Direct Lending: Expert commentary from Cortland

Think globally, act locally. It’s a popular slogan for many social initiatives, but it also fits the business profile of loan servicing and administration firms that are key to supporting the growth of alternative lenders.

Asset managers, debt originators and debt investors of all sizes are facing the dual challenges of tight financial regulations, with mandates for return and security that send them around the world. What enables those firms to execute on their mandate while following changing and complex rules are back-office firms that provide á la carte services or comprehensive programmes.

Maranon Capital is a prime example of what enabled investors can do. Based in Chicago, Maranon is an alternative investment management firm focused on private credit investments in mid-market companies.

Since 2008, Maranon has raised $1.5 billion of institutional capital across private funds and managed accounts and invested $1.8 billion in more than 100 portfolio companies. In just the last four months of 2015 Maranon closed debt financings including for companies in aviation information management, coatings and packaging, medical monitoring and speciality materials.

Varagon Capital Partners is another example. The firm was launched in June 2014 and just three months later first served as joint bookrunner, joint lead arranger, and documentation agent on a senior secured financing.

WHAT THEY HAVE IN COMMON?

Both lenders use Cortland Capital Market Services. “When we are an agent on a transaction, we use Cortland to help manage the agent relationship,” says Mike Parilla, Maranon’s chief financial officer. “They also provide separate back-office operations on funds, especially a leveraged fund. They help keep us compliant with the requirements of the debt facility.”

Cortland handles fund administration, syndicated bank loan services, loan servicing, securitisation services and back/middle-office support to investment managers, commercial lenders, real estate operators and others.

In line with the global/local approach, it has offices in New York, Chicago, Los Angeles, London and Nanjing. In October, the UK unit gained regulatory approval for loan agency, escrow services, cash management, and custody. A few weeks later Cortland formed a commercial partner- ship with Ipreo that combines its administrative agency services with Ipreo’s new loan trade settlement platform.

Tim Houghton, managing director and head of sales and business development at Cortland, describes why his firm’s services are so essential to lenders.

“The majority of loans to mid-market borrowers, especially those in designated credit levels, used to be made by banks or specialty finance companies. Since the financial crisis, banks are less willing to lend in some segments. The middle market is starved of credit, and into that vacuum have come funds. They have capital, but they must invest to build a back office,” he says.

That is where a firm like Cortland comes in. While the firm offers a broad array of services, most client firms start with just one or another specific operation, and then expand as their needs grow. “All of us have banking backgrounds,” says Beata Konopko, managing director and head of agency services. “We are their back office, an extension of their own team.”

She notes that Cortland was founded in 2008, not the most auspicious time for a financial services company to take its first steps. “We started at a time of uncertainly,” Konopko says, adding that the time kept the firm focused and disciplined.

Robby Bourgeois, head of finance and operations at Varagon, confirms the path: “Cortland was a flexible, responsible and efficient provider of agency services at my former employer. At Varagon I recommended Cortland as service provider for a broad set of back-office functions that I was confident they could deliver based on my previous experience with them.”

Lora Peloquin, managing director and enterprise market executive at Cortland, adds that there is more than just efficiency and compliance at stake. There is actually profitability in the mix. “In many cases clients have credit analysts doing the things that they come to us for. It just does not make sense to have a high-margin person doing low-margin jobs like that.”

That kind of addition by subtraction is not a GAAP principle, but it is real. “As we were able to hand-off duties from inside to outside, our in-house people were able to move to different duties,” says Maranon’s Parilla. It also adds both transparency and scrutiny.

“One of the main reasons we have gone with Cortland is because they are independent,” he adds. “We are trying to give investors more confidence through outside controls.”

Lenders and investors need flexibility without the regulatory burden, Houghton confirms. “Our operational audit is the SSAE16 Soc I Type II report, so we are not regulated per se, but are carefully controlled. That means a lot to LPs and investors.”

For Varagon, Cortland provides multiple services, including agency services. “I enjoy working with them because they hire smart people and are willing to be flexible. They don’t just run the numbers. They understand the needs of our investors and provide the customisation we require.”

Houghton recalls that when private lenders and investors expanded to fill the voids left by banks, “making loans was relatively easy. When the business evolved to lines of credit and revolving debt, they realised they needed more sophisticated accounting services, both domestic and international. That includes foreign exchange, cash management and unitranche in sectors as complex as energy, construction and project finance”.

Houghton adds: “In 2013 we added a team of successor agency services professionals, including Joanna Anderson, to serve the distressed and turnaround market as effectively as we were serving the performing and new origination market.”

That breadth helps carry relationships across companies. As with Bourgeois, Alan Kirshenbaum worked with Cortland at a previous firm, and has brought them along in his new role as chief operating officer and CFO at a start-up business in asset management. “Their role for me now is the same as it was before, agency services. I was referred to Cortland by a major financial company that does not provide agency services,” says Kirshenbaum.

In his time in the industry, Kirshenbaum, whose last role was as CFO at TPG Specialty Lending, says he has noticed a range of preferences for service providers. “Some lenders and investors want to develop big broad relationships among just a few service providers. Others want to diversify, not have all their eggs in one basket. I tend to be very relationship driven and prefer to consolidate. But that is only driven by a good job done over time.”

Kirshenbaum suggests that firms like Cortland, that have a full range of services but are not locked in to package programmes, have an advantage. “Over the last several years there has been a trend by lenders and investors to outsource more, particularly those in the middle market. But I can’t say that there is any clear trend of consolidated or diversified. I don’t think the mix has changed that much.”

“Thoughtful” is the word that Kirshenbaum uses to describe Cortland.

He adds: “They don’t just run the numbers and send them back to us. They take a step back and make sure that the numbers relate to the underlying credit agreement. They hire smart people. They are growing in a thoughtful way, starting small, adding and expanding services as they fit. We are a small company just starting, but we don’t get small-client treatment. I am looking forward to growing with them.”

This article is sponsored by Cortland Capital Market Services. It originally appeared in PDI's Direct Lending Special supplement, published in February 2016.