The genesis of Hilco Diligence Services was an answer to a very simple question: How do we grow our professional services offering to better serve our clients?
The genesis of Hilco Diligence Services was an answer to a very simple question: How do we grow our professional services offering to better serve our clients? We sought a way to leverage our existing infrastructure and relationships to increase the services we provide, convert opportunities and solve additional problems. Field exam services were a natural adjacency to the valuation services we already provide. In the past, when clients called us to do an appraisal, they typically made a second call to have a field exam done. We wanted to give our clients the option to make just one phone call to get all of their diligence needs met.
In the past, when clients called us to do an appraisal, they typically made a second call to have a field exam done. We wanted to give our clients the option to make just one phone call to get all of their diligence needs met.
After a comprehensive buy-versus-build analysis, it became clear that the right answer was to build a best-in-class diligence services team rooted in the strong cultural foundation that already existed within Hilco Global. When the time came to find the appropriate person to lead the effort, I was honored and humbled when the search landed on me.
How Hilco and I came together is a story of two organizations and several individuals arriving at the same conclusion: There is room in the marketplace for a professional diligence services group grounded in asset-based field examination services. Consequently, we set out to build a platform that is scalable and flexible enough to serve clients in leading-edge, global asset-based transactions, as well as plain “vanilla” ABL opportunities.
Roots
As many ABL players know, Hilco’s roots are founded in the valuation and monetization of assets in healthy or distressed environments. Over the years, the business has grown into a diversified financial services firm.
I came to know Hilco as a client. The firm helped me navigate the collateral side of deals and helped my bank get challenging deals done. Hilco was a partner, not a vendor. My professional roots are in public accounting, but I have spent the majority of my career in commercial finance, working in lending and restructuring roles through my tenure at Fidelcor Business Credit, JPMorgan and its predecessors, AlixPartners, and my own firm, Jupiter Advisory. The relationship I now have with my fellow Hilco colleagues is the same as when I was a client — it’s a partnership. We work together to achieve our business goals and solve client problems.
Build, Not Buy
The plan early on was to build, not buy. The only way to ensure a new business has the same culture, the same energy and the same passion for delivering quality client services is to build it from the ground up. There is no magic or secret sauce. Field exam is about people — finding, hiring and then training the right people — a discipline that never ends. A field exam often gets confused with auditing, so there is a school of thought that auditors or CPAs will make good field examiners. This is not always the case. I am a CPA and have an audit background, and over the years I have successfully hired both CPAs and non-CPAs.
However, conducting audit procedures is just one aspect of field examination work. The rest includes understanding the underlying business, analyzing collateral performance, asking the right questions, evaluating the collateral and credit impact of all observations, and most importantly, being able to articulate all of that information concisely and clearly in the final product.
Conducting audit procedures is just one aspect of field examination work. The rest includes understanding the underlying business, analyzing collateral performance, asking the right questions, evaluating the collateral and credit impact of all observations, and most importantly, being able to articulate all of that information concisely and clearly in the final product.
This was my approach at Fidelcor Business Credit and Manufacturers Hanover Trust, a predecessor bank to JPMorgan Chase, where I built a field exam and collateral monitoring group. And this is the same approach I employ at Hilco. As such, many former and current field exam colleagues are highly respected and recognized members of the ABL community.
A Unique Position
Given Hilco’s unique structure and access to the global platform, we are able to differentiate from others in many respects. First, our field exam shop is embedded within an established appraisal group and is part of a multi-faceted financial services firm. We are able to serve ABLs, private equity groups and others with a comprehensive suite of valuation and field exam services across all asset classes. We employ former bankers, advisors, attorneys and other subject matter experts in relevant sectors and geographies, and tap into asset appraisal experience, industry specialists, proven liquidations teams and consultants that exist under the Hilco umbrella. We know asset values because we make the market.
Members of our global field exam team were lenders and deal people in prior lives. We sat in front of or were part of credit committees, we syndicated loans, and we negotiated with prospective borrowers. We understand how the field exam fits into the entire ABL process.
Synergies
Having access to inventory, machinery and equipment, real estate, receivables, and intellectual property experts at Hilco Valuation Services is an enormous benefit to our field exam process, whether we are engaged to perform a field exam alongside an appraisal or a standalone field exam. We are industry agnostic, yet we have access to expert resources, many of whom were hired directly from industries such as auto, metals, retail and technology. Together with our U.S.-based resources, Hilco Valuation Services’ offices in Europe and Asia allow us a more global reach. Particularly, we work with our partners in London to carry out field exam services in cross-border deals. In fact, our UK-based field exam team pre-dates our North American launch and has been servicing the UK and European community for several years now. As a result, we can offer expertise in collateral issues in a number of jurisdictions across the globe.
We also brought in a team that has significant specialty finance diligence experience — an area that augments our asset-based field exam services. Many of our clients have both ABL and specialty finance portfolios, including loans to small-ticket commercial finance companies or consumer finance investors. This fits in well and broadens our service capabilities in a meaningful way.
Guiding Philosophies
We know how to perform comprehensive field exams. We do more than check boxes. We ask the next question, and synthesize our findings and collateral issues into the borrowing base, provide structuring suggestions, and communicate with clients during field work so they can re-direct if they choose.
Guiding philosophies that permeate our business model include:
• 360-degree execution: perspective, approach, problem-solving, the next question
• Professionalism: communication and consensus building
• Objectivity: Ascertain the facts/truth, transparency
• Collaboration: with clients and between team members
Meeting Demand
We began hiring for our North American platform in early 2014 and continue to recruit. Today, we have teams based in New York, Chicago and Portland, OR, and with our London team, we are continuing our growth to meet demand across the U.S., Canada, the UK, the European continent and Australia, where we launched an appraisal platform in the third quarter of 2014.
Our client projects range from single lender regional deals to agented, syndicated transactions, and span a variety of industries, company types and sizes. Almost nothing we’ve done to date is plain “vanilla,” and we are sought out by clients structuring ABL deals that require creativity and a deep understanding of collateral performance. We serve as another pair of eyes and ears. Our goal is to be our clients’ partner, and as such, we operate as if we are an extension of their organizations. abfj
DOUG JUNG is managing director at Hilco Global.
STRENGTHENING THE FRONT LINE
The best way to explain why Hilco Global made the decision to build an asset-based field examination business, Hilco Diligence Services, is to review the history of field examinations over the past 25 years.
Having spent 25 years in and around ABL, field exam work has always been viewed as the team serving on the front line, acting as the eyes and ears of the deal team — credit, portfolio and new business. The role is to cull out the necessary collateral attributes to structure a company-specific borrowing base and identify any issues lenders must be aware of. To this day, the field exam process remains front and center in credit, underwriting and portfolio management processes, with its careful review of the expected and unexpected collateral attributes. This role remains vital as a necessary component of an ABL structure.
In the late 1980s, when I started my career in asset-based lending, very few outside firms performed field exams for a lender. A few independents were go-to resources, but few if any third-party firms provided nationwide coverage. At that time, bank and non-bank ABL lenders had internal field exam resources. There was a comfort level in having your own people go out and “kick the tires” — do the A/R stats, the shipping tests, check cash receipts, test count inventories, and other procedures of prospective and existing borrowers. In fact, external firms were viewed as outsiders that did not necessarily understand what ABL needed to know. (Similarly, third-party appraisals for inventory were not common, and when inventory was in the borrowing base, it was at a low advance rate; only machinery and equipment appraisals were common.)
As a field exam manager at Fidelcor Business Credit, my overriding objectives were to improve the quality of our internal staff to make sure our quarterly field exam schedule was completed in a timely way, and new business surveys were covered. In order to do that, I began recruiting people like myself with public accounting backgrounds and trained them with existing staff. I also started training and teaching regional CPA firms how to perform field exams, as I knew our internal resources could not possibly keep up with the schedule.
With the ensuing bank consolidations and reductions in force, many internal field exam groups were downsized, creating more opportunity for third-party field exam services, and over time the practice became more acceptable. And frankly, for new market entrants, it is more natural to build ABL businesses comprised of new business, credit and portfolio functions, as they are more functionally integrated in the day-to-day loan process than field exam.
Today the industry has morphed into an outsourcing model where many lenders do not have integrated field exam staff and it is “business as usual” to engage outside resources to perform this function on their behalf. Those lenders that have their own staff frequently employ third-party firms when their internal teams are fully deployed. Over the past 25 years, what was once unacceptable is now widely accepted in the marketplace.
BY DOUG JUNG
Doug Jung, recently appointed managing director at Hilco Global, talks about the launch of Hilco Diligence Services and provides insights into what motivated Hilco to make the decision to build a field exam services organization to complement its valuation services business.
View article in ABF Journal