Tied with Golden Thread: Stonebriar Aims for Well-Rounded Diversification
by Rita Garwood September/October 2015
Dave Fate and Paul Bossidy share the story of Stonebriar Commercial Finance and their plans to build the startup into a diversified commercial finance company. With the GE Capital divesture announced one week after Stonebriar’s launch, conditions in the underserved middle-market playing field are the best they have seen in 30 years.
While Dave Fate and Paul Bossidy have blazed two very distinct careers through the decades, one golden thread has tied their paths together: GE Capital. Through the years, they’ve watched the equipment finance industry shift from an arena flush with independent mid-market leasing companies in the 1980s and 1990s, to a game dominated by primarily one large institution in acquisition mode. Now, with the core components of GE Capital offered up on the auction block one week after the launch of their new startup, Stonebriar Commercial Finance, Fate and Bossidy say conditions in the middle-market playing field are the best they’ve seen in 30 years.
The Stonebriar Story
To truly unwind the intricately woven tale of Stonebriar, we must travel back to the late 1980s when the majority of Stonebriar’s senior management team first met at ITT Capital Finance, and Fate was hired for a senior risk position. “We came in and did what I call a complete ‘Control-Alt-Delete’ of the business,” Fate recalls. “We changed the marketing model, changed the business model, and we grew it to about a $1.9 billion business.”
Then the marketplace changed, and ITT decided to sell its finance company. “ITT was a great learning experience. We fixed the business, we grew it, we had a lot of success and were involved in the sale process,” Fate says. “The first time you get to do something like that, from my standpoint, is invigorating and very informative. It was a great opportunity to meet with a lot of investors.”
Two of those investors, GE and Transamerica, would go on to earn supporting roles in the story of Stonebriar. While the team eventually sold the ITT business to GE, Fate recalls an attraction to Transamerica: “It was the first time we’d been exposed to an insurance company. We really liked the type and quality of Transamerica’s capital. They understood risk versus return.”
Fate and several members of his team were on the phone with Transamerica’s chairman the day after ITT’s sale to GE closed, asking if he wanted to back their management team in a denovo startup. “Transamerica had an asset-based lending business in Chicago with the portfolio at the time of a little over $1 billion,” Fate says. “They thought equipment finance would be a very good plugin with many similarities and overlapping potential customers, and they were right. We started out with no assets day one; ten years later we were the second largest finance business Transamerica had at a little over $3 billion in assets.”
Change soon crept into the scene again when Dutch insurance company Aegon bought Transamerica. When Aegon announced its intention to sell the finance businesses, Fate and his team were once again charged with selling their business. The buyer, yet again, was GE Capital. This is where Bossidy comes in.
“That was my first exposure to Dave,” Bossidy recalls. “At GE capital, I was responsible for acquiring the equipment finance business that Dave and his team had built. It was very well put together. We tried to get Dave to come onboard with GE. We didn’t get him, but we did get some really good people and hundreds of new customers who brought us a really good book of business.”
“I didn’t want to become part of the big GE machine,” Fate says, “But we had a lot of laughs about selling the business again 10 years later to the same guys.”
Bossidy stuck it out with GE Capital, but AIG was the next stop for Fate. “We found a tremendous partner with AIG,” he says, recalling the first few years at AIG. “We had a great run with that business from October 2004 to September of 2008, when the whole world was hit by financial crises.”
AIG survived the crisis, but was forced to jettison many of its non-insurance businesses. Fate’s business, AIG Commercial Asset Finance, thrived through the crisis and was one of the last remaining non-insurance AIG businesses. When AIG finally determined to merge Commercial Asset Finance into its Private Placement Group, located in Houston, Fate and eight others left the company in the spring of 2014. Fate spent the next three months thinking about his next move. After witnessing the aftermath of the world financial crisis, he was able to pinpoint what would not be on his agenda. “I thought about what I didn’t want to do as much as what I did want to do,” he explains. “I wanted to stay out of a regulated lending environment. I was very focused on that.”
Underserved Marketplace Strategy
In mid-July, Fate and his team were introduced to a seasoned strategic advisor, Andy Salter, who had heard of Fate’s efforts and wanted to help with a connection to the right kind of capital. “Paul and Andy met at about the same time,” Fate recalls.
Bossidy, Fate, Salter and Steve White — another GE veteran — had an initial meeting that summer. “Everything really clicked,” Fate says. “That meeting formed the basis of a strategy to approach the marketplace and find the kind of capital that we wanted.”
The team chose a go-to-market strategy reminiscent of the AIG launch. “We stuck with what we knew,” Fate says. “Most of us grew up in GE or Transamerica and the early years of AIG where we were primarily single ‘B’ structured middle-market lenders. We were not chasing high quality bank credits. We played in that space right below where the banks would hit a wall on credit quality. Many companies competed for business in that space during those years, and what happened over the last 20 years? GE Capital bought the vast majority of those middle market leasing companies.”
Fate says he saw the writing on the wall when GE Capital appointed a CFO to replace the retiring CEO. “Paul and I thought that was just a very telling sign,” Fate says. “When I see a CFO put in charge of a company, I think one thing. They are getting ready to sell.”
In fact, this was one of the points his team emphasized in its investment thesis and pitch-book. “It was greatly underserved and there was a tremendous opportunity there,” Fate says.
Patient, Perpetual Capital
Next on the to-do list was locating “long-term, patient, perpetual capital,” which eliminated private equity investors. The team met with a number ofultra-high net worth individuals, insurance companies and large asset management firms. “We had a very detailed roadmap to show potential investors, which was very appealing to them. It was clear that this was not our first rodeo and we had a very successful track record to back it up,” Fate says.
After many meetings, the team weighed their options and ultimately chose a partner whose crown jewel is Security Benefit Corporation, a life insurance holding company with approximately $30 billion in total assets under management. “We’ve got a wonderful partner with patient, long-term capital, and a significant amount of it,” Bossidy says.
“The value of the life insurance company capital was very appealing,” Fate adds. “The fact that it is a private company and relatively free from the mass of the financial regulatory environment was very attractive to us.”
With funding in place, the team faced a difficult assignment. “Picking the name of a company is probably one of the hardest things I’ve ever had to do,” Fate says, explaining that after the team had some fun throwing ideas around, they decided to stick with “Stonebriar,” a name that paid homage to the company’s north Texas roots.
“In the North Dallas area, that name resonates everywhere.” Fate says. “It’s associated with first class properties in this area.” The origin of the name to the area is unknown, but Fate likes the image of strength and resilience associated with it.
Launching at the Right Time
With that, Stonebriar was ready to launch. “I’m really excited to be a part of a startup company,” says Bossidy. “It’s exciting. It’s thrilling, and a little scary some days but overall just a lot of fun.”
“It’s hard not to get excited,” Fate says. “Having done it a few times and having some success at it, you earn which people and functions you need; it’s something that most people don’t ever get a chance to experience in their careers.”
One week after Stonebriar launched, GE announced the divestiture of GE Capital. “We couldn’t have timed it any better,” Fate recalls. “With the sale of GE Capital there are really no major competitors left in the marketplace. As we look at our direct competitors in this space today, there are very few that come to mind.”
Stonebriar’s goal is to build a diversified commercial finance company — with all asset classes and industries in play — that caters to underserved single ‘B’ rated credits in the $5 million to $30 million range on one end, and longer-term large corporate deals in the $50 million to $200 million range on the other.
“We want to build, over time, a well-rounded, diverse business represented by many different companies and many different industries,” Bossidy says.
Fate says sectors that are under stress, like energy currently, present opportunities. “We like to catch what we call “fallen angels,” businesses that, for whatever reason, banks have begun to avoid, or sectors with a lot of noise around them, that still have good companies that are in need of capital,” he explains. “This allows us to get very high quality credits that typically wouldn’t be in our credit space, good structures and good returns.”
“We’re out there lending; many are not,” Bossidy says. “Another advantage we have in the current conditions is that the people we do see lending have a heavy appetite for loans and we’re strong in leasing and loans. Many of our clients are very interested in leasing.”
“We really don’t care whether the product is a lease or a loan as long as it fits our criteria,” Fate adds. “That’s the key. We treat all the transactions the same way. Whether they’re directly or indirectly originated, we have a process.” To illustrate this point, Fate points to the fact that while Stonebriar has looked at more than $3 billion in potential deals, the total it has funded and committed to date is approximately $280 million. “We’re very transactional in nature,” he says. “We’re being very picky and very cautious as you should in this space. The majority of our team started in the risk side of the business, which I think speaks volumes to why we always had success and a good track record. Everyone on our team understands risk versus return.”
Fate believes Stonebriar will fund approximately $300 million in business this year. “In our last years at AIG, we were generating approximately $1 billion a year in originations,” he says. “I think that’s the kind of size, scope and scale we are aiming for at Stonebriar, but volume is not our first priority. I just want to be smart about the deals we choose.”
Although Stonebriar has a seasoned team, it still faces many startup challenges. “We still have a number of things that we’d like to finish in this third quarter, like our website and moving into our permanent office space,” Fate says. “You have to get through start up mode before you can start adding more infrastructure.”
Assembling a Winning Lineup
Building out the team is one short-term goal. Fate says people have been reaching out, and Stonebriar has seen many opportunities to add individuals, or teams, who specialize in an industry or an asset class. “It makes a lot of sense to bring them on board,” he says, pointing to recently appointed EVP and senior managing director Michael Amalfitano. “We feel blessed and very fortunate to bring someone of his caliber, expertise and skill set on board to build our business aviation platform. That was not initially planned as a first year initiative. But when an opportunity like that presented itself, we seized it.”
Fate says Stonebriar has many other potential team-member irons in the fire. “We’ll be smart about which ones we’ll bring on board,” he says. “We have a lot of what I call ‘specialization expertise’ in-house.”
Another area Stonebriar has begun building out is its direct originations team. “I’ve told our parent company that you hire good quality direct marketing personnel when they become available,” Fate explains. “We’re going to see a few good ones become available from companies such as GE. We are looking for those types of people now.”
While no specific time frame has been set, Fate anticipates building out the North American side of the direct originations platform first. “Dave and I have always been in business where there was a good balance between the direct and the indirect origination channels and that’s what we foresee here as well,” Bossidy says. “Dave built a nice indirect team, and we’ll need strong direct originators as well. We’ll be firing on all cylinders.”
Setting a Target for Success
Once Stonebriar reaches full throttle, its team plans to aim high. Fate says the company’s long-term vision includes building a multi-billion dollar, best-in-class, diversified commercial finance company with a number of vertical or platform businesses that spring from it. “We feel like we have the people, the experience and the capital behind us to do that,” he says.
“We really have the opportunity to become the leading equipment finance solution for middle-market companies,” Bossidy adds. “With the options available now, we can fill that void very effectively and have competitive financing.”
Like their vision for Stonebriar, Fate and Bossidy have an optimistic opinion of the industry. “I love the business, always have,” Fate says. “That’s what prompted me to continue doing this and build another business from the ground up for the third time.”
“I just really fell in love with the industry,” Bossidy adds. “I like that it’s a profession to help other people with their goals, and to provide solutions to build their business. I’m glad I have this opportunity with Dave to build this company. It’s very exciting.”
“I feel very good about what the industry stands for and the people in it,” Fate says. “It’s just a great environment to be in. I’m a big proponent of the initiative to bring youth into the industry.” Fate plans to implement a program to hire and train entry level financial analysts when Stonebriar gets out of startup mode. “I want to get some young people into all the different functions within our business, and do what someone did for me when I was 21 years old and right out of school.”
Fate and Bossidy believe this is an exciting time to be in the industry. “The downsizing of GE is a monumental game changer within the equipment leasing world,” Fate says. “To have an institution of that size, scope and scale go away is a tremendous opportunity for Stonebriar. It’s the biggest event in the equipment finance marketplace that I’ve seen in my lifetime.”
“Our timing has been good here,” Bossidy agrees. He lists two major effects of the GE Capital divesture: First, companies that have partnered with GE will lose a source of equipment finance, so lots of good single ‘B’ companies will become immediate prospects for Stonebriar. Second, he points to the tremendous amount of talent at GE. “I think, over time, some of them will migrate out of GE and will become available in the market. That will give us a great opportunity to accelerate our growth and leverage those people.”
“It gives us talent, it gives us customers and it gives us market share,” Fate says of the ongoing gifts of the GE Capital divesture. “What more could you ask for?”
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