The Tower of Babel and Trade Finance as an Asset Class

If you listen to some of the publications out there, you would think that trade is already an asset class and all you have to do is go on a Bloomberg terminal and invest in receivables from Vodaphone or Trafagura and Bob’s your uncle.

Yes, the missionaries, prophets and preachers are all singing the praises at just how great this investment is for investors, but they generally forget one thing, the investor.

Yes, Trade finance receivables are short term, uncorrelated, primarily contract risk, not market risk. Low interest rates are forcing investors to look at new things in search for yield and trade receivables has sparked interest in a broad group of institutional investors, as well as many unnamed Private Equity Funds and Family Offices, Pension offices, Property & Life Insurers and even Corporates themselves.

Everything I hear regarding Trade as an Asset Class originates from those that want to sell assets to Investors but not the Investors themselves.  I’ve been reading countless pieces on this subject over the last few months, and truthfully, most of it is superficial, or worse, misleading and ill-informed.  I guess if you say it enough someone will believe you.  But that is true of blockchain, cyrptocurrencies...okay, I digress.

The truth is how does an investor look at this space – and the answer is it depends on who the investor is and what they are authorized to do.  Are we talking about a loan backed by payables?  Is it a synthetic note?  Is it straight corporatre receivables and payable?

You see, investors, and I lump them together but could be talking about pension funds, sovereign wealth funds, hedge funds, family offices, etc. are governed by restrictions.  And bankers and FinTECH (emphasis on TECH), generally don't understand the issues of restrictions.  The bankers get authorizations from credit committees on what they can do.

As it relates to investors, the starting place is what can they do with money?  Can they only invest in bonds?  Rated bonds?  Is the only way to invest in trade finance is if it is made into a bond?  Does the bond need to be rated?

I have interviewed a broad spectrum of potential non traditional trade finance investors to explore their interest in trade finance as an asset class.  From these discussions, the challenges in the market are several and significant.

  • First, as an asset class, it is poorly understood by end investors. Many interviewees we spoke to consider trade and factoring the same thing.  So there is a serious amount of education in order to develop products.
  • Second, Trade finance data is not standardized, transparent, or granular, making it more difficult to package. A letter of credit (“L/C”) for coal can be quite different than an L/C for merchandise or corn.
  • Third, Trade is not a visible asset class. From an investors perspective, there is very limited information on Bloomberg, there is no bourse or exchange.
  • Fourth, Funds that have invested in Trade Finance typically are not scalable, and mention the high barriers of entry to develop product. This is due to the need for expertise around Custody, Settlement and Documentation.

In a nutshell, this is complicated and to date assets under management via third parties is trivial relative to the overall market.

While this space has matured to some degree, it is still primarily a private placement market filled with confusion and mis-information.

Yes there are ways to buy trade finance and trade receivables including sources such as: Trade Finance Funds, Electronic Invoice Platforms, Digital Source to Pay and other Networks, and of course banks.

But caveat emptor to the investor.

 

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