Mauritius-based asset manager Barak Fund Management offers alternative asset opportunities via its Barak Structured Trade Finance Fund, investing in trade finance with a focus on agricultural and food transactions. Director and senior advisor Prieur du Plessis talks to Sarah Rundell about the progress so far.
GTR: What trade finance do you offer?
du Plessis: We finance grains, rice, sugar, coffee, fruit – in fact virtually all agricultural and food-related commodities and products. At the moment our portfolio includes a heavy weighting of meat imported from Brazil into Africa. The fund has also shifted its focus to include more value-added products, financing foods like noodles, split peas, canned products and milk powder for African wholesalers and supermarkets as consumer demand in Africa grows. We also finance trade in minerals, particularly exports of coal and chrome mostly to China, as well as textiles and petroleum products. Most of our clients are traders in Africa importing commodities and food products but we also finance developed market importers sourcing goods from Africa and do a great deal of inter-African trade. We provide finance for African-based processors particularly – millers needing wheat and maize for flour, or coffee and cocoa processors.
In the mining sector our clients tend to be African junior minors looking to export into China and India; here the focus is on short-term bridge financing. We don’t do any pre-production financing or input financing – we only finance the commodity when it’s out of the ground. To balance the portfolio we try to equal our exposure between internal African trade finance, financing imports and exports outside the continent. There is a seasonal nature to our transactions too – currently we are participating in various fruit export programmes mainly to Europe.
GTR: Who are your investors?
du Plessis: Trade finance is still a relatively new asset class for investors but we are seeing strong investor interest for the African market. Our investor base comprises family offices, institutional investors, corporate investors, funds of funds and high-net-worth individuals. We’re seeing annualised returns of 15.5% after fees and target returns of between 15%-20% on an annualised basis. New investors are approaching us as our track record grows, particularly from the US. We have delivered a compounded annual return of 77.48% since inception four years ago. We offer our investors a piece of the African growth story which is uncorrelated to equity markets.
GTR: How are deals structured?
du Plessis: We use an ownership structure for the majority of transactions with pricing agreed upfront and fixed for the period of the transaction. The average time period is currently 99 days but transactions range between 30-180 days. The value of transactions entered into can be anything from US$100,000 to US$5mn and we sometimes partner with banks or other sources of finance to co-finance a transaction. By acting as a lead, or co-lead in the majority of transactions, we ensure our influence over the structure and terms of financing.
GTR: What are the risks and how do you mitigate them?
du Plessis: We use agents to document and inspect products at port of loading as well as at port of discharge. We ensure that all transactions have adequate risk and marine cover and that the fund is noted as a loss payee under the policy. We don’t tend to insure against political risk, so if a product is confiscated, expropriated or war breaks out we aren’t covered by insurance. We prefer to mitigate the risk rather than sell it off to an insurer. We mitigate this risk by spreading the transactions over various countries’ commodities, clients and time periods. We also try to avoid entering into transactions during election periods and we have over 90 transactions across the portfolio at any one time.
We use an independent commodity firm to review prices, and compile data on import and export parities for various commodities. Credit default can occur if a commodity price suddenly falls, allowing clients to buy the product at lower prices. However if global prices fall there is often a lag before local prices are affected. This risk is also mitigated by performing loan to value calculations on transactions on a weekly basis and rectifying any breaches by calling for additional security either in the form of cash, additional commodity or other types of security like bonds or debentures. Most importantly we favour companies that have a proven track record, that are stable, predictable and have low default rates. The liquidity of the commodity, country rating and tenor also forms part of our selection criteria. Transactions always involve an offtaker and although their credit quality is important we particularly take into account their track record with references from previous suppliers, buyers and bankers. We only finance transactions in US dollars so there is no currency risk.
GTR: How has the banking crisis affected business?
du Plessis: A lot of the banks have pulled out or substantially reduced exposure to trade finance in Africa, because of the credit crisis and Basel regulations. This has created an opportunity for funds like ours. Many banks do not want to extend their facilities into certain countries like Malawi and Zimbabwe. In Zimbabwe we are seeing real growth; hyper inflation and currency risk has been taken off the table since Zimbabwe dollarised its economy and it is one of our most lucrative markets. We offer more tailor-made solutions than the banks and we are quick to turn financing around. Although banks have moved into supply chain finance with asset-backed lending using the commodity as collateral, we offer something different. In many of these cases the sponsor will struggle to provide the required guarantees or other banking instruments to mitigate any loss. That is where we come in because our focus is on the transaction, the commodity and the track record.
The trend in non-bank finance is opening up and growing. We are seeing more and more investors including private equity looking at this asset class, and especially Africa. Demand for trade finance from companies keeps growing but with limited liquidity and funding to finance it. There are a lot more deals out there than what we can participate in.
GTR: How do you see the business evolving?
du Plessis: The majority of our portfolio is agricultural raw materials but we are beginning to see more value-added coming in across all commodities and we will grow with our clients in this space. Africa will be the future food basket for the world and trade with Asia, particularly around mineral exports, is growing despite the slowdown and will require more finance. Over time we’ll also increase our investor base and assets under management. We want to give more investors access to Africa and ensure that they are comfortable with trade finance as an asset class. We are also focusing on increasing our US investor base.