At Finverity, Viacheslav Oganezov, co-founder and CEO, provides an overview of the unique opportunities that the supply chain finance platform offers to investors interested in the trade flows of emerging market mid-market companies.


Supply chain finance has never been so high profile, for both good and bad reasons, as it is right now. Its critical role in helping keep firms afloat and trade flowing throughout the pandemic was evidenced by the speed with which development banks and multilateral lenders rolled out huge trade and supply chain finance programmes as the crisis struck. It has, however, also taken a reputational hit as the Greensill debacle taught markets a sobering lesson in how not to do SCF – but at the same time educated investors about what qualities and capabilities to insist on when choosing SCF transactions and originators.

At Finverity, we believe diversification, tech-driven transparency and social impact should top that checklist. And that there is no better way to achieve all three than by investing in emerging market small and medium-sized enterprises (SMEs), via a platform with the technology and expertise that makes investing seamless, economically feasible and safe.


Diversify with emerging market mid-caps

Unlike most SCF platforms, where assets on offer are typically restricted to those of a small pool of over-served large-cap names, Finverity provides a rare opportunity to invest in the trade flows of emerging market mid-market companies. Doing so can create immediate diversification for existing SCF investors, allowing them to better balance their portfolios and avoid the high concentration risk that has traditionally plagued lenders in the sector.

The payables of emerging market SMEs also offer strong uncorrelated returns – ranging from 5% to 10%, against 1% to 3% for bigger firms – which looks even more compelling in the current low-rate environment. And they do this with a risk that is much lower than often perceived. For example, the Asian Development Bank recorded zero defaults or losses in the 10 years to 2018 on its US$36bn trade finance programme, the bulk of which focused on the emerging markets of Bangladesh, Pakistan, Sri Lanka and Vietnam.

The smaller ticket sizes associated with SMEs’ SCF assets mean that any securitisation or directly funded portfolio that includes them will necessarily comprise a higher number of names, further reducing the likelihood that all will default at the same time. Syndicating deals with other lenders via a platform reduces that risk even more.

At Finverity, we reduce risk one more notch by focusing on the ‘M’ in SME – originating mostly from mid-cap firms with strong credit profiles that are located in ‘developed’ emerging markets. This provides investors exposure to a diversified flow of high-quality deals across a variety of sectors, regions and currencies.


Scale up sustainably in a liquid, tradeable asset class

For alternative investors and smaller banks to build, grow and maintain a portfolio like this on their own would, of course, be prohibitively slow and expensive.

Onboarding smaller entities is complex, with due diligence checks around know your customer (KYC) and anti-money laundering (AML) requiring extensive data collection and analysis. Most SMEs lack traditional credit ratings, meaning granular credit analysis must be undertaken to confirm their financial health and ensure risk is priced accurately. Servicing transactions then also requires real-time monitoring for fraud, double financing and performance risk.

The associated costs can make small-ticket transactions appear economically unfeasible and unattractive for many investors. This was demonstrated in the Asian Development Bank’s 2019 trade finance survey, in which over three-quarters of respondents cited AML and KYC requirements as obstacles for providing trade finance, while 59% pointed to high transaction costs. Among lenders’ reasons for rejecting financing applications, 15% stated they were not profitable enough to process.

For these reasons, SCF – particularly for non-investment grade obligors – remains a frontier asset class: one that institutional investors are attracted to, but which has until now lacked the liquidity and scalability they require.

Finverity helps investors overcome these hurdles by shouldering 80% to 90% of the middle- and back-office processes associated with investing in these transactions. By undergoing a rigorous pre-screening process to select and display the best deals and matching them with lenders’ investment parameters, we streamline their due diligence while reducing rejection rates. Once a transaction is approved for funding by the lender, we act as servicer, running the facility on their behalf using our technology platform, which automates everything from client onboarding to disbursement of funds and reconciliation. We also monitor transactions throughout their lifespan, providing early warnings to funders immediately if covenants or mandates become at risk of breach.

As a result, investors are able to scale up their supply chain finance portfolio affordably and sustainably, confident that every possible safeguard against fraud or default has been taken, and that they can demonstrate this if needed: exactly what was lacking at Greensill.


Tap technology for transparency and traceability

This is all made possible because of technology. By automating procedures associated with onboarding, due diligence, programme servicing and transaction verification, Finverity makes participation in SCF more efficient, reliable and transparent. Automation also enables us to process the huge amounts of data required to enable rapid, accurate risk monitoring without pushing up costs.

Investors benefit directly from technology-enabled transparency by gaining access to real-time data on the underlying assets and funds used in transactions. Finverity’s platform provides them with full, dynamic visibility across their portfolio and access at the touch of a button to detailed breakdowns of every single receivable they own, as well as obligor concentrations and each transaction’s historical performance and current status. They also benefit from 360-degree oversight of how programmes are performing, with a real-time data feed flagging and alerting them to any potential problems, such as payment delays, while they are still small enough to solve.

Traceability is further strengthened by providing investors with all supporting documentation, such as individual invoices or re-assignment deeds, with a detailed audit trail available in the event of any investigation.

For additional comfort, each lender onboarded on the Finverity platform gains a segregated, named bank account, giving them direct control and ownership over the funds. Assets are owned on trust, with the investor remaining as the unique beneficiary owner, and use of SPV structures are common. This helps strip out originator counterparty risk and lowers the cost of entry into the asset class for a growing community of investors.


Strengthen your ESG credentials

Sustainability is also increasingly important to Finverity’s investor base from an environmental, social and governance (ESG) perspective, which comes back to our focus on emerging market SMEs.

As ESG assets continue to outperform the broader market, they are attracting more institutional capital. ESG assets under management in Europe alone surged by 52% in 2020 to €1.1tn and could represent more than a third of the projected US$140.5tn global total by 2025. Within this universe, there is also growing focus on the ‘S’ or ‘social’ pillar of ESG, with 59% of respondents to a recent report by German asset manager DWS saying they had increased allocations here to help combat inequalities exacerbated by the pandemic.

The World Trade Organization and other multilateral organisations have repeatedly stressed that SMEs and emerging markets play a crucial role in the real-world economy, both in terms of job creation and driving trade, but that they cannot fulfil this role without better access to trade finance. Even pre-Covid-19, inability to access trade finance was one of the top three export obstacles for half the world’s countries – and mostly the poorest – directly hindering sustainable economic recovery in emerging market SMEs.

This has been truer than ever during the pandemic, with trade finance shortages hindering trade in medical goods, food and other essential goods.

In its November 2020 report, Why Trade Finance Matters – Especially Now, the World Bank’s International Finance Corporation warned that the stubborn trade finance gap would expand throughout the pandemic, with emerging economies disproportionately impacted. This is borne out by numerous statistics. For example, 38% of local banks in Africa reported rising rejection rates for trade finance in the first four months of 2020, while more correspondent banking relationships were cancelled, according to the African Export-Import Bank.

The Asian Development Bank argues that the trade finance gap directly threatens seven of the UN’s 17 Sustainable Development Goals, especially those related to job creation, poverty reduction, economic growth and gender equality. Investing via Finverity therefore enables lenders to make a positive impact and improve their ESG footprint by channelling the funds into the real economy and enjoying strong, stable uncorrelated returns.