Faes & Co: What we’re building

I’m excited to be launching Faes & Co. Based out of the US, our new firm will focus on building and investing in technology-enabled direct lending businesses, alongside our own private credit fund.

I’ve learnt a lot from the long journey of building LendInvest, and in recent years investing in various fintech lenders, helping build Onate and the Fintech Founders group; and I’m looking forward to rolling this experience into our new firm as we build out our first US-focussed lender F2 Finance, and launch the Faes & Co Income Fund.

As a firm we are going to build a team internally (and externally through a network of trusted partners) that are experts in identifying market opportunities, credit underwriting, raising capital, funds management and building businesses. Over time, we want to attract the best founders under our umbrella to help build best-in-breed finance businesses.

Building a successful lending company has unique challenges. It can be hard to create a competitive product, develop economically viable distribution channels, and build sound underwriting models and processes. However, one of the hardest challenges of all, is attracting the right lending capital.

We believe that we have a playbook and a business model that will be a winning combination.

Lessons learnt

I personally have learnt a hell of a lot from the experience of building LendInvest, from starting in 2008 with not much more than a vague idea for the business, through to its IPO on the London Stock Exchange in 2021 - it was quite the journey. We made a lot of mistakes along the way, but when we did, we always iterated and just kept building.

Through that constant process of innovation, we built one of the largest non-bank mortgage lenders in the UK, and I would claim, one of the most innovative finance companies out there. LendInvest now manages billions of pounds of capital for some of the largest investors in the world from J.P. Morgan, to PIMCO, to Barclays, to HSBC and the list goes on. We have also built a whole range of funding structures for investors, from a listed retail bond programme, our own public rated securitizations, an online platform for sophisticated investors through to a funds management platform out of Luxembourg. The diversification of funding built significant resilience around LendInvest’s business.

Over the last decade, I have also been a relatively active angel investor in different lending startups. Through this experience, I would see founders make the same mistakes and deal with the same challenges we did in building LendInvest.

Another business I have been really involved with building is Onate in Ireland. Starting from scratch as the Covid pandemic was starting, it has gone on to become the largest bridging finance lender in Ireland, and it was profitable from year 1. Providing finance in a modern and agile way, with a startup mindset and appropriate guardrails in place, has been a real winner. In many respects, this experience has provided a template for our new firm and how we want to build and invest in businesses.

A lot of stuff to get right

Whilst there isn’t exactly a secret formula to building a successful lending company, I believe there is definitely a playbook. You have a lot of stuff that you have to get right. Then, if you get all of it right, you need to be able to force a transformation of the business from a scrappy startup’ to one that is built for institutional capital.

However, the absolute key challenge in the early days is really all about finding the right capital for the business to lend. As a lending business, capital is your ‘stock in trade’. If you don’t have capital to lend, then you’re like a shop with nothing to sell. Even more critical, is that you need capital that is flexible enough to allow you to iterate and build your product, and that is priced appropriately so that you can attract the right profile of borrower - and leave a margin for the business at the end of the day. Then comes institutional capital, which will help you really drive down your cost of capital and drive better margins and scale.

Too often you see a startup lender raise the wrong type of capital at the start of the journey. Capital that has unrealistic valuation expectations attached to it and that drives the wrong metrics for the business. The end result would be far better for 99% of fintech founders if they bootstrapped their businesses and focused on building the business on non-dilutive lending capital.

Technology

Technology can obviously move the needle when it comes to building technology and building a new financial services business. However, one of the key things is to be very specific with your focus on what exactly it is you are building, and constantly be asking how technology will (a) provide a true competitive advantage; and/or (b) drive huge operational efficiencies in due course. You can’t build technology just for the sake of it. There is simply no value in doing so.

The reality is that most ‘fintech’ businesses are more ‘fin’ than ‘tech’; ultimately, it's a matter of getting all of it right as a package. It is critical to have a ‘technology mindset’ and build a business that operates in a modern and agile way. Technology is a part of this, whether that’s having world-class off-the-shelf systems or building proprietary technology.

The opportunity in fintech

The original excitement around fintech was that there was an opportunity to take on the big banks, which had been painted as the 'bad guys' in the aftermath of the financial crisis. Governments around the world enacted significant new regulations to prevent another global meltdown, which created significant constraints and challenges for traditional banks. Banks were left with no real budget nor focus for innovation and technology, leaving many customers underserved or continuing to be frustrated with archaic ways of doing things.

This created an opportunity for innovative startups to come to financial services with a blank sheet of paper and VC’s poured huge amounts of capital into the sector. The 'great unbundling' of financial services was underway, with new fintech startups picking off the various products and services provided by the big banks, and providing these in a more modern way. But a decade and a half later, we've all learned that eating a bank's lunch is very hard.

However, despite the amount of investment that has been poured into fintech, there still remain vast parts of the financial services landscape that provide customers with a woefully backward experience. We must still be in the early days of where this transformation goes.

When I think of fintech, I don’t think of the hyped-up unicorn chasing VC nonsense, I think of the new breed of entrepreneur that is grinding away, trying to build a finance business from the ground up. They are rethinking an area of finance, coming from the perspective of starting with a blank sheet of paper - unencumbered by the legacy issues of traditional financial services providers. That’s the stuff that excites us.

What we’re building

As a firm we are going to find areas of finance that continue to provide customers with a woeful experience; and we’re going to build technology-enabled, modern and agile businesses around these opportunities.

Building these businesses alongside our own private credit fund will solve the key challenge of lending capital from day one. As an asset manager investing in asset-backed loans, you can’t get a closer nexus to the underlying loans and to mitigate risk, than being an owner of the origination platform itself. As such, we will be able to provide investors the opportunity to achieve regular income and a superior risk-adjusted return.

Over time, our group will look like a conglomerate of direct lending businesses, with a growing funds franchise providing investors with great returns year after year.

I’m convinced that this unique business model will provide a powerful combination. As with all startups, it will take years to build out to scale, but that’s what we’re going to do.

Christian Faes