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Trade Finance: Sector in Brief
For many investors, trade finance appeared on the radar as a potential opportunity in 2012-15. Yet those who were interested encountered significant challenges, including a severe lack of data, a limited group of managers and a high degree of opacity regarding underlying portfolios. Today, the sector has evolved considerably: a broader range of funds has been established and manager analysis now provides more representative data for default rates, volatility and performance.
IN THIS PAPER
Facts and figures: Practical data on trade finance strategies and funds including target returns, numbers and types of managers and the growth in assets under management.
Jargon buster: Clear explanations of different types of asset-backed and non-asset-backed trade finance, what they are based on, how they are categorised, and where commodity finance sits in the broader picture.
Investment experience: Insights from bfinance manager searches in this sector. Based on recent analysis there is a roughly even split between funds that do direct loans and funds that participate in loans syndicated by third parties, with a small minority doing both Those targeting a specific emerging market region are more likely to go direct than globally diversified players, although there are exceptions.
The appeal of trade finance in today’s investment landscape is intuitive: short duration in the later stage of a credit cycle, real assets underpinning a substantial proportion of loans, and relatively high resilience to market cycles.
Yet the investment realities are more convoluted and complex. Trade finance is dominated by commercial banks and the asset manager sub-sector is relatively immature and opaque, although it has developed substantially in recent years. Based on our most recent manager analysis, just over 20 managers are currently offering appropriate funds for substantial institutional allocations and 64% of these had only launched their first trade finance fund in 2010 or later.
Investors seeking asset managers find that the quality and level of data provision, even at RFP stage, is relatively patchy, making strong due diligence particularly vital. After a period of healthy fundraising, most of these managers are not in ‘asset-gathering’ mode.
Meanwhile, asset managers face high barriers to entry, even if the major challenge - sourcing appropriate dealflow - can be overcome. The underwriting style differs considerably from longer-dated loans, while the small universe and bespoke nature makes benchmarking and price comparison more difficult.
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