Having come up through the ranks at Credit Suisse and Goldman Sachs in the late 1980s and early 1990s — working at the commercial mortgage-backed securities desk of the latter — Nino Fanlo, CFO of SoFi, is no stranger to New York’s financial district.
Since he relocated to San Francisco, first as treasurer of Wells Fargo and then as a partner at private equity giant KKR, a lot has changed on Wall Street. Perhaps that explains why so many bankers are willing to relocate and take a pay cut to work for SoFi, which Fanlo joined in 2012.
“If you walk through the office, it doesn’t feel like a financial firm,” he says. “It feels like Wall Street did in the 1980s. It’s a much younger crew. It’s fun.
“We get a lot of inquiries from people in traditional finance jobs. It does involve a pay cut, but often we are able to convince people that you can make a third of what you were making and still build your career for the better.”
SoFi started out connecting university students with alumni, creating what it calls a “community-driven marketplace” where students can refinance their college loans — saving an average of almost $12,000 — with capital provided by lending alumni.
It’s now moving into the mortgage and consumer loans business. As it has grown, so has its investor base, with banks, hedge funds and insurance companies all getting involved alongside college alumni with spare cash. But to continue growing, it needs the capital markets proper.
“For the online and peer-to-peer lending markets to grow you have to expand to fund in markets where capital is provided at a lower cost,” says Fanlo. “You need to get investors informed about your product — it’s necessary for us to serve the type of customer we want.”
SoFi lends in the low to mid-single-digit range. But the peer-to-peer sector in general funds in high cost markets, with rates in the high single-digit and double-digit range.
Institutional investors — who generally invest in securities, rather than the whole loan pools SoFi sells to its other investors — are key to maintaining the firm’s competitive rates. That’s why SoFi needs to make sure it’s a bit more sensitive when it brings its third securitization in November.
One investor, Western Asset Management Company, came in with an “early and aggressive” bid for SoFi’s last deal in July, a $250m ABS run by Morgan Stanley and Goldman Sachs. In taking that bid, SoFi left some investors feeling a bit left out. One would-be buyer promised “unpleasant feedback” at the firm’s next roadshow.
One of the reasons for the delay that Fanlo says allowed Wamco to take the lead in that deal was a U-turn by Standard & Poor’s. Having said two months earlier that peer-to-peer securitizations were not ready for public ratings, the agency went ahead and rated SoFi’s deal. The lack of a presale report suggests the decision was somewhat last-minute.
Fanlo says he has learned from that experience and will endeavour to avoid any surprises this time around, which should help rebuild some bridges with the precious institutional buyers he says SoFi is trying to attract.
“There were whole elements [of our last deal] that were new,” he says. “It was new for S&P to work with us, it was a new syndicate. You have to explain carefully to people what is going on. It will definitely be a more regular deal next time, which is how institutional investors want it. We want to make it simple, easy, and traditional.”
Curb your enthusiasm
The key will be in convincing people that a disruptive company like SoFi can offer a traditional securitization product. But while SoFi may be rocking the boat, it’s not exactly a mutiny yet.
“Just like Uber or Airbnb in the taxi or hospitality industries, we are a fraction of the banking market,” says Fanlo. “We’re at 30%-40% quarter-on-quarter growth now, but the industry could grow for a decade and still be a fraction of the banking market.
“That growth will happen, for several reasons. First, the entire environment for product delivery is overwhelmingly online now. Secondly, the regulatory environment makes space for more customer-centric firms like us. Thirdly, the technological elements of our credit modelling, and our light infrastructure, allow us to create more offerings without the problems of legacy technology application.
“Sallie Mae will do three times as many student loans this year — but with about seven times as many people.”