Page 10 - TACC 2023 Program

10 HOUSTON BUSINESS JOURNAL FEBRUARY 24 - MARCH 2, 2023 FEBRUARY 24 - MARCH 2, 2023 HOUSTON BUSINESS JOURNAL 11

19th ANNUAL ACG CAPITAL CONNECTION SPONSORED CONTENT SPONSORED CONTENT 19th ANNUAL ACG CAPITAL CONNECTION

Fact or Fiction: The truth about Asset Based Lending By S. Scott Simmons, Senior Vice President and Business 3 Ways technology can give asset managers a competitive edge Victoria E. Langley, Senior
Content Writer, Ontra
Development Officer, Asset Based Lending, Bank of Texas

Given the volatility of the last two funds, instead of manual, time-consuming tasks. enabled teams to work remotely effectively.
Asset Based Lending, or ABL, is a method of providing consumer behavior, large swings in certain commodity growth strategies of acquiring competitors, developing
Cloud solutions also support firms’ goals of becoming
flexible financing for commercial borrowers through a prices, and a general contraction in economic activity. new product lines, pursuing new geographic markets, etc. years, asset managers are looking While searching for technology solutions, asset managers more resilient and agile in the face of unprecedented events.
to either retain or gain a competitive
focus on the borrower’s working capital assets. Where It’s an appealing option when you consider our post- These situations often have higher-leverage characteristics edge based on what they believe will can review when and where automation is available and The past two and a half years have proven that firms must
conventional commercial lending typically prioritizes cash pandemic world. We have a general contraction in economic and complex capital structures. ABL is also used to support be lasting changes in the market. To whether they can use it to achieve further efficiencies. For be ready for anything. Adopting advanced technology and
flow first and collateral coverage second, ABL flips the script, activity in an inflationary environment with recovering global leveraged buyouts and dividend recapitalizations. that end, private equity managers example, contract automation can save in-house lawyers’ cloud-based solutions helps firms enhance their operational
underwriting the collateral first. supply chain problems, large swings in certain commodity are focused on appealing to new and deal professionals’ time when handling high-volume, resiliency.
Since it’s hyper-focused on collateral, ABL is substantially prices, and a radically altered consumer behavior. What it’s not
By S. Scott Simmons, Senior Vice President and Business Development Officer, Asset Based investors, raising funds to increase routine contracts.
Lending, Bank of Texas less sensitive to traditional cash flow metrics. CEOs and CFOs are more willing than ever to trade the Asset based lending was once used exclusively in times Victoria E. Langley, assets under management, and Finally, firms should prioritize advanced technology Outsourcing
elevated collateral reporting requirements that come with of distress, turnaround and restructure, which earned it a Senior Content Writer,
For asset managers, insourcing every single task can be
How does ABL work? an ABL structure for the increased operating flexibility. less-than-positive reputation. Ontra enhancing returns for their investors. solutions to tackle the large quantities of data they’re costly and inefficient. Instead, firms can benefit from coupling
Larger asset managers are
generating. Technology is the only way to become equipped
The heart of an ABL structure is For these reasons, ABL is often referred to as a situational ABL has come a long way since then and today, it’s more
prioritizing new distribution
a revolving line of credit with two lender. We tend to partner in two situations: a matter of choice and strategy, providing flexibility and channels and building new products, including direct-to- to develop effective data management and analytics — an advanced technology with outsourcing services.
Partnering with a third-party provider, such as an alternative
operational priority for many firms, according to BNY Mellon’s
key features: In transition. Companies that are facing challenges in their maximizing capital in certain situations. consumer products. Additionally, managers of all sizes have research study, Asset Management: Transformation Is legal services provider, can cut costs. It might cost less to have
• Dynamic availability based on industry, pursuing a turnaround or looking to restructure ABL gets more traction with companies that are trying begun to focus on winning the retail investors coming into Already Here. external resources handle certain tasks instead of paying in-
a closely-monitored borrowing often look to ABL for its flexibility. These companies are to execute on some sort of growth strategy rather than the private markets. Firms with the ability to gather, sort, and analyze data can house legal or business professionals.
base often transitioning from a conventional/cash flow lending companies focused on just sustaining.
These priorities are in conjunction with the overall goals
Better yet, outsourcing high-volume, repetitive tasks frees
• And cash dominion (a treasury structure and may have defaulted on covenants. The cost of asset based lending is about the same of introducing new efficiencies and cutting costs. Given the drive investment performance, restructure and rationalize up employees’ time. Business and legal professionals have
product offerings, reduce operating model costs, and use
By S. Scott Simmons, account structure that requires Weaker operating performance may be tied to cyclical as conventional credit, but there are some additional
Senior Vice President and the borrower’s incoming cash be pressures or exposure to commodity values that have administrative requirements for borrowers. many intersecting goals, asset managers need the right tools digital tools to connect with investors. more opportunities to focus on the firm’s core strategies,
Business Development and service providers. They can’t do everything on their own. such as fundraising, identifying deal targets, and increasing
Officer, Asset Based aggregated into a single account swung in an unfavorable direction. For companies with The way we do business is by taking a close focus on The cloud value for investors.
Lending, Bank of Texas that the lender can control). good assets, ABL can be a viable refinancing option, and collateral values, which change frequently and require a
We take a hard look at the can, in some cases, provide greater access to capital with higher level of reporting from our borrowers. Leverage these tools to gain a competitive advantage Some asset managers have been skeptical of the cloud Depending on their business goals, firms can consider
liquidation value of the collateral, combined with the cash more flexibility in terms of covenants and performance in the private markets for years, but they have begun to recognize the advantages outsourcing some aspects of fund administration, accounting,
of moving from dedicated servers to the cloud, especially
tax, compliance, legal services, contract management,
dominion arrangement, to create a mutually beneficial, risk- expectations. Advanced technology & automation as cloud service providers achieve security certifications and investor relations, information technology, human resources,
reduced relationship, because the bank cannot lend more Pursuing growth. Businesses looking to grow capital S. Scott Simmons is a 25-year veteran of the ABL community and manages Asset managers of all sizes must pay close attention to SOC 2 compliance. benefits, payroll, training, ßor insurance.
than what it would recover in a liquidation and incoming often look to ABL as a source of senior financing. ABL can Bank of Texas’ business development efforts throughout the Texas market. their tech stack. Firms can improve efficiency, reduce costs, BNY Mellon found 96% of respondents currently use cloud Outsourcing also helps firms use technology solutions
funds are swept daily. structure a solution for borrowers that are focusing on top- Bank of Texas is an entity of BOK Financial, a $48 billion regional financial and develop new abilities by adopting technology solutions computing technologies, and 88% plan to develop their cloud that would be too heavy of a lift on their own. Partnering
It’s an appealing option when you factor in the current line growth versus bottom-line profitability. services company. for various business functions, including operations, human
ambiguity of operating in a post-pandemic environment, The ABL team works with sponsor-owned (private equity/ resources, finance, legal, investor relations, and dealmaking. computing in the next few years. Respondents ranked cloud with an outside vendor can give an asset manager access
to the expertise they need to improve their technology and
computing as the single most important technology right
characterized by disrupted supply chains, radically altered family office/investor group) borrowers who typically employ For back- and middle-office processes, technology now. security infrastructure and data management. This will be a
solutions let employees handle a higher volume of tasks Firms realized (or confirmed) the value of the cloud during popular theme moving forward, as BNY Mellon found 97%
without hiring more people, which in turn supports the firm’s the COVID-19 pandemic when they couldn’t rely on manual of respondents were considering exploring or expanding
ability to scale. processes taking place in the office. Suddenly, firms had to outsourcing for data management infrastructure and 78%
Private Company M&A Trends for 2023 Philip Dunlap, Partner in Balch & Bingham’s Houston office functions. Employees can instead focus on developing new support a distributed workforce. Cloud-based technologies were considering outsourcing for data operations.
The right tech can also reduce time spent on non-core
products, building relationships with investors, and raising and the right communication and collaboration solutions
As interest rates increased in the Less Guaranteed Money issues typically arose well after definitive documents
second half of 2022 to levels not After several years of earnouts decreasing (both in had been traded and negotiated close to a “final” form.
seen in over a decade, certain quantity and dollar value), as economic uncertainty has Diligence issues that would have been worked through Property Taxes, Inflation, and You: What Rising Costs Mean for Your Tax Bill Caitlin Flynt, Marketing Coordinator,
trends in deal-making began emerged, earnouts have once again become prevalent. in a better economic environment have now been used Tax Advisors Group LLC
to appear. With continued Buyers have attempted to mitigate their risk by pushing as reasons for buyers to stop the negotiations or re-
uncertainty over higher interest for larger contingent payments while sellers seem to be trade deals. When it comes to paying taxes, no utilize third-party appraisers to calculate property values. that Tax Advisors Group even has “a few clients that did
rates and fear of economic accepting the fact that if they want to get a deal done In 2023, sellers (and their advisors) should be aware one likes to be surprised. However, With the United States currently experiencing historically not have any change in their taxable fixed assets from 2021
downturn, those trends may right now, they will have to agree to some portion of the of this risk and put greater effort on the front end of Texas businesses may be in for a bit high rates of inflation, we are seeing an increase in the index to 2022, but because of the third-party appraiser’s higher
Philip Dunlap, Partner continue in 2023. purchase price being deferred and contingent. addressing potentially risky areas such as environmental, of sticker shock this tax season. The factors used by these third-party appraisers across the index factors for 2022, their market value was higher than
in Balch & Bingham’s One unique aspect to this latest push for earnouts employment and benefits matters. By dealing with enormous rise in property taxes board, with some showing a significantly higher increase the year before.”
Houston office
More RWI Please! is that parties are utilizing a variety of metrics, rather these issues up front, sellers should be able to work across Texas over the past decade than in previous years. For many taxpaying businesses, opening that envelope
While Reps and Warranties than just EBITDA or net income. Both sides seem to though those risks with buyers. has been well documented and Discussing these rising costs, Tax Advisors Group’s Senior from the central appraisal district with their properties’
Insurance (RWI) has been widely be flexible in the structure of the earnout (sometimes discussed in both local and national Director of BPP Consulting Chad Wallace said, “When using taxable value for this year may be shocking. However, those
accepted in M&A transactions for over a decade, the using customer retention or even revenue as the metric) No More Non-Competes? Caitlin Flynt, Marketing news, but that doesn’t make the these higher trend factors, we are seeing some values values are not set in stone. Through a process of appeals,
availability of policies for smaller deals has increased. because they realize that with higher interest rates and Although this has not been a trend yet, with the Coordinator, Tax huge numbers coming from the becoming higher than they were in the previous year.” taxpayers have the option to make a case for the fair market
Advisors Group LLC
As a result, more deals are utilizing RWI (including negative economic signals, everyone needs to readjust FTC’s announcement that it may ban non-competes for county central appraisal districts He went on to note, “Index tables are very high this year value of their assets in order to reduce their taxable liability
some structured as non-recourse deals). As economic expectations for post-closing performance of the employees, deal makers should be aware of the rulings sting any less. Much of the property compared to prior years, adding that “trend factors are instead of relying on the tax assessor’s – or in this case,
uncertainty increases, both buyers and sellers are business. Some buyers have even required the sellers or and how this can affect certain deal terms. Any bans on tax discussion in the pop culture around 20% higher than prior years.” the county appraisal district’s third-party assessors’ –
looking to RWI to provide more certainty in their post- owners to be employed upon the final measurement of non-competes will not likely apply to sellers/owners, but sphere has revolved around Texas homeowners and their According to Mr. Wallace, “The inflation increases from depreciation tables. By looking closely at market dynamics
closing operations. the earnout or risk forfeiting their portion of the earnout. they would affect whether a buyer can enforce restrictive residential properties – but what about business properties prior years have caused the appraisers to raise the index by area and property type to gauge what fair market value
Buyers seem to appreciate knowing that they can covenants against the employees of the target business. and the companies that own them? factors used to bring a fixed asset to what they consider the actually is and considering individual property factors such
collect on a claim if they have RWI. Sellers are placing Diligence Kills Deals With the expected macro-economic struggles in 2023, In Texas, companies must pay property taxes on all ‘replacement cost new’ prior to applying their depreciation as age or condition, consultants are able to determine what
a higher value on increased cash at closing (rather than The old cliché that “time kills deals” should probably it is easy to project that deals may be more difficult to tangible personal property that is used to produce income factor.” These inflation-driven increases in index factors a true and fair value would be if one to sell that property on
funds in escrow) and the certainty of holding or investing be revised to “diligence kills deals”. In the latter half of close this year. However, by looking at the trends of late in the state. Tangible personal property refers to assets directly impact the values assessed for Texas taxpayers. today’s market, potentially saving taxpayers thousands of
their proceeds without fear of post-closing claims. When 2022, a trend arose where buyers became increasingly 2022, buyers, sellers and their advisors can find ways to such as furniture, fixtures, inventory, equipment, vehicles, “This has caused their starting value prior to depreciation dollars or more.
both sides know there is market risk that could affect concerned with diligence issues much later in the mitigate (or reallocate) risks. If both sides will be flexible and more – essentially, if your business owns it and it’s in to be higher than what a property owner paid for an asset, It’s a simple fact: nobody wants to pay higher taxes each
post-closing operations, both sides look for certainty. transaction process. on deal structure and then show a willingness to work the state of Texas, they’re going to tax you on it. These and this can cause an asset to be valued higher than what year. By being aware of all the factors affecting your tax
Because of this, there has been an increase in the On a number of deals, operational issues with the target through potential road blocks, parties should be able to business personal property taxes are administered by the it was assessed for in the prior year.” liability such as inflation, rising property values, and higher
number of deals where buyer and seller are willing to business that had been disclosed and discussed early in continue to pursue and close deals in 2023. county central appraisal districts, which are responsible for This is important to note for businesses with property index factors, as well as working with a trusted team of
split the costs of RWI. the due diligence process suddenly became “hot button” assessing the value of properties and collecting taxes on in the state of Texas because it means that assets may be consultants and advisors, tax savings are not only possible
issues as interest rates increased, the stock market them each year. While many counties handle the assessment valued at higher than what they were originally paid for under – they’re achievable.
declined and general uncertainty prevailed. These process in-house with their own staff of assessors, others the third-party appraiser’s tables. In fact, Chad Wallace said