Investment Areas

TRANSACTION BANKING: TRADE, TREASURY & CASH

Trade and supply chain financing as an activity is complex, in part due to the multiple parties involved, each with their own paperwork and regulations with which they must comply.

Coupled with the variability of currency exchange rates, the need to comprehensively screen transactions to comply with anti-money laundering (AML), and know-your-customer (KYC) requirements, this end-to-end financial transaction has become a source of higher operating costs and multiple pain points for the trade finance intermediary.

As such, financial institutions are constantly looking for solutions in trade, treasury and cash management, to improve their margins on trade finance lending, while achieving portfolio optimisation in terms of trade asset exposures.

As a financial activity estimated at US$ 16 trillion annually, our view is that bank led trade lending is here to stay. We therefore maintain an investment focus on innovation and opportunities in this space, including solutions which mitigate fraud and ease regulatory compliance.

WHAT WE LOOK OUT FOR

The delta may be in innovation around services associated with trade lending, enhanced by technology, marketplaces, and innovation.

In this respect, GTR Ventures seeks to invest in founders and tradetechs who demonstrate a solid understanding of trade and transaction banking processes, who are able to cost effectively bridge the gap between treasury and trade for clients, and who are willing to partner with financial institutions to solve traditional trade lending pain points, including helping them achieve distribution efficiencies in their portfolio and risk management of trade.

RISE OF NON-BANK LENDING

Certain regulations, like Basel III, have increased banks’ cost of capital for trade and supply chain lending, resulting in shrinking appetites and balance sheets for trade finance assets.

In turn, this has given rise to of trade and supply-chain lending from non-banks  such as trade finance funds and digital trade lending platforms. These structures allow for private-accredited investor groups, family offices and hedge funds to partake in the returns from trade finance. According to a International Chamber of Commerce report from 2016, the default rate on trade finance instruments such as export letters of credit (LCs), can be as low as 0.04% (see below). In addition, due to the short-term nature of trade financing cycles, investments into trade finance are fairly liquid.

DEFAULT RATES

Asset ClassDefault Rate by Exposures (%)Expected Loss (%)Time to Recovery (Years)
Import L/C0.0820.5
Export L/C0.0420.3
Loans for Import/ Export0.2170.4
Perf. Guarantees0.1910.2

We believe trade finance lending can be considered as an alternative asset class for investors looking for portfolio optimisation and low volatility returns akin to investment grade bonds.

Besides specialist trade finance funds and trade lending platforms, we see corporates and marketplaces already involved in some form of trade lending activity. Amazon and Alibaba for example, have extended financing to their merchants; while Maersk as a shipping line, has set up a separate unit to extend trade finance to its customers.

WHAT WE LOOK OUT FOR

We invite you to get in touch with us and explore how we can work together, if you are a fund, a family office, or an investor, interested to find out more about opportunities from trade and supply chain lending.

If you are part of the physical ecosystem of trade (e.g. shipping line, airline, freight forwarder, logistics company) and wish to explore how providing trade finance may enhance your revenue base, get in touch with us.

TRADE INSURANCE & RISK MANAGEMENT

Credit insurance is a common tool used by trade financiers to mitigate against buyers’ insolvency risks. Trade credit insurers play an important role in unlocking greater liquidity for trade, especially for small and medium enterprises (SMEs).

Other types of insurance in the international trade world include political risk insurance, cargo, shipping and marine insurance, currency insurance and product liability insurance.

Faced with the evolving needs of global trade, shipping lines, freight forwarders, and exporters, insurers are now stepping up their game in terms of 1) offering more sophisticated trade services, 2) investing in innovation and product development, and 3) improving their interaction with customers.

Insurers also need to tap on solutions and processes that enhance their risk management models.

WHAT WE LOOK OUT FOR

Insurtechs for trade who help insurers and insurance brokers operate on a lean model of minimal infrastructure, heightened differentiation, and smart automation of time-consuming processes such as underwriting and claims processing.

Solutions that enhance lending processes through APIs for example, or enable better risk management and analytics through data and aggregation are also keen areas of interest for us.

SME FINANCE & SUPPLY CHAIN

Securing sufficient working capital, and managing outstanding invoices are the top concerns of almost any firm (see chart below), particularly for small and medium-sized enterprises (SMEs). Existing solutions in supply chain finance offered by banks such as invoice discounting or those offered by factoring firms, have partially alleviated the burden.

WHAT WE LOOK OUT FOR

Tradetech solutions that can liberate liquidity within supply chains, lower credit risk for suppliers, and improve firm efficiency by bettering their abilities to forecast future cashflows, and providing great access to credit.

We are also keen on credit enhancement solutions for SMEs and databases or tools which allow banks or non-banks to cost-efficiently underwrite trade or invoice lending.

TOP 5 SME PAIN POINTS

1. Cost Containment 
2. Maintaining Adequate Cash Flow 
3. Falling Demand for Products and Services 
4. Efficiency in receivables management 
5. Collection of outstanding invoices in emerging markets 

PHYSICAL TRADE

Anything and everything physical that supports a trade flow, from chambers of commerce, shipping firms, freight forwarders, trade brokers, customs authorities to seaports and airports, are important nodes which impact trade transactions just as much as its financial aspects.

We therefore keep a keen eye on trends and innovation in this space as non-bank corporates themselves embark on new ventures and partnerships to improve existing processes and operations.

What we look out for

GTR Ventures supports the overall trend towards digitalisation, automation, and virtualisation of trade. For example, tradetechs which improve operational efficiency, be it in freight, contract management, or optical character recognition (OCR), are some of our targets.

With the trade finance market seeing a constant stream of new entrants, from invoice financing platforms to blockchain-based technology consortia, this showcase competition brought various start-ups together for the chance to “pitch” their business models, strategies and activities to a panel of expert judges. Strong emphasis was placed on innovation, efficiency and providing greater access to finance particularly for the underserved SME market.

Host: Jolyon Ellwood-Russell, Partner, Simmons & Simmons

Scroll to top