Private credit funds are turning to trade finance strategies in increasing numbers, attracted by the attractive yields on offer.
Global trade finance is a well established market, functioning international trade, investment flows and economic growth, but only recently have direct lenders begun to enter the space.
Direct lenders are finding increasing opportunities in trade finance as stricter regulation, which has led to higher documentation and compliance costs, has prompted banks to retreat from the market. According to the Asian Development Bank, this has resulted in a US$1.5trn global trade finance gap that could have a negative impact on economic growth.
The banks’ withdrawal has hit small and mid-cap companies in particular.
In April, BNY Mellon published a survey that addresses this trend. Titled “Overcoming the trade finance gap: Root causes and remedies,” the report said that 33% of respondents to the survey agreed the rejection rate by banks for trade finance deals has accelerated in the past year.
The primary reasons for this are compliance constraints, as well as the inability for applicants to provide sufficient know your customer (KYC) data, the survey said.
Direct lenders are attempting to fill that gap with new trade finance strategies that support both banks and corporates.
Asset manager Pemberton has recently expanded its trade receivable finance investment team with the hiring of portfolio manager Jean Tournaire and consultant Mark Darell-Brown to enhance its trade receivables and supply chain finance strategy.
To invest in supply chain finance loans, the firm has formed a strategic partnership with technology platform Global Supply Chain Finance and provides structures for tier one technology companies, Tournaire said.
Alternative private credit fund Audentia offers a different approach for its commodity trade finance strategy, focussing on sharing risk alongside commercial banks. It provides extra liquidity to the trade finance lenders.
“We see ourselves as partners to the trade finance banks rather than competing with them,” Audentia managing partner and Co-CIO Fasil Nasim said.
Overall, trade finance deals are considered to be an attractive alternative investment opportunity as default rates are low and they work in isolation to traditional asset classes such as the equity and bond markets.
“Trade finance strategies can be a good addition to a private debt portfolio,” Abhik Das, head of private debt at Golding Capital Partners, said.
However, before investors engage in a suitable private debt strategy, it needs to prove successful.
“As LPs, we are cautious about participating in the first closing round of newer fund strategies, but will watch the outcome very closely,” Das said.
This piece was written by Kerstin Kubanek EMEA Middle Market Loans Reporter for Reuters Refinitiv. First published Refinitiv Eikon and Loanconnector.com on 18 June 2019.