Fintech companies see a huge opportunity in turning assets related to trade finance into the mainstream of investment opportunities.
Demand should exist if these can be made easier to access. Receivables, letters of credit or supply-chain loans offer attractive risk-adjusted returns with low correlations to stocks or bonds.
Today, however, this is an asset class available mainly to large banks. Globally, investors such as hedge funds, insurance companies and family offices account for only about 10% of demand. In Asia, buy-side participation is even lower. (Federated, a U.S. fund management company, is a rare case of a mainstream buy side with trade-finance capabilities.)
Institutional investors face two hurdles, according to Jeremy Son, a fixed-income trader at Alliance Bernstein in Hong Kong.
First, invoices and other trade notes are not included in mandate guidelines. Second, these assets lack standardization and are therefore difficult to understand.
“You probably need a team of specialized credit analysts who understand the structure and underlying fundamentals,” said Son.
Two technology companies addressing these hurdles are Hong Kong’s Velotrade and Singapore’s CCRManager. The challenges are the same but their approaches are quite different.
Velotrade is now a licensed investment manager, while CCRManager is about to launch an index to give fund houses a benchmark for structured investments.
Velotrade targeted outside investors from the beginning of its life. Its business strategy could be compared to Steve Jobs, who said inventions like the iPhone were meant to create a demand that consumers didn’t know they had.
However, onboarding customers appears to be a bigger challenge than the founders expected; Velotrade would not disclose figures around user numbers or volumes.
CCRManager’s approach is, in contrary, iterating on proven customer demand. As we know, Steve Jobs is an outlier and his business model almost impossible to replicate.
To securitise receivables, Velotrade spend 20 months on a type 1 license granted by Hong Kong’s Securities and Futures Commission. Now the company can split receivables into tranches that can be sold as a “collective investment scheme” which counts as a security under SFC rules.
Tranches of receivables are often low-value paper, more suitable for small investors. But this is intended to be an alternative asset class for institutions and professional investors. The business risk is a mismatch in the securities’ size, versus actual investing needs.
On the supply side, in order to provide high-quality assets, Velotrade hopes to attract a few large multinational companies. But these are precisely the clients that banks cater to now. Why would they switch to a small, untested platform?
Velotrade says some companies face macro uncertainties. Let’s say an oil refinery faces a downturn in oil prices. In volatile situations, companies need to diversify their funding channels.
But then in such a case, the risk profile of these securitized receivables would increase – which would require them to yield more to justify the risk to investors. Again it’s a question of whether the asset class fits actual investor demand.
CCRM is taking the path of working with the banks rather than trying to compete against them.
The Singapore company started out serving bank-to-bank trade-finance transactions.
“The majority of people in the market don’t know this kind of transaction exists”, George Lee, co-founder, COO and CFO, told DigFin.
When an importer asks a bank for a Letter of Credit (LC), that’s just a primary transaction, aka the origination. In theory the money follows the LC from the buyer’s bank to the recipient bank. In reality, banks often transact via a third bank that can facilitate a better price for the paper.
The process is manual, conducted over the phone.
This is an arcane trade among banks that leaves importers and exporters baffled. “Very often the clients don’t understand why it takes so long,” Lee said.
Focus on digitalisation has been on the client-to-bank transaction, but very little on the bank-to-bank space, Lee explained.
CCRM was started by ex-bankers from this niche field, and they attracted about 20 banks in Asia and Europe to co-design their trading platform, a digital peer-to-peer place for negotiations. It’s like an instant-messaging app, offering an audit trail and structured data that the participants can view.
Its first live transaction was in 2017 and it now has up to $500 million in monthly volumes.
From banks to fund managers
CCRM is planning to launch an index of average market prices.
To generate an index requires enough transaction data. So far the most activity on the platform are deals between Asia and Europe, so an index covering that is being rolled out in the fourth quarter. CRM has yet to decide whether to provide detailed percentages of price changes, out of concern it could breach user confidentiality (it’s a small market). But only users can see their own data; CCRM’s own people won’t have access to it.
The index should give banks a reference to measure the performance of its trading department, or to compare performance among traders. Initially it is aimed at banks but Lee says it will pave the way to bring in new investors, as the asset class becomes more transparent.
CCRM is in talks with development banks, credit insurers and fund houses, to understand how their information needs will very from banks’.
These non-bank investors will be included by the end of this year.
Lee says buy sides should be easier and faster to onboard, as fund managers would only be receiving data, not disclosing information of their own.