Why should African Receivables Provide Same Investor Return as Coke’s Suppliers Receivables?

I have seen many ventures in the market recently centered around creating assets off of commercial trade transactions, leveraging information, technology, smart phone apps, etc., to create a receivable for investors to finance.

The whole idea is short term trade receivables are low risk.  Generally that is true, but there is fraud, dilution, supplier insolvency, supplier performance hiccups, and of course money laundering via over and under invoicing.

Many pitching for investor funds like to quote a few details to argue how great these assets really are.  They usually make the following argument:

  1. Size of the prize is enormous – at any point in time, there are trillions in receivables outstanding, much of which doesn’t get financed by the banks.
  2. Trade receivables are low risk as measured by historical default rates – generally this takes the flawed data from ICC Trade Loss Register and tries to imply similar loss characteristics by association.  In particular, I highlighted six problems in that data set here - ICC Trade Loss Registry – Not Credible to Investors in Trade Receivables 
  3. Trade is also low risk because the goods underlying the transaction act as collateral – yeah, and tell me you have a way of tracking that collateral, valuing it, taking possession and then selling it.
  4. SMEs represent an enormous gap – yes true, we know its hard for small business to get money everywhere, but particularly in emerging markets. Tell me something I dont know.

Usually the pitch document starts with some incredible new technology the company has developed, their secret sauce, that’s going to scale like hot cakes.

Then we get down to the real issue any investor is concerned about – Risk and Return.  And usually I find the returns are not commensurate with the risk.  I don’t want to buy into a medical distributor invoice scheme in Africa for 8% return as an investor when I can buy Coca-Cola approved invoices for the same return or better.  Can I really trust my distributor to get paid by hospitals in Naoribi? Do I even know about regulations that govern bankruptcy, late payment, etc. in those markets?  Does my broker or asset manager?   Nor as an investor am I interested in a Middle East deal that provides a 10% return when I can buy into a P&G or Pfizer Latam approved invoice solution for the same yield.

The challenge is sourcing these deals.  One of the reasons investors have poured into Marketplace lending is its easy.  Lending Club, Prosper, Avant, and others generate assets to sell.  Since August, Citigroup has sold more than $1 billion of securitized loans from online platform Prosper.  But commercial trade transactions are much harder to find.

The trick then is how to avoid Chasing Yield in the trade receivables area when you do find them.

If you would like to discuss asset sources around commercial trade, reach out to me via dgustin at globalbanking.com

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