It was back in 2013 when I first met Albert Periu. He was a partner at a startup small business lender called Endurance Lending (we wrote about them here). That company was bought by Funding Circle later that year and became Funding Circle USA with Albert running capital markets. I have gotten to know him quite well over his years at Funding Circle and I was very curious when I heard at the end of 2016 that he had moved on from Funding Circle to start his own venture.
I reached out to him at the time and he was somewhat coy about his intentions. It was not until last month when I visited his office in San Francisco that I finally found out the full extent of what he was doing with his new venture called Neptune Financial or NepFin.
The Middle Market Needs Disrupting
Whereas Funding Circle focuses on small businesses needing loans of up to $500,000, NepFin will be covering a completely different segment of the business lending market, what is called the lower middle-market. Specifically those companies with revenue of $10 million to $100 million looking to borrow between $5 million and $60 million. I was surprised to learn that this was a somewhat underserved market.
I would have thought companies of such size would have plenty of options to borrow money. But because of Basil III (increased capital requirements), Dodd-Frank (additional compliance costs) and bank lending rules these medium-size companies are underserved. I thought banks would have provided a lot of the funding for these companies and that is true to some extent. But often they will not lend the full amount these businesses require.
Enter NepFin. They don’t have the same capital requirements as banks and they have a little more flexibility on their loan terms. And Albert can apply all the learnings from Funding Circle to this different but related market segment.
Together with his co-founder, Thomas Meister, formerly senior counsel at Funding Circle, Albert raised a $3 million seed round a year ago led by senior members of Third Point. He has built out an initial team and created all of their own tech from scratch. Today, they are announcing a $10 million Series A led by Sands Capital Ventures with participation from their existing investors. Sands Capital and Third Point are both companies with deep experience in the online lending space and will bring significant expertise along with their capital.
Here is what Albert said in the official press release:
This market represents such a significant driver of the American economy, but hasn’t seen many technological advances in a long time. With commercial banks leaving the market, mid-sized American companies see increasingly few options to fund their growth, and the options currently available to them lack efficiency and transparency into the process.
The initial loan product that NepFin is offering are term loans of between three and six years in length. Interest rates are floating and will be based on LIBOR plus 550 – 950bps with a LIBOR floor set at 1.25%. These are much lower risk loans than the typical small business loan and Albert expects losses to be well below 1%.
On the investor side NepFin has an initial $100 million SPV that will invest in these loans. NepFin plans to adopt a hybrid model of balance sheet and marketplace to fund their loans. As for who is investing today Albert would not disclose any of the names he has attracted but he did say they are some very well-known investors in the online lending space.
One of the most interesting things that Albert shared with me is their approach to data. They have hired a data science team to build out their data analytics infrastructure. Their initial product includes an online dashboard for borrowers and intermediaries to easily share, manage and track all the documentation related to an application.
They are also leveraging machine learning to help them not just analyze loans but also to help identify new potential customers. What was surprising to me is that this segment of the market is not very advanced when it comes to technology with many loans still being processed in a highly manual way.
My Take
There are 176,000 companies with revenues of between $10 million and $100 million according to NepFin’s own marketing deck. The middle market is a $1.4 trillion loan market so the opportunity is huge. And what is really interesting to me is that I know of no other fintech company attacking this space, at least in the US. It looks like the middle market is ripe for disruption.
Given his many years at Funding Circle, Albert knows what it takes to create an industry leading small business lender. He has the advantage of being able to create his tech from scratch which should help NepFin leapfrog over the competition.
Fintech companies are disrupting pretty much every area of finance. It was only a matter of time before large segments like this middle market attracted fintech lenders. NepFin may be the first fintech to focus on this market but I am sure they won’t be the last.
