Trends Watch: Trade Finance

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks Philip Simotas, Partner, Teres Global.

What is your outlook for investing in trade finance?

While trade finance is among the oldest forms of credit, it has only recently become accessible to most institutional investors. As an asset class, trade finance offers some very compelling investment properties including high liquidity and good return premiums over other short-term fixed-income alternatives of similar and longer duration, and a predictable return/risk profile. In addition, returns from trade finance are uncorrelated from all other major asset classes.  

To date, banks have been the overwhelming source of financing to the global supply chain. However, the global banking community has been unable to meet the surging demand for trade finance worldwide. As a result, the outlook for investing in trade finance looks as strong as ever, particularly when viewed against a backdrop of shrinking yields for other types of fixed-income investment. The trade financing gap, which represents the amount of trade finance that has been requested and rejected by importers and exporters, is currently measured in trillions and is expected to grow larger over the decade.

Where do you see the greatest opportunities and why?

Asian exporters, in particular, face some of the greatest obstacles globally, when looking to finance trade receivables. However, fintech players have entered the market over the last several years to challenge the banks’ grip on trade financing. With the advent of machine learning technologies that are able to pour over reams of financial and transaction data, commercial factoring platforms are able to accurately assess risks and open up new funding sources.

Our supply chain finance strategy finances the “last mile” of the trade finance investment universe. We only provide financing after goods have been delivered and declared in good order. All transactions are denominated in the U.S. Dollar, meaning no currency risk. Our strategy is short-term in nature, financing receivables with a maximum maturity of 360 days. The effective portfolio duration is 90-100 days in practice. By financing a specific transaction to an Asian supplier after confirmation of proper delivery of goods to the buyer, the strategy obtains returns based on local interest rates. The credit exposure is to large investment-grade North American and European companies. The result is a superior return and replicable stream, outperforming similarly diversified credit portfolios in excess of 300bps.

Where do you see the greatest challenges and why?

One of the reasons why trade finance investments have yet to be incorporated into most institutional investment portfolios is because they are an esoteric field of investment with many idiosyncrasies. It takes time to learn. It is also a difficult asset class to source and scale. Sourcing, researching and performing due diligence on invoices is a major undertaking. We are fortunate to work with the leading B2B trade finance platform in Asia which has been providing trade finance solutions for over 20 years and has a zero default track record.

What keeps you up at night?

Servicing, servicing, servicing.

Servicing risk, which relates to the process of managing the cash flows when financing a trade receivable, outweighs the credit risk associated with the obligor (or buyer) of the invoice. For this reason, linking one’s investment to fintech firms that are skilled and experienced in servicing cash flows and payments on their factoring platforms is critical.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.