Lender with unique niche broadening its ambitions

A Carmel firm that lends exclusively to insurance agencies/brokers plans to diversify this summer, with its first loans to registered investment advisers.

Oak Street Funding LLC has made upward of 2,000 loans to insurance firms totaling more than $400 million since 2003.

"We think [the investment adviser business] could be potentially bigger," said Rick Dennen, founder and CEO of Oak Street Funding.

He ought to know, as the 63-employee Oak Street has been owned since 2010 by New York-based Angelo Gordon & Co., a privately held, registered investment adviser firm with $25 billion in assets.

Discussions already are under way with a handful of registered investment adviser firms, and it's likely that a couple of loans will be wrapped up by the end of June, he said.

Investment adviser firms are similar to insurance agencies to the extent they're often small companies whose tangible assets consist of little more than desks and computers. That sometimes scares away traditional banks when these firms come looking for money to expand, upgrade technology or buy other firms.

The upside is that they often Dennen have predictable cash flow streams from commissions from customers' insurance policies. Oak Street's loans are based on projected future cash flows.

"It comes down to people - how they've operated their businesses, how they treat their own employees," Dennen said.

Furthermore, Oak Street Funding said loan delinquencies are generally lower than those experienced by an average bank.

According to the Investment Adviser Association, the median investment advisory firm has eight employees, 100 accounts and 26 to 100 clients. There were 10,533 such firms operating in 2013 managing nearly $55 trillion.

Helping drive Oak Street's business on the insurance side, and perhaps applicable to the investment adviser industry, is a wave of baby boomer retirements. Some are selling their agencies to their children. Others are selling to agencies ambitious to grow.

Indeed, in August, Oak Street Funding launched a line of succession and recapitalization loans aimed at ownership transfer to relatives of an agency. Among takers was Dallas-based TexCap Concord Insurance Services, which wanted to fund the buyout of its majority owner and to restructure debt.

"We're seeing a lot of mergers and acquisitions. It seems to be increasing and it's a nationwide trend," said Carol Dulle, executive vice president of the Independent Insurance Agents of Indiana, who moved here a year ago from Missouri's independent agent group.

"A huge number of independent agency owners will be retiring within the next 10 years," she added.

Same goes in financial planning, said Juli Erhart-Graves, owner of Worley Erhart-Graves Financial Advisors in Indianapolis.

"This may be a valuable business venture only because one of the issues in the financial business is, advisers are older," Erhart-Graves said. "There's a lot of talk about succession-planning in the financial industry."

In fact, Erhart-Graves bought the firm in 2007 from owner Grace Worley. She was able to obtain traditional financing through PNC Bank, however.

Last month, Oak Street Funding secured an additional $100 million in capital from a consortium of banks led by BMO Harris Bank. That boosted one of its two main credit facilities from $55 million to $105 million.

The deal also will allow Oak Street Funding to boost its maximum loan amount from $10 million to $15 million.

In November, Oak Street reached a new deal with DZ Bank AG of Germany to increase its other major credit facility to $125 million.

The bigger lending capacity and addition of registered investment adviser lending is likely to result in a need for additional employees. Last year, the company boosted its head count about 35 percent.

"What we might be looking to add are specialized loan officers who've worked in that space," Dennen said of registered investment adviser firms.

Dennen was a certified public accountant for 10 years before launching Oak Street Funding. His idea for lending to insurance agencies was embraced by former sister company Oak Street Mortgage as a countercyclical hedge against down times in the mortgage market.

Dennen's insurance-lending division was kept separate from Oak Street Mortgage, and that was fortuitous. The mortgage operation that once employed 720 people went bankrupt following the housing downturn and economic collapse.

Oak Street Funding doesn't disclose revenue or profit, although Dennen said both increased substantially in 2013.