Private Credit and the Trade Finance Opportunity

Non-bank lending by private credit investors in the trade and commodity finance sector is increasing and looks set to make even greater inroads as further understanding and increased education of the asset class spreads among alternative asset managers, funds and their investors. The report “Private credit and the trade finance opportunity”, produced in partnership with the Alternative Credit Council (ACC) and international law firm Simmons & Simmons, provides an overview of the trends shaping the involvement of private credit in the trade and commodities finance market.

Jiri Krol, global head (ACC) comments: “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.”

Jolyon Ellwood-Russell, partner, Simmons & Simmons, states: “Our report shows the economic appeal of trade finance to private credit investors is increasingly attractive as an opportunity. Even so, the structures and solutions in trade finance and understanding the underlying flow of goods, money and documents can be complicated. Additional operational, logistical and documentary risks exist associated with the international trade and supply chain and these can be unfamiliar to private credit asset managers and their investors.”

He adds: “However, the report demonstrates the determination and resolve of asset managers, investors and all participants in both the private credit and trade finance market to collaborate and continue to transform the trade and supply chain finance markets into an investible transparent asset class.”

This report is based on data and a series of in-depth interviews with industry leaders. Below are some key takeaways from the report.

> Download the full report here

COVID-19 hit, but outlook is good

Alternative asset managers, banks and corporates are cautiously optimistic about the current state of the trade finance industry. Most of them 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, followed by corporates and banks. 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 full potential with corporates and SMEs.

Finding your perfect partner

Banks generally held a more negative perception of alternative asset managers prior to working with them. Banks working with alternative asset managers also highlighted their different mandates and the need for asset managers to understand the operational and regulatory constraints of banks. 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, bespoke financing and strong relationships were the most popular benefits of private credit cited by our respondents.

ESG is now business as usual

Corporates cited ESG as very important to their outlook. 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 tradetech

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 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. 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 alternative asset managers' involvement in trade finance grows.