In an interview that takes in a few concepts of modern and traditional finance, we talk to a financial business created in 2011 which says it is part of the expanding field of non-bank finance.

After interest rates rose sharply from their pandemic floor about three years ago, and then started to ease again recently, the moves put the market for non-bank credit in focus. 

Since the global financial crisis of 2008-09, alternatives to traditional banking and sources of capital for companies and individuals have been expanding. 

New fintech channels and even questions about traditional fractional reserve banking have fuelled new ways of financing companies. 

Fasanara Capital, founded in 2011 and headquartered in London’s Mayfair district, argues that it taps into financial innovation, combined with age-old verities about the need for diversification. It works with more than 140 fintechs and platforms which originate loans and receivables for borrowers, and Fasanara buys packages of these debt contracts, usually with an average maturity of no more than three months. (Such a short period reduces sensitivity to rate changes.) 

The firm, which oversees about $4.2 billion of capital, as of Q3 2024, wants to more than double that amount. Investors include institutions such as pension funds and insurance companies, as well as a smaller segment of family offices. So far, capital for Fasanara has tended to come from large institutions. In a new development, Fasanara is offering its strategies to wealth managers, knowing that they seek more diversified returns.

This news service recently spoke to Francesco Filia, CEO and founder of Fasanara. Prior to this, Filia was head of EMEA Mid-Caps and the Principal Investors Group, Global Markets & Investment Banking at Bank of America Merrill Lynch, and previously worked at JP Morgan from 1997 to 2000.

“It [this form of finance] is widely dispersed among business sectors and geographies; concentration risk is avoided through thousands of loans; [there is] zero leverage so robust when markets are volatile,” he said.

Packages of debt
The firm’s main lending strategies buy loans of small and medium-sized enterprises, consumers, real estate firms and football clubs. Filia argues that this strategy gives an uncorrelated source of return; risks can be easily monitored and calculated by keeping a close eye on concentration, leverage and duration. Durations are short, only about three months at most for receivables factoring. (According to one online definition, factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable, such as invoices to a third party, aka a factor, at a discount.)

Default rates of SMEs, even during the financial crisis of 2008, were around 4 per cent, so this is a robust asset class, with defaults of 2 per cent in normal conditions, Filia said. There is considerable diversification in the exposures, and the short duration seriously limits exposure to fluctuations in interest rates. It offers mid-teen percentage returns, he said.

Filia is something of a thought leader as well as a financial services figure. With his colleague Daniele Guerini, he has published a recent book, The Future of Finance: The Rising Tide of Fintech Lending and the Platform Economy. The book delves into how digital lending and fintech affect business and consumer finance.

It's getting narrow around here
A structural issue is that banks have been pulling out of credit in the small and medium-sized enterprise areas, preferring to do larger ticket sizes, given that their capital has been constrained by regulations and shareholders’ desire to reduce risk exposure post-2008.

Fractional reserve banking (FRB) is not the last word in banking, Filia argued. (FRB is a system in which only a fraction of bank deposits are required to be available for withdrawal. These banks would, without central banks adding as lenders of last resort, be vulnerable to devastating bank runs.)

In particular, Filia said, the fractional reserve model of contemporary banking has proven increasingly difficult for small and medium-sized borrowers. After regulators have tightened capital requirements on banks, they have cut their offerings.

Platforms are filling the gap in such financing, with what could be called “narrow banking,” Filia said.

“In most European countries, employment is based in SMEs, not in large companies. It is incredible how large banks have abandoned this [SME] market,” he said. 

“A `narrow bank’ can be defined as the system of banking under which a bank places its funds in risk-free assets with [the] maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets,” Filia said. 

Narrow banking is big business, although total financial assets of the non-bank financial institution sector contracted 5.5 per cent in 2022 from 2021 to $217.9 trillion, mainly reflecting valuation losses in mark-to-market asset portfolios, in particular in investment funds. The relative share of total global financial assets held by the NBFI sector fell to 47.2 per cent (source: Financial Stability Board, 23 October 2023).

Asset-backed
WealthBriefing asked Filia about the type of debt that Fasanara handles.

The debt is a form of asset-backed lending: such as being linked to receivables, credit card payments and others. Receivables – money owed for products and services contracted for – is a big market resulting from developments such as online retail (Amazon, etc), he said. 

Fasanara has two strategies: Receivables, and consumer loans. On receivables, it has a 10-year strategy track record, with all months showing positive returns. It targts returns, gross, in dollars, of 9 to 12 per cent. On the consumer loans side, the track record is five years, also with no negative months, targeting 12 to 15 per cent.

A different beast
This form of credit is different from standard forms of private credit, he said. 

“Private credit has been saturated by direct lending, especially in the US. With other forms, such as asset-based lending, it is much more recently in demand.” Filia said. 

For some time, much private credit was popular because it tends to be a floating-rate market; it was attractive when rates were almost, or at, zero, because there was a bit of a yield spread, he said. 

The fintech-linked debt class is relatively new, given the rise of tech-driven lending/financing. Examples include LendingClub in the US.

Fasanara has a very scalable business model, said Filia. It can expand by more than double to $10 billion in AuM before the business model would have to be changed, he said.

Most of Fasanara’s exposures are in the US and Europe; there is also some exposure to Southeast Asia, Latin America and the Middle East.

Filia concluded by saying that European firms need to wise up to new forms of finance: “European businesses need to expand their horizons in terms of their financial partners and how they seek to raise capital. There are more sources of finance available today than ever before.”