Investment Areas

TRADE FINANCE

SOLUTIONS FOR BANK-LED TRADE FINANCE LENDING

A typical trade finance transaction is complex, in part due to the multiple parties involved, each with their own paperwork and regulations with which they must comply.

Trade and supply chain finance transactions are also subject to the variability of currency exchange rates, especially when the underlying trade is cross border. Coupled with the need to comprehensively screen trade transactions to comply with anti-money laundering (AML), and know-your-customer (KYC) requirements, the end-to-end financial transaction has become a source of higher operating costs and multiple pain points for the trade finance intermediary.

Despite these increased costs, banks will remain as the primary source of capital for trade finance. As we observe the rise of non-bank sources for trade lending, it is our view that regulated trade lending is here to stay. For example, bank-intermediated trade finance accounts for 40% of transactions.

We therefore maintain an investment focus on innovation and opportunities in this space.

WHAT WE LOOK OUT FOR

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

NON-BANK TRADE FINANCE LENDING

Certain regulations, like Basel III, have increased banks’ cost of capital for trade lending, resulting in shrinking appetites and balance sheets for trade finance. In turn, this has given rise to a number of niche offerings from non-bank structures such as trade and commodity finance funds — which 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. As an advocate of trade finance as an asset class, GTR Ventures is building a database of non-bank sources of trade finance investment structures. Watch this space as we prepare our impending white paper on trade finance lending and funds.

WHAT WE LOOK OUT FOR

We invite you to get in touch with us and explore how we can work together, if you fall into any of the following categories:

  • If you are starting a fund or entity specialising in trade and commodity finance.
  • If you are an existing trade finance fund or entity.
  • If you are a provider of debt capital, and wish to find out more about lending into trade finance.

TRADE CREDIT INSURANCE

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

Faced with the evolving needs of traders who seek more flexible solutions, trade credit 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 customer interface.

WHAT WE LOOK OUT FOR

Tradetechs 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.

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
Cost Containment22.1%
Maintaining Adequate Cash Flow18.5%
Falling Demand For Products & Services12.6%
Efficiency in receivables management12%
Collection of outstanding invoices in emerging markets7.6%
Others27.3%

Source: Atradius

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.

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