Inside the Fintech & Private Credit Booms with Christian Faes

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Overview:

Christian Faes is the CEO of Faes & Co, an investment firm specializing in private credit, and the founder of F2 Finance and LendInvest, a publicly traded UK digital mortgage lender.

In this episode, we discuss Christian’s journey from law to entrepreneurship, the evolution of financial sector disruption, the rise of private credit, and the advantages of specialized lending. Additionally, Christian offers key insights for private credit investors and discusses the role of technology in enhancing niche lending markets.

Please enjoy our conversation with Christian Faes.

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Links:

The Investipal Podcast is produced by ⁠⁠www.investipal.co⁠⁠. Past guests include Peter Lazaroff, Douglas Boneparth, Jamie Hopkins, Tyrone Ross and many more.

Follow us on LinkedIn: www.linkedin.com/company/investipal⁠⁠ | ⁠⁠www.linkedin.com/in/cameronhowe/; Twitter: www.twitter.com/camhowe16 | www.twitter.com/investipal; Tiktok: www.tiktok.com/@camhowe16 | www.tiktok.com/@investipal; or Instagram: www.instagram.com/investipal/

Find Christian Faes at:

https://www.linkedin.com/in/christianfaes/

https://x.com/christianfaes?lang=en

https://www.faes.co/

https://www.f2yes.com/

https://www.lendinvest.com/

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Key Takeaways

  1. How Governments Can Support Innovation: The UK's proactive approach to encouraging FinTech innovation post-2008 financial crisis demonstrates the significant role of supportive government policies and regulatory frameworks in driving industry growth. This strategy has resulted in considerable investment, establishing the UK as a world leader in financial technology.
  2. Gradual Disruption of the Financial Sector: The transition from initial revolutionary expectations in FinTech to a more steady, evolutionary integration underscores the difficulties of displacing well-established financial incumbents. It also emphasizes the importance of technology in gradually enhancing and transforming traditional financial services.
  3. Increasing Interest in Private Credit: The surge in private credit interest is driven by significant shifts in the investment landscape, including a decrease in publicly listed companies and heightened banking regulations post-2008. These changes have opened opportunities for private lenders to provide more adaptable and efficient financing solutions, catering to borrowers not adequately served by traditional banks.
  4. Gaining Competitive Advantage through Technological Specialization: The effective integration of technology in specific lending markets, such as real estate bridging finance, exemplifies the competitive benefits of combining specialized knowledge with tech-enabled operations. This approach enables agile companies to meet specific customer needs more effectively than traditional banking institutions.
  5. Key Considerations for Private Credit Investment: When assessing private credit opportunities, investors and advisors should concentrate on diversification, the manager's experience and track record, and the institutional rigor of the funds. These factors are essential for making well-informed and strategic investment decisions in the private credit market, ensuring a diverse and resilient investment portfolio.

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Timestamps

00:00 The Journey from Lawyer to Lending Entrepreneur

02:05 The UK's Role in Fintech Innovation

06:25 The Rise of Private Credit

11:09 Increased Appetite for Private Credit

13:22 Banks Investing in Private Credit Funds

20:05 Advice for Investment Advisors on Private Credit

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Transcript

Cameron Howe

Hi everyone, welcome back to the Investipal podcast. We have on today Christian Faes. Christian is the CEO of Faes & Co, an investment firm focused on the private credit space. Christian himself has extensive experience in the lending world, having founded F2 Finance and LendInvest, a publicly traded UK digital mortgage lender. Christian, thanks for coming on today.

Christian Faes

Yeah, thanks for having me, Cameron. I'm looking forward to our discussion.

Cameron Howe

So I guess, you know, maybe to kick things off, you know, you've started several lending companies. I'm curious if you could give a little bit of background context on how you got into this space and, you know, especially on the UK side, how you ended up building up a pretty large publicly traded UK mortgage lender.

Christian Faes

Yeah, so I guess I always wanted to be an entrepreneur, but I started off my career as a lawyer. So I was a lawyer back in Australia where I grew up, studied law, was a lawyer there for a while. And I jumped around a bit. So I was a lawyer in Australia, then I moved to London. I was a lawyer for a little while. And then I went back to Australia and was involved, I started my own law firm, which is kind of the first business that I had. And with that business, I started acting for some small mortgage lenders. And that was kind of my first, I was doing real estate and property corporate finance law, but, I started acting for some small mortgage lenders and through that got a really good introduction to, to mortgage lending, you know, on, on the legal side, putting together the documentation and working through enforcements and kind of really being in the weeds with, with the asset class. and I guess over time kind of felt like being the lawyer, putting together the documentation and being on that side of the table was a lot less fun than being on the lending side. So I set up a lending business, which was very small at the time. But I was always keen to get back to London. So I moved back to London in 2008 and wanted to set up a mortgage lending business then there and arrived. Yeah, arrived. It was like the financial crisis was unfolding.

Cameron Howe

Good timing.

Christian Faes

Extremely naive, you know, didn't have any investors that didn't really have any direct lending experience in the UK. And so it was a, you know, it was an interesting time as an entrepreneur to be setting up that business. But, you know, I had I had the legal background in terms of, you know, seeing the industry, albeit in another jurisdiction, and, you know, went about building what what became LendInvest.

Cameron Howe

I always find the UK seems to be, people might not be aware of it, but they always seem to be at the forefront of a lot of fintechs. So digital mortgage lending, also like in the crowdfunding world, they were pioneers in that space. What do you think the UK has that the US market lacks in terms of innovation in the finance sector?

Christian Faes

Yeah, that's a really good question, actually. I think in many respects, it was a moment in time. So I think, you know, I was, I was a beneficiary of that moment in many respects. So we had set up an offline mortgage lending business 2008, sort of, you know, very slow start, started to build the business over time. And then about 2012, 2013, we saw the government started to become really supportive of FinTech. And they, their sort of thesis, I guess, was, you know, London is the home of capital markets or, you know, certainly one of the centers of capital markets. and so, you know, and, and post the financial crisis, you know, there was a need for financial services to evolve and it was kind of a very anti bank, kind of, you know, sentiment, I guess around, around the industry. And so there was a, there was a encouragement for, you know, startups to start with a blank sheet of paper and using technology to come in and disrupt financial services. And, and, you know, I think the UK government did a really good job of fostering that ecosystem and that sector in the UK. And like you say, they, they pioneered with the first crowdfunding legislation, which made it possible to do crowdfunding online, to raise equity for companies and also peer to peer with lending. And through that attracted a lot of investment and, you know, a lot of talent. And I think, you know, there was kind of a real momentum around that. And there still is, I mean, London, I think certainly still is a center of FinTech. There's a lot of investment and a really strong ecosystem system around the sector there in the UK, but I think there's other parts of the world as well that, you know, maybe caught up or certainly, you know, making big investments in the sector. But yeah, I think London was an early innovator and I think full credit to the government at the time.

Cameron Howe

And you think it's peered out a little bit since then?

Christian Faes

I think initially there was this feeling of revolution. There's these startups are going to come with a blank sheet of paper, they're going to totally disrupt banks and financial services and all the rest of it. And the banks are too slow and lazy and haven't got very good technology and everyone's going to eat their lunch. I think the reality of it is that it's pretty hard to eat a bank's lunch, you know, the deeply entrenched incumbents and have a lot of advantages that go with that. And, you know, a startup starting with a blank sheet of paper doesn't always, you know, get the traction and all the institutional sort of buy in and sort of is not able to scale and challenge the incumbents in the way that perhaps was initially perceived. So I think it's kind of more evolution now than revolution. And I think that's the reality of where FinTech is and in many respects, it's just kind of tech enabled financial services. That's very much how I think of it in the sense of, you know, no one would set up any business these days without having technology as a core part of the business that they're setting up. So, you know, if you're setting up a financial services business, it's understandable that technology would be a core part of it. So almost by virtue of that, every startup today in financial services is in some, some regards a FinTech.

Cameron Howe

So you took a lot of those learnings, moved over to the US to found Faes. I think very interesting, probably a little bit better timing than your 2008 launch. We're seeing a lot of interest in the private credit space now. I'm curious your thoughts on why the increased appetite for private credit.

Christian Faes

Yeah, so that's interesting. So I moved to the US. I mean, I think I do see some parallels between sort of, you know, when I moved here a couple of years ago, to set up this business in 2008. Clearly, it's not as dramatic as what 2008 was. But we have had a period where there's kind of disruption in the market, you know, interest rates have come up very quickly over a fairly short period of time. And I think that's caused some, you know, some some general disruption. In terms of like, to your question around private credit, I think that the reality is that the stock market really is just not what it's cracked up to be or not, you know, not not what it used to be, I think is the reality of it. So if you look at this multi decade, kind of trend where there's just less companies listed on the stock market now, and I think it's awesome stat, it's kind of like over 50 % of the companies since the 90s have left. the market and there's kind of like, so there's a lot less companies that are actually listed on the stock market. In addition to that, you have sort of the magnificent seven where, you know, there's a huge concentration of value in a very small handful of companies. And so actually by, you know, the opportunity to, to invest in the stock market is not quite the same as what it used to be in terms of the diversification of offering. If you're investing in an industry, you're getting sort of a very small exposure to, you know, a few companies. And even if you're investing across the whole of the market, there's just less companies to invest in. you know, look, I, I went through that. I listed a company on the London stock exchange. I've been through that entrepreneurial journey. And, I must say that, you know, you take a very entrepreneurial business and you put it in the listed world. It has a lot of bureaucracy and sort of, you know, institutional additional institutional rigor put around it, which in many respects is good, but also, you know, it's often a very difficult way to run a business. And so I can understand why perhaps less companies want to be listed. And then you've got private equity sort of buying a lot of companies, because there's other ways to realize value without kind of going through the IPO process and being a listed business. So I think that's kind of like a broad trend that maybe makes the stock market as a whole slightly less attractive. So that sort of plays into alternatives, I guess, more broadly than just private credit. Specifically with regards to private credit, I think, which is a subset of the alternatives world, is that post the financial crisis, you had banks really struggle. And we talk about that sort of moment of time when fintechs came in and sort of, you know, we're attracting a lot of capital and so on. And perhaps now if we play it through, it didn't fully eventuate to all the banks disappearing and this new breed of financial services businesses all sort of taking over. But, you know, post the financial crisis, banks have had bad books that they had to deal with, you know, lots of legacy loans that kind of weren't perhaps performing the way they wanted. They have had to deal with increased regulation and as a result of that increased capital requirements. So actually it's become more difficult for banks. to operate in many respects. And so I think there's certain parts of the market that they've clearly retreated from because they just can't compete. They don't want to compete. It's not efficient for them to compete. Also, I think there is that technology angle in terms of there's certain parts of the market where you just have to move quickly, provide a service to a customer that a bank's just not really that well set up to do. And so the first lending business that we're building here is F2 Finance, which our credit fund invests in the loans that...

Cameron Howe

Mm-hmm.

Christian Faes

…originated by that business. And that's focused on real estate bridging finance here in the US. And I think that's a good example of an opportunity where banks just don't really, you know, they don't interface with a customer and move very quickly to provide, you know, the sorts of finance that we do to borrowers and the borrowers need. And so I think, you know, private credit is really about filling that gap and really giving investors the opportunity to get diversification and to get a decent return. And in some respects, a less volatile return. I mean, depending on sort of where you're investing, but you know, there's certain parts of the private credit world that I'd argue are much less volatile than perhaps, you know, investing in the stock market. So I think we've got this kind of like these big trends that are going on that are playing into what we're seeing happen.

Cameron Howe

So just to rehash it, two market tailwinds on one end, the theme of companies staying private for longer. So on the investor side, less access to good investments, we'll call it. Your investment universe has shrunk quite significantly. And then on the debt side, the capital pools essentially have dried up. Those companies still need, or those...

Christian Faes

Thank you.

Yeah.

Cameron Howe

Lendees still need access to capital, so then entrants like yourself can come in to help service them.

Christian Faes

Exactly. Yeah. Well put. Yeah.

Cameron Howe

Okay, very interesting. And theme wise, do you think this is something that's sticking around for a while? Do you think private credit is here to stay? Or do you think, you know, like let's say Trump gets reelected, cuts regulations to the banks like he did last time. Do you see banks positioning themselves to try to come back into this world? Or do you think it's going to be relatively untouched and serviced by a lender like yourself?

Christian Faes

So I think there's probably a couple angles to that. I mean, one is just kind of the general setup. Like I was saying, there's some banks that just don't really have the technology or the reach or the desire to service like the type of customer that we deal with. Very entrepreneurial, fairly scrappy, property entrepreneur. They want to transact in a very quick way. A big bank is just not really set up to invest or to service that customer. They love it. They'll provide warehouse funding to groups like us, or they'll invest in the securitizations or whatever. So they like the asset class. They're just not really set up to originate it. In terms of the capital side of things, I think that whilst regulation might dissipate, there might be a trend to being less constraining on the banks. But I don't think we get to a point where there's a free for all for the banks. And actually, I just can't really see it. I mean, obviously it's a very volatile political situation where you go through living in the US. But we saw what happened with Silicon Valley Bank last year and a lot of the regional banks are still suffering from the fallout of that. And so I think there's more likely to be continued regulation in the banking world rather than less.

Cameron Howe

Mm-hmm.

Christian Faes

And so yeah, I think this is a trend that does continue and you know, you still have businesses that need funding and investors that are looking for alternative places to put their money and private credit is a neat option for that.

Cameron Howe

I wonder if there's a parallel there with, and correct me if I'm wrong, but I believe, you know, the likes of like funding circle in the UK, it was originally peer to peer. But I believe it moved more institutional where a lot of the other side of that, the capital pool became institutional.

Christian Faes

Yeah. Yeah. And that's exactly the trend. I mean, that's a really good point. And we did see that with the whole sort of fintech space where a lot of it was about sort of providing investments to sort of smaller retail investors. But actually the truth is that's, you know, servicing a retail customer.

Cameron Howe

So I wonder if there'd be like a similar theme where like the bank might not be directly providing the capital pool, but they're investing in as an LP, eventually in like a Faes fund.

Christian Faes

is still a fairly regulated place, you know, what sort of regulatory regime you come under. And so as you're trying to scale, you necessarily do institutionalize your business. And so, you know, we have a private credit fund for accredited investors. But we also have our first warehouse line being put in place and anticipate, you know, as we scale the business, we will get more institutional capital come into what we're doing. And like I said, I mean, I think banks do find the asset class interesting, particularly the one that I know very well, and you know, many parts of private credit. But it's, it's easier for them to outsource the origination that like the bank's competitive advantage is ultimately it's low cost of capital, you know, so that's something that we'll never be able to compete with in terms of, you know, raising deposits at the rates that they do. But they don't do particularly well at sort of building technology and operating sort of niche areas of the lending market. So it is a neat sort of combination for them to have the cheap capital and then they sort of plug that into and partner with originators that kind of are experts in their area and kind of service what is perceived, often perceived as kind of like niche and uninteresting to the banks in terms of being able to invest the resources to originate the asset class, but they're very interested in investing in it from a, you know, asset quality perspective.

Cameron Howe

So as it relates to Faes, and I know you were focused in somewhat of a niche around bridging finance, what are the typical criteria you're evaluating a company or a developer on?

Christian Faes

Yeah, so our product, just to explain it, is we're lending on a short-term basis to what I would describe as property entrepreneurs. Always corporates, so we're always lending to a corporate, but we will have backing of personal guarantees from the individuals that are involved with the corporate entity. And we're typically lending to a borrower that wants to buy a property, rehab it, replace the bathrooms, kitchens, tart it up, and sell it on. and do that in a pretty quick timeframe, usually six to 12 months in duration, sometimes even less can be very quick here in the US, it's such a liquid market. And so what we look at is there's a couple of angles to it. We look at the asset principally. So I think of it very much as an asset lens. So what's the property worth? We're only lending in the residential space. So typically sort of small single family residences. What's the value of the asset? How liquid is that market? And what's the sort of loan to value that we're prepared to go to against it? We'll go up to 80%, but across our book, we're quite conservative. So it's in the mid sixties is typically where we will lend to in terms of LTV. And then the other side of it is looking at the borrower. So we'll be specifically looking at who is, who are the people behind this, this corporate and, and, you know, What's their liquidity? What's their FICO scores? You know, we sort of look at it as if it was an individual land, even though we're not lending to them individually. And the other key thing is what's their experience? You know, have they done this before? And the perfect sort of borrower for us is one that does it five, 10 times a year. They operate in a certain area of the market. They know the local real estate agents. They know what the end buyer wants in terms of the product that they're going to rehab and sell. And so we can build up a very sticky customer base by being just a very easy finance partner for those borrowers. And I think what the result is, is, you know, it's a pretty sound and conservative asset class. You know, when you pull that all together, our average loan size is less than $400,000. So there's a lot of widgets. There's kind of a lot of loans that go into the pool.

Christian Faes

And I think, you know, all firstly in security, low LTVs, good quality borrowers, you know, it actually pays a better return than I think the correlated risk involved. And that's, you know, makes it an interesting investment opportunity all around.

Cameron Howe

And I guess how you're differentiated versus a typical private credit fund since there's relatively short term loans, does that increase the liquidity profile for LPs in the fund?

Christian Faes

It does. So we try and match the underlying liquidity with the investment coming into the fund. So we have an initial one year lock in and then it's 90 day liquidity. So you could give you you could be out within a year, you can give you sort of notice after nine months. And then there's sort of six to 12 month loans in the underlying asset class. And the other thing I think that slightly differentiates from some other you know, there's we're not the only private credit fund that does this, but I think it is a distinction worth pointing out. is that we are originating the loans ourselves. So we're very close to the credit, where I think some private credit funds perhaps, they're buying loans of originators. They're almost like acting as an intermediary to the bank and then sort of leveraging it up and so on. We're actually in the weeds. We're originating the loans. We're very close to the credit and the portfolio management on a very active basis, which again, I think slightly de-risks the opportunity for investors.

Cameron Howe

Okay, very interesting. And you know, I got, I try with a lot of RAs in the US and there seems to be a rising tide of alternatives. you know, we've had a few guests on actually who've talked quite extensively around it. for any investment advisors listening to this right now, what would your pitch be to them on getting access to private credit and how they should be evaluating that for their clients?

Christian Faes

Yeah, so that's a good question. I mean, I think it's private credit is whilst there's a lot of momentum behind it, it's kind of it is. you know, there's, there's a lot of reasons for that. And it makes sense, you know, you can, you can understand, but as we've talked about what those reasons are, I think, however, though, an investor or an advisor doesn't really need to look at it. Much different to how they would look at any other investment. So I think it's kind of, you know, I don't think it's such a great investment opportunity that investors should be putting all of their money into it. You know, it's kind of, I think the usual diversification principles apply. I think it's looking at an investor's goals from their investment portfolio and what they're trying to achieve. And then just looking at the underlying asset manager and do they have the experience in the sector? For us, we've been doing, I've personally been doing it almost 20 years, short-term mortgages. So I think it's experience in the asset class and is there institutional rigor around the fund? There's lots of... small private credit funds that kind of are doing niche things, but you know, are they doing it in an institutional way? And I think that's kind of you can uncover that by looking at who the auditor is and the administrator of the fund and the experience of the team involved with the fund. So I think it's kind of it's it's it's common sense prevails in many respects, but you know, just doing their diligence, you know, as they would any other investment.

Cameron Howe

Okay, very interesting. And maybe we'll keep a pin in it for now and I'd actually love to have you back on and talk more in depth about the industry overall. But if anyone's interested in learning more about Faes or even more about you, what's the best way they can access that information?

Christian Faes

Yeah, sure. So I'm pretty accessible. My email address is christian at faes.co. So F A E S dot C O. And you can go to our website faes.co/invest. It kind of all the information about our fund. Would love to hear from your listeners and really appreciate you having me on the show.

Cameron Howe

Of course, Christian, yeah, I think it's a very interesting space. And I think, you know, the one hesitation I always had with the private credit space was just the redemption periods. But the fact that, you know, at least as it relates to you, the short term redemption cycles, the access to liquidity, they have a very interesting opportunity.

Christian Faes

Yeah, it is. It is. Thank you very much.

Cameron Howe

Alright, Christian, we'll leave it there. We'll leave a link to the show notes for anyone interested as well. Thank you very much for coming on.

Christian Faes

Thanks. Talk soon.

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