LFP122 – Securitising Trade Finance To Make It An Investable Asset Class w/Christoph Gugelmann CEO Tradeteq

Trade Finance – a $9trn pa market – is possibly the most important transaction type in FS – a huge number of our possessions will have come round the world in a container and needed financing. Tradeteq is turning Trade Finance form a banking closed-shop into an investable asset class via Securitisation As A Service.

One of the macro-trends in FS is to make previously uninvestable asset classes investable. This attracts new pools of finance and lowers the borrowing costs on the one side of the coin whilst on the other offering non-correlated assets with potentially higher returns as we covered in the prior episode about Litigation Crowdfunding.

We last dived into the super-important market of trade finance a couple of years ago in LFP081Β re what it takes to digitise a very oldskool transaction type. Now we take the next step and look at how this is being made investable.

Maybe the pension fund of the future can have not just the century old cash/bonds/equities but cash/bonds/equities/trade finance/ litigation crowdfunding? Certainly the greater the diversification the lower the volatility of value and potentially coming with a higher return.

Topics discussed include:

  • Happy Chinese New Year πŸ™‚
  • Tradeteq’s teams in Vietnam and Singapore
  • Convergence in geographic developer rates
  • Christoph’s career journey
  • the interest of real assets compared to abstract assets (derivatives et al)
  • has the explosion in derivatives finished after a few decades of exponential growth
  • innovation in the least sexy aspects of FS and the world as a whole is always the most solid and slowest to be addressed
  • the oldest type of FS is, ironically, almost the only one that is uninvestable
  • how trade finance works
  • three main types of trade finance type
    • “documentary finance” – banks only
    • “pre-payment finance” purely between buyers and sellers
    • “open account financing” – can view from a buyer-centric or a seller-centric perspective – which side of the deal is being financed
  • unnecessary complexity in trade finance starting even with the language where different terms are used for the same items
  • historically there was a disincentive for banks to simplify and create standards
  • an analogy with Xmas presents – a box with wrapping is easy to pass around
  • SPVs (Special Purpose Vehicles – ie a company which does one thing only) as the box for securitising Trade Finance
  • comparison with the invention of the cargo container which has made physical transportation of goods that much easier – nothing like this has happened on the finance side
  • with an SPV can use normal settlement channels such as Euroclear, is visible on Bloomberg, has an ISIN number etc making investing administratively simple and in line with other investments
  • “opening the box” – how to assess the value of what’s inside
  • the failure of historic approaches to address this issue
  • solution a package of 1,000; 10,000; 100,000 assets which might be tiny in size along with portfolio management rules as often these are very short maturities
  • Tradeteq’s Securitisation As A Service
  • how the process of investing in Trade Finance works via Tradeteq
  • Tradeteq are currently working with 8 of the largest banks
  • how portfolio management works in Trade Finance
  • portfolio rules
  • banks haven’t historically thought along these lines but on the old-fashioned basis of simply using-up credit limits
  • why technology is decisive
  • the complexity of assessing the assets inside the box
  • how assessing Trade Finance differs radically from traditional credit risk assessment
  • dilution risk – one party ships the wrong goods to the other
  • credit risk
  • fraud risk – esp collusion
  • all of which leads to the need for transactional credit assessment
  • the necessity of machine learning to cope with the large volumes
  • liquidity not to relevant as the investments tend to be short term – Tradeteq can create notes of 3mts, 6mts, 12mts maturity; cf infrastructure market where you might have 30yr assets
  • whether having a Trade Finance index tracker fund would be A Thing
  • the challenges of creating an index in this market
  • alternative pools of capital will want to invest in higher risk assets that the banks are not so interested in
  • “the nice thing about these alternative investors, you can place any risk with them as long as they understand it and can price it”
  • “there’s a market for any type of exposure but it needs to be transparent”
  • returns for low risk assets are bank rates + 50-200 bps
  • higher risk assets can yield high single digits or low double digit returns
  • a shoutout for investors or sellers of this asset class
  • the Trade Finance Distribution Initiative
  • a long list of events that Tradeteq are presenting at
  • Tradeteq have 40ppl now, looking to do another equity round and scale dramatically
  • recruitment needs

And much much more πŸ™‚

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