When Guy Fuchs was named president and chief operating officer of Wells Fargo Capital Finance in April, the industry took note. Capital Finance, part of the Wells Fargo Wholesale group, is a major player and trendsetter in the asset-based lending market, and Fuchs is a well-respected industry mainstay with 25 years of experience. Henry Jordan, chairman and chief executive officer of Capital Finance, said Fuchs’ appointment would serve to enhance the company’s efforts for “continued growth in helping our customers succeed financially.” Against a background of double-digit growth in 2014, Jordan sets the bar high.

We sat down with Fuchs and his newly appointed leadership team to discuss what’s in store for one of the country’s leading banks, the challenges they expect to face in their new roles, where their growth potential lies and their plans for the first 90 days.

Fuchs, a 14-year Capital Finance veteran, announced his new leadership team in June, charging them with the oversight of three newly aligned core groups comprising 14 business divisions. The groups are Corporate Finance under Kurt Marsden, the Industries Group under Steve Macko and Global Capital Solutions under Scott Diehl. The Corporate Finance Group includes Business Finance, Capital Finance UK, Junior Capital, Syndicated Finance and Retail Finance. The Industries Group includes Technology Finance, Specialty Finance, Lender Finance and Flatiron Capital. The Global Services Group includes Supply Chain Finance, Receivables Securitization and Commercial Services.

“My new position presented a good opportunity to think about our existing structure and how we might better align our businesses to meet our goals,” says Fuchs. “It made sense to realign complementary products within the respective business groups and put them under this new leadership team. The new alignment gives us better ability to support the needs of our customers, domestically and globally, while also supporting our plan for continued growth.” Referring to the deep bench strength of his new leadership team, Fuchs adds, “We’re fortunate to be able to put their extensive knowledge, significant industry experience and lengthy tenure at Wells Fargo to work for our customers.”

The new structure was set up to provide a more efficient go-to-market strategy, in line with Capital Finance’s five and ten year plans, and gives the company broader market coverage. The company’s customer base is predominantly in the U.S., UK and Canada, but many have global operations. “As our customers become more global, we follow them and strive to meet their needs as best we can.”

Capital Finance has grown substantially over the last three years, with significant advances in the UK and Europe through the 2012 acquisition of Burdale Financial Limited, which rebranded as Wells Fargo Capital Finance UK last October. “The Burdale acquisition gave us the ability to better support the global needs of our domestic customers and also to originate business for customers domiciled in the UK and Europe. Since its acquisition this business has more than doubled in size, and we have added products beyond traditional ABL,” reports Fuchs.

New Structure Focuses on Growth

We asked the Capital Finance leaders for a brief assessment of the growth potential they envision for the remainder of 2015 into 2016. For a mature business with a large market share, growth can be a challenge, but Capital Finance believes their opportunity lies in several areas: their international capabilities; specialty products such as technology, healthcare and the various supply chain product offerings as well as the ability to package financial solutions using all the products that span Wells Fargo’s Wholesale Banking Group. “Our size is a huge positive for us,” emphasizes Fuchs. “One of our advantages at Capital Finance is that we can deliver the entire bank and offer one-stop shopping, no matter where they are in their life cycle. We let the customer choose which option is the best fit.”

“As part of this reorganization, we have taken complementary products that previously weren’t grouped together and bundled them into one reporting structure to better serve our customers,” informs Scott Diehl, a 31-year veteran of the company. “Most of our division managers were already working together at various times, so it made sense to bring them together officially.”

The realignment will help expand international markets by bringing together various pools of expertise. “In order to lend in certain European jurisdictions, you need the appropriate regulatory approvals,” cites Kurt Marsden, a 23-year veteran of Wells Fargo Capital Finance. “Within our EMEA operations, we have the necessary licenses, so we partner with those teams to provide cross-border lending solutions to our customers. Capital Finance UK gives us a doorway to the rest of the world.”

Though Wells Fargo enjoys an excellent reputation in the UK and Canada, the company must accept its perception as a foreign bank to its non-U.S. customers. “For some prospective customers, that can create hesitation, especially if we are new in their market and don’t have history with them,” admits Marsden. “The UK has an active market with plenty of options for borrowers, including the main UK banks, other U.S. banks as well as European competitors. It’s imperative to hire team members who know the cultures of our international markets, and we rely on our UK team to guide us.”

Specialty Products with a Focus

The business divisions of Capital Finance offer specialty products that complement the company’s core ABL offerings while addressing customer demand or serving untapped markets. The Technology Finance division provides a good example. “We have been lending to software companies for more than 20 years and pioneered the practice of senior secured lending tied to recurring revenue streams,” notes Steve Macko, a 17-year employee. A native Californian, Macko was there when Capital Finance opened its San Francisco office in 1999. He was among the first to recognize the opportunity to offer a senior secured product to the tech market in Northern California.

“At the time, software companies were mostly operating under a traditional revenue model of license and maintenance,” remembers Macko. “They had license fees that were billed upfront plus maintenance fees that were billed and collected over time. We focused on that maintenance revenue, the value of this revenue and how to lend against the future recurring revenue stream. The key driver is the recurring revenue stream: We look at historical renewal rates, the stickiness of the customer base and the mission-critical nature of the software solution. These days tech companies are converting from a historical license and maintenance model to SaaS (software as a service), and lenders are adapting to that shift.”

“The Junior Capital division offers another product that came about because of a desire to satisfy our customers’ needs,” relates Fuchs. “This group typically lends either deeper into traditional ABL asset classes and/or to a different asset class and takes advantage of unique market opportunities. They provide secured debt but lend against less tangible assets such as intellectual property or a trade name.”

“Junior Capital looks at more unusual asset classes and finds a way to lend a little deeper,” adds Marsden, who oversees this group. “This product demands a premium relative to a traditional asset-based facility, and it can be synergistic. For example, if we partner a Junior Capital solution with a Retail Finance facility, we can provide greater value to our customer and differentiate ourselves in a positive manner.”

Healthcare is a hot topic these days, and the Capital Finance team is excited about the opportunity to help support healthcare companies as they navigate the challenges in that sector. There are several economic factors at play in the healthcare industry. These include the high level of spending in the U.S., continued investments in patient care — especially in technology — and increasing regulatory requirements. It is an industry that is becoming increasingly complicated for lenders.

“Not only have past legislation and general healthcare reform left a lot of uncertainty around reimbursement rates but also the industry has become more data-driven,” says Macko, whose group includes Healthcare Finance. “The ability to harness, analyze and utilize that data requires a huge investment in technology. When you add the increased competition amongst providers and industry consolidation, it’s easy to see that this industry will keep healthcare lenders on their toes. Healthcare providers who are investing in such a way as to take costs out of the system and improve the efficiency of patient care are going to be the winners. As a lender, we know not to have knee-jerk reactions to the changes; we are patient and well-poised to work through potentially difficult times with our clients.”

The Receivables Securitization Group falls into Global Capital Solutions under Diehl’s leadership. “It’s a supplemental form of liquidity that is complementary to cash-flow structures provided by larger banks such as Wells Fargo,” says Diehl. “Because our objective is to find new, better ways to lend money to the corporate market as a whole, this form of financing serves companies that probably wouldn’t be considered an asset-based prospect for financing. We look at the receivables, figure out how we can create a borrowing formula against them and find a way to provide a credit facility that is good for the client and good for us. It’s a great business for Capital Finance and Wells Fargo as a whole.”

Supply Chain Finance has three products with global applications and has realized international growth — particularly in Europe and Latin America — via their Channel Finance product. This product works with technology manufacturers to provide extended terms for their key distributors and value-added resellers (VAR). Diehl elaborates, “When a distributor or VAR buys products directly from the manufacturer, payment terms are likely to be 30 days, even though they often wait 60 to 90 days before they receive payment from their customers. To solve this cash-flow challenge, we work with the manufacturers to buy their receivables from the distributors and VARs while simultaneously extending their payment terms, typically using ABL advance rates to support the extra trade credit.”

Supplier Finance, another Supply Chain Finance product, is designed to meet demand from Wells Fargo’s key corporate customers who manage their balance sheets for increased working capital. Diehl notes “Our customer for this product is typically a large manufacturer, distributor or retailer that has strong credit ratings, ample bank credit facilities and desires to manage its balance sheet to create additional liquidity by extending payment terms with their suppliers,” notes Diehl. “This is not always synonymous with the suppliers’ objectives. We bridge the gap between the objectives of the buyer and supplier by paying the supplier within days at a negotiated price, well in advance of the 60 to 90+ days it would take for the buyer to pay the invoice. The result is a win for all: The buyer can generate millions of dollars in working capital, and the seller can quickly reinvest his cost and profit back into his business.”

Economic Changes Shape the Role of Financing

In a world where the only constant is “change,” the Capital Finance team relies on their experience and the flexibility of asset-based lending to deliver solutions to their customers. The economy has played a major role in shaping the dynamics of various market sectors as well as consumer spending. It has taken its toll on the retailers, manufacturers and distributors that feed into the consumer industry. The Retail Finance division of Wells Fargo Capital Finance is the largest asset-based retail lender in the country, and its senior team has many decades of retail experience. In fact, there was hardly an ABL retail deal done in 2014 that Capital Finance didn’t play a hand in.

With the reorganization, the Retail Finance division moved into Marsden’s Corporate Finance Group that provides broad asset-based solutions typically ranging from $5 million to over $4 billion. “That includes sole lender solutions, agented solutions that we syndicate and positions we purchase in other agented ABL facilities,” says Marsden. “Business Finance, Syndicated Finance and Retail Finance work directly with our largest customers. These team members are experienced in industry segments such as energy, metals, transportation, and of course, retail, and they know all the ins and outs as they bring knowledgeable, creative solutions to the table.”

Low rates and high liquidity have affected the markets served by the Syndicated Finance division, also part of the Corporate Finance Group. “Every bank seeks to get a fair share of a customer’s wallet,” claims Marsden. “Many CFOs are aware of that and do their best to allocate their bank products across their key banking partners to keep them engaged and interested in their business. We strive to secure a leadership role by bringing a breadth of solutions to our customers. The asset-based solution is, of course, a priority for us, but we also strive to partner with our investment bank to provide even more robust solutions. Given lower yields, it is critical that we stay flexible and creative in order to remain relevant to our customers.”

Tougher regulatory requirements may challenge the banking industry, but they provide a boost to non-bank finance companies. The Lender Finance division has lent to independent finance companies since 2001, and Macko is enthusiastic about the opportunities there. “I think independent finance companies are going to flourish,” declares Macko. “When outside capital pours into a sector, it’s an indication of attractiveness — and this space has become really attractive to financial buyers. Smaller independent finance companies are well-positioned, thanks to continued scrutiny of big banks and access to capital from both strategic and financial buyers.”

Factoring as a financing solution has weathered the impacts of the economic recession, too, and the resulting provider landscape has changed. The Commercial Services division is essentially a factoring business that specializes in apparel, consumer goods, government, staffing, transportation and other industries. Diehl collaborated with the factoring business periodically when he oversaw the Supply Chain Finance business prior to the realignment; he now oversees both groups as part of the newly formed Global Capital Solutions group. “Given that both divisions are global, the new name is a powerful moniker,” says Diehl, “but given the breadth of companies they serve, it wasn’t an obvious choice. If you think it is challenging to bring together two such groups, I can tell you that we found it more challenging to come up with an appropriate name for this division!”

“Factoring is a timeless business, and we are fortunate to have assembled an exceptionally experienced group to lead our efforts, both domestically and globally,” continues Diehl. To explain factoring, Diehl offers a high level view: “We are typically the primary credit provider, and our customers are mostly small to middle-size companies. Factoring has a different feel than pure ABL, because we lead with our industry knowledge and are focused on how to provide credit to our clients’ based on the strength of their customers. Several years ago, we brought in a new international team that has taken our products and offerings to a new level.

“In the past, when a U.S. company bought products from another country, it needed a letter of credit, but now international trade is primarily on open account,” states Diehl. “So, for example, when an Asian manufacturing company sells to a U.S. retailer, we offer credit-risk mitigation by standing in the middle. There are many different ways of doing business, depending on the country, but everyone wants the same thing—to sell a product and make a profit without worrying about getting paid. We take out some of the vagaries of collecting receivables. This is an exciting industry and one to keep an eye on!”

Facing the Challenges Ahead

Looking back over the years and considering the possibilities ahead, each of the Capital Finance executives took time to share some of their experiences and concerns. When Diehl first came to Wells Fargo in 1984, the company was one of only a handful of well-known ABL providers. “Things have changed dramatically, especially in the bandwidth of the customers we deal with. Historically, ABL was perceived as a product that a company used when it had no other financial options . It is now considered a great way to have predictable borrowing capacity.”

However, predictability comes with challenges, and the continual expansion of compliance requirements is one of them. “One of the more significant requirements in recent history is the leveraged lending guidelines that are now being implemented,” comments Marsden. “Everyone is working their way through these policies, to understand what makes sense, and seeking clarification from their regulators. Obviously the conversations are different from bank to bank, but we are all doing our best to implement effective, actionable policies that serve the needs of our credit-worthy customers.”

“It is an incredibly competitive environment out there, not only to acquire and keep customers, but also talent,” says Macko. “We want to be sure we are doing our best to keep our most talented team members happy and keep them here. We feel the same way about our customers. We are in a very frothy part of the cycle, and there is a lot of capital out there, particularly from the unregulated, alternative debt market. We work hard to keep a sharp eye on client retention, staying flexible to meet their needs and keeping them satisfied, so that we are not caught off guard by other lenders courting and taking away our best customers.”

“You spend your time trying to calibrate what could go wrong, but you never really know until it happens,” shares Diehl. “There are always surprises. Even good companies can have things happen to them. Essentially, we rely on the company’s assets to take away some of the risks of loss. But things can change. I still worry about the market overheating again and people repeating some of the excesses that led us into recession.”

First Things First

So what can we expect in the first 90 days under the new regime? We asked each leader about his top priorities.
“The realignment of these business groups is still very fresh, so any changes or refinements ahead are yet to be determined,” observes Fuchs. “We have tremendous market coverage through the existing business groups, all of which existed before this point, but we were finding areas where our units ran into each other, at the customer level and also with our internal banking partners. The realignment will help us eliminate confusion and improve efficiency in how we go to market. We will continue our focus to cross-sell in conjunction with all of our internal banking partners and work on streamlining how we interact and communicate where it makes sense.”

“A year ago, I was tasked with merging our large ABL and middle market ABL operations,” recalls Marsden. “Through that process, we created a shared services platform putting most of our back office functions into a centralized group that could operate as a center of excellence. I want to utilize that shared service organization to drive greater efficiency into these other ABL business lines.”

“The challenge will be to get the product knowledge through to all our team members, so that they can work together and look at our total offering on a holistic basis,” adds Diehl. “Wells Fargo Capital Finance has more than 1,800 team members, and they must be able to choose the right product for our customer rather than sell the product that feels most comfortable to them.”

“All leaders feel the need for an ‘action imperative’ when they come to work each day,” Macko remarks. “That’s that feeling you have when you wake up, and a small voice tells you that you have a big, new job. Then it asks, ‘So, what have you done today?’ My initial focus is to maintain a strong grasp on the businesses I manage — to assess the people and think through the key strategic objectives for each group. Our goal is clear: It’s growth. We operate in an incredibly competitive environment, and I am focused on helping my team grow the business, but in the right way. We will do that through existing channels and also by finding adjacent avenues where we can continue to lend to more companies, helping our customers succeed and grow our assets outstanding.”

“Wells Fargo and Wells Fargo Capital Finance have earned their status in the market as industry leaders through a lot of hard work by our entire team,” sums up Fuchs. “That status will continually present us with both opportunities and challenges, and that is never going to change. It is my responsibility to manage the team to take advantage of these opportunities and manage them through the challenges. That is my biggest focus. If we do that while continuing to grow the business and help our customers succeed, I would define that as success.”