In this installment of our series of executive interviews, Charlie Perer sits with Bianca Barredo to discuss MidCap Financial’s strategy, leadership, change in the ABL industry and state of the market, among other things.

Charlie Perer: Thank you for your time Bianca. To begin, can you please talk briefly about your background?  

Bianca Barredo: Thanks for having me. Well, I’m actually a second-generation lender, oddly enough. I remember my dad really loving his job and having longtime friends going back decades to his credit training program. It made a real impact on me.

I started my career in commercial banking and went through the traditional credit training program at Comerica. I got my MBA in finance & entrepreneurial studies and joined GE Capital’s Corporate Finance group where I did non-sponsor ABL and cash-flow lending. One of the main reasons that I joined MidCap Financial was I saw their approach to ABL addressed a real need in the market at a time when there was not as much competition.  I now run the West for MidCap Financial, which has been a career highlight as they have given me a platform to essentially build my own business.

Perer:  Do you think the large non-bank ABL space has become too crowded or is there room for new entrants? 

Barredo: Well, at MidCap Financial we have been doing non-bank ABL since 2008, so easy for me to say it is getting too crowded. I remember joining five years ago and there was only one other lender doing $50mm+ non-bank ABL deals. Right now, I can easily name five new direct lenders that I actively and consistently compete against. So yes, it is getting crowded. That said, I do think there is room as every time someone new enters the market it redefines the ABL box and expands the pie for everyone. For MidCap Financial, specifically, we are always trying to find white space and sub-products within ABL in response to more competition. Competition fuels the creativity and I expect more product expansion this next cycle.

Perer:  What is your strategy and how does is separate MidCap Financial from other well-funded competitors?

Barredo: Every deal is going to be both competitive and challenging in some respect so my strategy has been to find good companies with a reason to exist and strong enterprise value. We will structure creatively and very aggressively for those companies. When I have conviction in a credit, it’s very tough to compete against us out here given our flat structure coupled with the fact I execute my own deals.

I’m also an Angeleno through and through (USC undergrad and UCLA grad) and have been a lender in this market for 15+ years. That is why a significant number of folks in the deal community know to make me their first call. Not necessarily for an ABL, but to brainstorm on structuring ideas.

Perer:  Are the days of down-the-fairway ABL deals gone for non-banks given the bank-ABL competition?

Barredo: I definitely think so. Even through COVID we didn’t see bank ABLs abandoning the down-the-fairway deals. The spread differential is just so large and banks continue to aggressively price these in-the-box deals. If most of us non-banks price at L+400 on our low end, we have to offer something structurally compelling to make the 250+ bps premium worthwhile; if you want more yield, then you need to do even more.

Perer:  Do you face stiffer bank competition from Super Regionals or the nation’s biggest banks?

Barredo: Most definitely the Super Regionals. Absolutely no question. With much more frequency than to my direct non-bank competitors. I frequently lose deals to regional commercial banks offering ABL-light or low-levered cash flow than to traditional ABLs whether bank or non-bank. I think the lines between ABL, commercial banking and cash flow continue to blur.

Perer:  Do you think bank-ABL is fundamentally different today than say 10 or 20 years ago? Said differently, is the bank version of the product getting watered down and booking safer credits to comply with regulation?

Barredo: Regarding regulations, in my experience, when a bank wants to do a deal, they do the deal. Some of that is price, sure, but I think they have been operating in a certain regulatory environment for over a decade. Most bank-ABL groups now have a better understanding of how to navigate and know when to pick their spots on certain higher risk-rated credits. Further, those regulations have fundamentally shrunk the bank-ABL credit box and made the bank risk decisions much more binary. They either want to do the deal, or they don’t. If they do, they don’t price the deal to risk, they view it as an integrated product and the ABL is just one component of the overall income-generating relationship. When banks buy non-bank ABL platforms we see this happen: it integrates with the rest of the bank, risk box shrinks, and the spreads shrink. I don’t think this is talked about nearly enough.  

Perer:  Do you lose more sleep over pricing or structure, if you had to choose between the two?

Barredo: Oh goodness, what do I lose sleep over – most definitely structure, but probably in a different way than you may think. If you are winning a deal, then you did something unnatural. You had to, given how competitive it is out there. Sure, once in a blue moon you get your unicorn proprietary deal, but middle-market ABL is so efficient those opportunities are few and far between. When I win and close a deal, I fully realize that I am slightly overextended out-of-the-gate. So, I lose sleep over the structure of the loans I just closed and whether I have the adequate protections to monitor and react. Non-bank ABL is a tough business and you have to be very aware, to the point of paranoia, of adverse selection. If a Borrower exceeds expectations and overperforms, they refinance quickly and you make some sort of exit fee, if things go wrong, you are living with working out the credit. Downside is just so much greater.

Perer:  You are now at the upper echelons of the ABL industry.  How has the industry’s leadership changed since you started in ABL?  How have mentors played a role?

Barredo: Thank you for your kind words. No question that there is a generational shift occurring with Baby Boomer leadership starting to transition to the next crop of leaders. The passage of time does that, so that is nothing revolutionary.

I think the concept of advocates vs. mentorship is important. I had and continue to have advocates who were vested in my development and success. I use the word “advocate” because a mentor provides counsel and advice, an advocate fights for you – this needs to happen more, particularly for women and ethnic minorities. Along those same lines, though, that shift is including more gender and ethnic diversity. Change is a funny thing, though, it happens gradually, then suddenly. Maybe some of this feels like a longtime coming, but I think we are on the precipice of a rapid shift.

Perer:  How have the new industry leaders such as yourself brought change from a management perspective?

Barredo: The nice thing about our industry is that it is very results-oriented, which naturally allows for a meritocracy. I think people with all sorts of backgrounds employing a variety of strategies can be successful, if given the opportunity, of course. I do want to emphasize the importance of giving people the opportunity to succeed. The other side of that coin, though, is historically very little emphasis had been placed on ideal strategies and traits of a successful originator. I think this is very much changing as the ABL industry evolves.

The individualistic proverbial “rainmaker” operating as an independent deal contractor operating in their own silo battling with some organizational credit culture is just falling out of favor. What we are seeing more today are deal teams, industry specialization, credit-focused selling, front-end structuring, and less silos; put more simply, a solutions-oriented approach that blends deal execution and origination.       

Perer:  How do you recruit and train talent compared to how you were recruited and trained? 

Barredo: I am currently going through analyst recruiting for recent college grads and, similar to what I mentioned earlier, I value team players. As part of my process, I spend a fair amount of time understanding how they work in a team. I ask a lot of questions and solicit anecdotes about their team projects, how they resolve conflict, the roles they play in teams, their work styles, etc.

Just as importantly, and like I was saying earlier about meritocracies and providing people with opportunities, I and MidCap Financial are firm believers in a broader, more inclusive approach to hiring. There are three specific instances in my career where explicit diversity in hiring practices provided me with opportunities I probably wouldn’t have received otherwise. Entry-level positions like our analyst programs are really the best place to recruit people with different backgrounds to build-up and train.     

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

Barredo:  Similar to what GE did, I think we are going to see a prevalence of industry specialization. We have this a bit already in non-bank ABL with healthcare, retail and energy, but I see this as the next way for new entrants to compete. I suppose I worry in that I have been a generalist my whole career, so we will see how it plays out, but I already see signs of this.