Once solely the preserve of traditional financial institutions, the trade finance space has seen a growing number of funds enter the market in recent years – and they are underwriting deals that banks either cannot or will not.
The GTR trade finance funds webinar, held last week, brought together industry experts, fund managers, trade financiers and impact investors to discuss the myriad offerings available in the market.
Across four sessions, participants talked about the evolution of funds’ risk appetite, the attractiveness of trade finance as an asset class, the importance of ESG performance when funding transactions, and the role of technology in creating an accessible marketplace, and highlighted some of the issues facing trade finance funds today, from reporting standards to valuations, liquidity levels and scalability.
In this post-event wrap-up, we outline some of the top takeaways.
Funds don’t want to replace banks
One of the stand-out issues raised in the first session was whether or not trade finance funds can – or should – replace banks.
Moderated by Aidan Applegarth, managing director of trade and financial services consultancy Bankingwise, speakers David Frye, CEO of multi-funder platform Levantor, Dave Skirzenski, CEO of Raistone Capital, and Ulla Fetzer, client portfolio manager at NN Investment Partners seemed to be in agreement that the trade finance pie is big enough for everyone, and that all players, from funds to banks and fintechs, have different roles to play.
“We don’t want to take over the relationship part,” says Fetzer. “We are not replacing an originator or replacing a bank. That’s not our intention. We are looking for solid, stable assets that we want to invest in on an ongoing basis.”
“For a while, it looked like banks were going to exit the trade finance space because of Basel III,” says Skirzenski. “But they’ve certainly have been partnering more with fintechs now, and getting back into the space. However, banks will always stay within their box, which is generally investment grade clients that they have a relationship with that they can cross sell to.”
Banks’ role as funders for trade finance funds was also discussed. “There’s a very natural balance in the funding that we source between banks and non-bank investors,” says Frye. “It’s very key that the core of the funding comes from banks that are relationship driven. That’s really the role of the bank, we need that relationship anchor. But at the same time, we need funders that are not relationship driven, who have that ability to take a view on risk.”
Trade finance funds are not mainstream yet
Although trade finance can offer an illiquid position in a volatile market, lack of understanding about what the asset class actually is continues to dissuade investors, according to the panellists.
“It’s definitely still a learning curve for a lot of non-banks coming in figuring out exactly which bit of the market that they want to play, what the appropriate yield expectations are and what the level of risk that they’re taking is,” says Frye. “It’s about getting comfortable with the instruments, and looking at the underlying cash conversion cycle – all the things that trade banks have been doing for centuries. However, once they do, they find that this is a very attractive asset class.”
“For some investors, the asset class is still relatively new,” says Fetzer, “But I do think that trade finance funds are here to stay and that we will see more funds and more inflows into this asset class.”
Despite recent fraud cases, trade finance remains an attractive asset class for investors
The last year has seen numerous allegations of fraud emerge at large commodity and energy trading companies. International banks have been quick to review their appetite for risk – with some pulling out of the sector entirely.
The second session, which covered the investor perspective, brought together Martin Opfermann, senior portfolio manager at Allianz, Dale Galvin, founder and CEO of Deliberate Capital, and Daouii Abouchere, head of ESG and sustainable finance at Channel Capital Advisors, to discuss the impact of recent scandals on investors’ willingness to put money into the market.
For Opfermann, the benefits still outweigh the risks.
“There’s nothing wrong with the asset class, but there are a few things wrong with the way people are approaching the asset class,” he says. “From what we hear, the institutional investors have not really been affected by the recent fraud cases; it was mostly the banks. Managing concentration risk is nothing special to trade finance, it is something that you need to manage for any asset class. There’s a compelling relative value in terms of risk return.”
Funds can provide the liquidity needed to close the trade finance gap
Many of the world’s biggest banks openly acknowledge the large, underserviced market of SME exporters. However, they are grappling with the challenge of high onboarding costs compared to the revenue opportunities of relatively small-scale loans, along with the cost of compliance with post-crisis regulation such as Basel III, know your customer and anti-money laundering requirements.
By opening up additional sources of funding, trade finance funds have an important role to play in getting money to where it’s needed – as well as providing much-needed yield to investors, says Abouchere.
“When the pandemic hit, we saw a sharp decrease in global trade followed by a rapid contraction of economic output. The trade finance gap has grown significantly this last year, and subsequently, there is a significant unmet need globally, which is more dire in emerging markets. There’s also a supply side constraint with some of the large major players, namely, the large number of commercial banks starting to refine and constrain their appetite. So for investors who are looking for yield due to lower returns on senior traditional asset classes, fixed income and corporate bonds, it’s not surprising that the global trade finance sector looks enticing.”
An ESG play
Linking trade and supply chain finance to ESG metrics, whereby borrowers can achieve more favourable interest rates if they meet certain performance goals, has become increasingly popular in recent years. But the power of trade finance to drive positive change can also be harnessed by investors, according to Galvin.
“With trade finance, you have an opportunity to not only change the shape of a transaction, but also meet a need of an investor, whether that’s a CSR programme at a bank or the sustainable development goal targets of a sovereign wealth fund,” he says. “You aren’t sacrificing any kind of return to incorporate these standards, but instead creating an opportunity, whether it’s risk reduction or even value creation.”
The role of technology in creating an active distribution market
In the third session, moderated by Christoph Gugelmann, founder and CEO of Tradeteq, panellists Mead Welles, CEO of Octagon Asset Management, Marilyn Blattner-Hoyle, global head of trade finance at AIG, and Bertrand de Comminges, global head of trade finance investments and global investment at Santander Asset Management, covered the use of new technological advances in scaling up non-bank trade finance.
“We can use big data, artificial intelligence, and blockchain to reduce risk to make the investors much more comfortable and increase security on data flows,” explains de Comminges.
Leveraging this technology to enable insurers to provide solid cover is also an area of interest, says Blattner-Hoyle.
“Origination is not necessarily the biggest challenge because there are lots of deals out there,” she says. “What I would say is the biggest challenge is transparency, and then pricing alignment, in terms of the risk profile that you have in the pool, or in the structure that you have. That’s why technology has been so critical to insurers being able to provide certain clear cover in relation to these funds and structures, and where you lose that transparency, things go wrong.”
“Today is probably one of the most amazing opportunities to capture market share as an asset manager in an area that has low correlation, low volatility, high absolute yields and short duration,” adds Welles. “These are incredibly desirable characteristics for institutional investors. And if you can get transparency through technology, that really is the clincher.”
Dispelling myths post-Greensill
After a recent paper by Fitch Ratings argued that funds that invest in supply chain finance (SCF) programmes “face an uncertain future” after the collapse of Greensill, speakers at the final session were keen to distinguish between good and bad actors in the market – and highlighted the need for consistent due diligence.
“The perception in market after the Greensill case is that receivables financing and supply chain financing are the worst culprits in that debacle and that it is a product issue,” says Federica Sambiase, CEO at Working Capital Associates. “This perception is inaccurate.”
She adds that the trade finance community has a responsibility to educate the market on what receivables finance and supply chain finance actually are, and define tight parameters.
“There needs to be an obligation of the buyer to pay for some goods to a certain supplier. There need to be an underlying asset. The Greensill case involved what somebody described as ‘future receivables’. There is no such thing. Receivables finance is a very simple product, very standard, and very, very plain vanilla, that has nothing to do with the Greensill case,” she says.
“There are lessons to be learned about the due diligence that we would expect partners in a trade fund to carry out,” adds Jason Barrass, chief commercial officer at Arc Ratings Agency. “We need to make sure that our governance is stronger, our structures are tighter, and that we have comfort that the Chinese walls that are built for the protection of the investors are doing what they are supposed to.”
