Specialty Finance Unveiled: Exploring untapped potential in this booming lending market to expand client exposure beyond direct lending strategies

Launched in 2019, Coromandel Capital offers flexible, non-dilutive, growth-oriented asset-based lending solutions to businesses in specialty finance, fintech, and technology-enabled sectors that generate predictable, recurring revenue. As one of the few non-bank lenders specializing in small-ticket debt capital solutions, Coromandel Capital and similar entities—willing to provide financings below $20 million—are vital players for capital-intensive specialty lenders. The firm's financings typically range from $5 million to $50 million and have a three-year term.

Co-Founder and Managing Partner Rob McGregor and I engaged in discussions on a variety of topics, including:

- The role of debt financing in empowering startups and other early-stage and growing companies, particularly in relation to venture capital funding.

- The risks associated with double pledging assets, including explanations thereof, especially in light of the recent collapse of First Brands.

- The utilization of debt as a strategic tool for business growth.

- The hidden costs related to venture debt.

- The untapped potential inherent in the specialty finance sector.

- The significance of diligent monitoring within lending relationships.

- Strategies for growing as a private lender while safeguarding and maintaining capital.

- Navigating the crowded and competitive private, non-bank lending industry to establish enduring relationships with borrowers and investors.

Among the characteristics Coromandel seeks in ideal borrower partners are:

- Balance-sheet intensive businesses (those originating or acquiring assets, tangible or intangible) that would otherwise finance these assets through equity.

- Companies that have raised equity from Seed to Series B (or similar stages within their lifecycle), possess adequate capitalization to support operational expenses and maintain sufficient 'runway,' with a portion of this equity potentially serving as a contribution (also known as "haircut capital," "first loss capital," or "overcollateralization") for Coromandel's credit facility.

- Subject matter experts and/or executives who are trailblazers with deep industry roots, a robust track record, and a validated business model.

- Companies operating within sizable markets and differentiating themselves through cost-effective customer acquisition strategies, as well as firms that have identified an untapped or "greenfield" opportunity to address underserved or unserved markets.

Key Takeaways for RIAs:

• RIAs have primarily used direct lending to gain private credit exposure, and this conversation delves into the opportunity offered by asset-based lending as a diversifying and complementary strategy for client portfolios.
• RIAs seeking to diversify in growing areas of private credit, such as asset-backed and asset-based strategies, can benefit from understanding how the fund manager underwrites, structures, and monitors their underlying credit exposures.
• Asset-based lending as a non-dilutive financing solution for growing specialty finance, tech-enabled lending businesses, and other growing firms in sectors generating predictable, recurring revenues, is an essential tool for strategic growth.
• Diligent monitoring and assessment of asset-backed loans are crucial in mitigating risks associated with double pledging, as evidenced by the recent First Brands collapse.
• The specialty finance sector harbors untapped potential that will only grow as more lending migrates away from banks, requiring RIAs to develop an in-depth understanding of risk management and strategic growth methodologies being employed by these alternative fund managers providing debt financing.
• Maintaining a competitive edge in the private lending landscape, even in emerging and exciting areas such as asset-based lending and asset-backed finance, requires building enduring relationships with borrowers while preserving capital for fund LPs.
• Venture debt, while a viable option for some startups, carries hidden costs that must be critically evaluated in the context of overall business strategy and capital structure.
• A thorough understanding of the unique dynamics of asset-based finance and asset-based lending strategies is essential for lenders, borrowers, and fund allocators as they navigate the complexities of this evolving market, where alternative investment and non-bank lending industry experts predict significant growth in the years ahead.

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