The Alternative Credit Council (ACC) and Simmons & Simmons are delighted to introduce this research paper on the role of private credit in trade and commodities finance. Produced in partnership with TXF, this research provides investors with data and insights on the risk and return opportunities in the global trade finance market.
Global supply chains and international commerce are adapting to structural changes in the economy and financial system. One of the biggest drivers of change is the retrenchment and greater balance sheet management of traditional lenders, who have historically been the largest providers of trade finance and key facilitators of cross-border business. This happens at a time when demand for trade finance has significantly increased, with firms adjusting their practices in response to Covid-19 and renewed interest in and pressures on global trade patterns. This is contributing to a growing trade finance gap which some now estimate to be greater than $2 trillion.
During the past decade, private credit managers have helped address finance gaps in global credit markets. While direct lending to SMEs and mid-market businesses may be the most prominent example, the growth of asset-based lending, leasing and speciality finance providers gives testament to the increasing role of private credit in the financing of the real economy.
Trade finance offers a significant opportunity for investors seeking assets that offer a differentiated and competitive risk-adjusted return. It can also provide borrowers with the tailored and flexible finance solutions they need to thrive and innovate. For these reasons we expect private credit to become a larger part of the trade finance market, and for trade finance to be soon recognised as its own distinct subset of the burgeoning private credit universe.
Investing in the trade finance market requires a sophisticated approach to the credit and operational risks that exist. There is also evidence that the sector is evolving in response to challenges in the market through the incorporation of technology, ESG and more sophisticated risk management practices. Furthermore, there are increasingly more diverse ways to take exposure to the trade and supply chain finance opportunity throughout the capital structure. Our research demonstrates that the potential reward for investors who can be part of this evolution is significant.
This research provides an overview of the trends shaping the role of private credit in the trade finance market. It is our hope that it will help investors understand the potential of this market and how private credit can help fill the trade finance gap.
Deputy CEO, Global Head of Government Affairs, AIMA
Partner, Simmons & Simmons
Private credit and the trade finance opportunity
Shaken not stirred: Alternative asset managers (63%), banks (61%), and corporates (52%) are cautiously optimistic about the current state of the trade finance industry. Most of the corporates (90%), banks (83%), and alternative asset managers (81%) reported being in a healthy position moving forward in 2021 and beyond despite the turbulence of the previous 18 months.
The commodity trade finance opportunity: Across respondents, alternative asset managers had the strongest knowledge of non-bank lending in commodity trade finance (4.6 out of five), followed by corporates who demonstrated a sound understanding (3.8 out of five) and banks (2.1 out of five). This data suggests that there is still a relative lack of understanding of non-bank lending within commodity trade finance across the market, which may prevent finance from reaching its potential with corporates.
Finding your perfect partner: Banks generally held a more negative perception of alternative asset managers prior to working with them (2.1 out of five) than after working with them (3.7 out of five). However, banks working with alternative asset managers also highlighted their different mandates (50%) and the need for asset managers to understand the operational and regulatory constraints of banks (both 43%) as key hurdles to developing stronger partnerships. Bridging the perception gap and acknowledging these constraints will be important for alternative asset managers looking to develop their relationships.
Filling the finance gap: Nearly half of the corporates surveyed chose to access private credit supplied by alternative asset managers because they have been unable to access bank financing. However, respondents also highlighted the attractive benefits of private credit as a key driver of their behaviour rather than the limitations of the banking sector. Faster execution times (48%), bespoke financing (43%), and strong relationships (38%) were the most popular benefits of private credit cited by our respondents.
ESG is now BAU (business as usual): Corporates cited ESG as very important to their outlook (4.4 out of five). Despite this, however, nearly 60% of the corporate respondents noted that alternative asset managers (AAMs) do not meet their ESG requirements, a finding that likely stems from corporates believing that AAMs can do more to demonstrate they understand fundamental ESG issues and challenges.
A tentative nod to tech: There were a range of different technology platforms used across the respondents, with Komgo, Bolero and essDOCS the most used for documentary trade, open account trade, and shipping and freight. However, the data suggests that use of digital technology in the sector is patchy with little certainty on when this may become commonplace across different trade finance activities.
The cost of capital remains a concern: Higher fees (46%) were the main reason for corporates who reported no current involvement with alternative asset managers or private credit. However, this cohort of borrowers also stated that they may do so in the future (3.1 out of five). This suggests that while the market will remain price-sensitive in broad terms, borrowers may increasingly consider non-price factors such as speed and flexibility, particularly as alterative asset managers’ involvement in trade finance grows