The Rich Column: When it pays to bet on black

Original Post Source

“Clients are rich because they bet on black. So our responsibility is not to bet on black.” As an analogy for the entire wealth management industry, this — from the head of a Swiss bank’s private client business — is rather good (at least, I assume it was an analogy . . . the bank’s London office is within staggering distance of Crockfords, Crown Aspinalls and the Ritz Club).

Many wealthy clients, having spent years taking risks to build up a business — pushing their finances into the red as much as the black — just don’t want any risks taken with their money. Entrepreneurs become risk-averse investors. Small business success stories only back large-cap stocks. But there is one exception to this rule, and it is being encouraged by niche investment managers and fintech pioneers: investing in supply chain finance.

For decades, small business owners have had to bear the risk of late payment by big customers, and going into the red at the bank while they wait. In the UK, payment processor Bacs reckons nearly half of all SMEs experience late payment, with around £26bn of invoices outstanding.

Supply chain finance aims to counter this by offering SMEs immediate payment, less a small interest charge or discount. In effect, a bank or other lender steps in to make the payment upfront, on the basis that the big customer is a low credit risk and will eventually come through with the full amount of the invoice.

However, old-style invoice factoring, as it was known, could cost SMEs valuable time, their financial reputation and a big chunk of their sums owed. Thankfully, some years ago, Lex Greensill — a former Morgan Stanley and Citi banker who saw his father’s Australian sugar cane farm blighted by late payment — sought a better solution from fintech and financial markets. By partnering with technology groups, his Greensill Capital group can plug into bank payment systems and offer early payments all the way down the supply chain. At the same time, it can raise money in capital markets by offering bonds backed by the short-term debt it takes on from low-risk FTSE 100 customers, such as Vodafone.

These bonds are attractive to wealth managers seeking a higher yield for wealthy clients. In effect, a 90-day senior claim on Vodafone for payment, in the form of a bond, can be bought at slightly better spread than actual Vodafone bonds but with the same credit risk. Greensill Capital says investors range from portfolio managers looking for a yield pick-up to insurance and pension funds seeking insured, low-risk assets. It recently partnered with Zurich-based asset manager GAM to establish the first fund that invests solely in supply chain finance assets.

Iain Tait, partner at wealth manager London and Capital, says alternative sources of yield such as these have become topical as wealthy families ask where they can turn next as interest rates stay low. Part of his answer has been specialist SME lending funds, such as TCA Global, targeting 8-12 per cent yields; Beechbrook, 10-12 per cent; and TLG Capital Credit Opportunities, 15 per cent.

Some are being even more creative and supporting very specific SMEs. Guy Lodewyckx, deputy global head of private debt at Amundi, says wealthy investors can now finance Italian ham producers, via a dedicated vehicle that issues bonds. It uses the money raised to buy semi-finished raw hams, and hold them through the maturing phase of 18-24 months. “Investors in the bond enjoy an attractive return of 4-5 per cent and a pledge on assets where the value increases over time.”

With all types of alternative finance investments, however, there is greater potential downside. “An unintended consequence is that clients could inadvertently be exposing themselves to much greater risk, such as illiquidity and tail risk,” says Tait.

In helping SMEs out of the red, clients need to remember, therefore, they are back betting on black, albeit at rather better odds than 50-50. 

Matthew Vincent is the FT’s Lombard columnist


Leave a Reply

Your email address will not be published. Required fields are marked *