’s based in Pittsburgh, PNC is heavily focused on Chicago. It should also be said the big three of Chase, Bank of America and BMO still control the market, but no longer dominate it like they did 10 years ago.

The dramatic market-share changes are correlated to the strength of relationships and a key principle of the lending business – people sell loans, institutions don’t. LaSalle may have been the market leader due to its size, which at its peak amounted to $70 billion in assets and 150 branches. But by no means was it the only lender. The LaSalle acquisition changed the Midwest and country for the better as it created what is now a strong group of mid-market bank and non-bank ABLs in Chicago and surrounding Great Lakes region. There is not enough space in this article to give mention to the many firms and professionals in the Midwest that were positively affected because, as it turns out, competition is good.

Three hundred or so miles to the east lies Cleveland, with KeyBank and Huntington/FirstMerit; and in Detroit there is Citizens, Chemical and Comerica. The good folks in Public Square in Cleveland fight the same fight as the folks in Chicago, and they know a thing or two about monitoring collateral. No other market in the country has so many regional and national lending powerhouses that know the lay of the land, know how to compete, and know how to withstand a market downturn.

Competition is arguably so good that many of these banks are taking the show national. MB Financial and CIBC/Private Bank are the first bank-affiliated ABLs that come to mind, as these teams were essentially spin-offs of LaSalle. Both are national in scope. Their core teams go back 20 years and their national expansion has been demonstrably successful. Encina comes to mind in the non-bank world, as its partnership with Oaktree has made it competitive on a national scale. Each of these firms’ ABLs groups just happen to be run by LaSalle alumni.

This is by no means about LaSalle, as the Chicago banking market is too big and filled with too many strong firms. Banks such as First Midwest and Wintrust have become regional powerhouses. First Midwest recently acquired Standard, and Wintrust is a holding company that owns close to 30 community banks. Local firm Byline Bank deserves mention, as does the Cincinnati-based Fifth Third Bank – which has developed a strong Chicago presence. New entrants on the non-bank ABL side – such as Monroe Capital, which recently established an ABL group, and Stonegate – are poised to take market share as each have their sights set nationally.

Between 1980 and 2008, firms such as Heller, Congress, CIT, GE Capital, and Foothill, along with smaller ABL shops like Finova, completed the non-bank landscape and helped to stretch the bounds of the ABL revolution in lending. While national in scope, many of the executives were alumni of the big Chicago banks. Chicago may be dominated by big banks, but over time many executives migrated to non-bank lenders given that the lending climate in the Midwest is heavy focused on the middle market and prone to cycles.

Middle-market lending is Chicago, as its economy is mostly energized by its sheer number of privately-held mid-sized businesses. Combine the number of middle-market companies with the fact that ABL lending in the Midwest is not for the faint of heart, and it’s brutally difficult competing for rust belt clients. To play in this market, you had to learn to lend in a cyclical environment populated with thousands of small manufacturers and suppliers serving a few major industries.

These boom and bust cycles produced battle-tested experienced lenders who don’t get rattled. That is one of the reasons these firms know how to effectively manage risk. The professionals running these firms learned to successfully lend across several market cycles and consolidation periods, while many of their clients got squeezed. Most regions do not face such concentrated industry and cyclical risk, and more often than not banks are viewed as cheap equity, which is the worst kind. Amateurs need not apply to this market.

To our knowledge, the original version of Super G’s product (an airball term loan subordinated to a revolver) was first started decades ago in the Midwest as a structured over-advance. Here at Super G we like to think we re-established the airball market, but those guys invented and perfected it. We are just here when a bank or non-bank ABL chooses not to finance the airball. Any respectable ABL knows when and how to make a judgement call, or whether to bring in a firm such as Super G.

It should be no surprise that these Midwest firms have their sights set on the New York City, Los Angeles and Texas markets. New York City may hold the designation of being a global financial center, but Chicago and the greater Midwest holds the designation for being the best lending market in the country. No other market has so many super regional competitors that can be traced back to one seminal event. The LaSalle sale to Bank of America closed on October 1, 2007. Like I said, it was 10 years to an overnight success.

We all need to work on our offense because the Monsters of the Midway are coming to a new market near you and they play to win.

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