Artis aims to consistently achieve above-average and stable returns by investing in one of the most secure asset classes available – trade receivables. These trades are sourced across an extensive, established network of local merchants and global suppliers, primarily in Europe, Central Asia, the Middle East and Africa.
Artis focuses on enterprises with clear developmental potential; established relationships with buyers; and a proven track record of delivering products and meeting the highest quality standards in their respective markets yet are underappreciated by banks.
Our investment strategy is centred around receivable financing, with a focus on reinvestment, business continuity and avoidance of spot transactions. As a sector-neutral trade financier focusing on non-perishable goods, our strategy provides diversification of exposure across sectors and a conservative approach to risk mitigation.
Multiple trade finance statistics back up the status of the trade-finance asset class as an ‘uncrowned king’ of low-risk, low-volatility investment. Together we will sift through the industry track records and our own to provide ample evidence of the reliability of this asset as well as looking at the cost of a trade investment.
Is a Trade Investment Still Worthwhile and are There Hidden Fees?
As an investor, you look out for the overall cost of an investment. The same applies to trade-finance investment and potential costs should be discussed and disclosed. There can never be enough risk mitigation; our proprietary credit-assessment process assures that this is always the case. Our model is based on deep financial analysis and forecasting of the industry and enterprise.
The process includes qualitative risk analysis with a thorough background check on the business owner and management in addition to a balance-sheet audit for creditworthiness; marketability and debt capacity; fraud-risk analysis; and third-party credit rating.
An on-site visit is essential to make sure that the goods in question are not simply a figment of someone’s imagination.
A credit-assessment intake form is completed by the applicant and analysed by our team. The collateral is assessed, and our risk analysts determine the level of account recoverability.
The internal application process for the terms of the financing arrangement can be accepted, rejected or altered by the firm any time before the agreement is signed.
We complete an in-depth analysis of the risk, which includes making sure we consider any targeted countries and industries. Finally, Artis checks the quality and standing of the applicant’s debts and their relationship with suppliers.
As a regulated firm investing in trade, we maintain a high level of value across the board. Investors expect a professional set-up with highly educated, trained and experienced team members. Our risk managers’ experience is comparable to standards found in any large financial company in the City. Our trade lawyer is on a par with a partner of Europe’s renown law firms. A detailed and time-intensive work analysis is undertaken to investigate each transaction, before selecting and executing the chosen few.
There is a cost of doing business. Artis, like other companies, charges a management fee. This fee helps to compensate our team for the high-quality work we do on the ground with clients and extensive back-office paperwork. In addition, we levy a defined percentage from the overall returns.
Investors might be tempted to avoid the fees involved in working with a trade-financing firm, to maximise returns. There is nothing wrong with that, though the experienced guidance of a dedicated and knowledgeable team protects your investment and should not be underestimated.
Much value lies in the ability to manage and mitigate risks that arise along the transaction chain. It is all about structuring deals for protection, ongoing account monitoring and control of the transactions towards eventual settlement.
This often makes the difference between a successful finance arrangement and failure, and is the prime reason why a premium is justified for the fund managers.
The Value of a Team
A systematic and rigorous approach to risk assessment and a checklist approach is vital to achieve low risk and must be followed scrupulously. Our value-based approach to trade financing is a proprietary model founded on our qualitative and quantitative criteria developed over the years.
One might think that the drivers in the trade-finance industry are the same as everywhere else – business risk, operational risk and credit risks. While it is essential to consider these risks, they are not the main transaction drivers in trade, which are negotiation, market competition and positive business relationships. In addition, there are the discretionary factors. Discretionary factors have historically remained unanalysed, which explains the inconsistencies in trade-financing pricing. Shouldn’t transaction drivers have a larger weighting than trade-financing pricing? In this school of thought, field discretionary factors are not weighed as heavily in respect to trade pricing.
After reviewing many transactions over the past 10 years, the Boston Consulting Group found that it is the field discretionary factor that influences the trade-finance pricing and not the transaction drivers.
Source: Sumitra Karthikeyan et al., “Breaking the Commodity Trap In Trade Finance”, BCG Global, Last modified 2019, https://www.bcg.com/publications/2019/breaking-commodity-trap-trade-finance.
Trade and trade-finance professionals rely on their established, proprietary networks and make frequent visits and enquiries to protect their investment. The ‘boots-on-the-ground’ approach of our team members is vital, wherever we invest.
Not a Night at the Opera; the Benefits of a Tenor
The investment tenor is the name for the number of calendar days until maturity of the trade. Once the tenor is reached, the payment is due and the investment is returned. Deciding the tenor date depends on the type of trade, industry, value chain and other specific factors for each trade deal. The tenors we accept range from 30 days on an open account to a maximum of 120 days for different types of accounts.
This short trade cycle fits our strategy, reduces the time of cash outstanding and offers consistent reinvestment opportunities. We grow alongside the businesses we are financing.
The mix of credit-insured receivables and short redemption periods makes the Artis trade investment an alternative to short-term bank deposits, with the latter often still bearing negative interest in 2022. A combination of short maturities and lower risk is the winning formula we are pursuing for our own and our investor funds.
The tenors of the accounts are influenced by the global market and competition. For a product in high demand, like mobile phones, the tenors are likely to be much shorter and the companies being funded are in growth mode. Industrial products, like pumps, have longer tenor cycles. Companies entering a new market might seek longer tenors to gain momentum or offer their buyer extended payment terms allowing them to pay for the product with the sales proceeds rather than from their own reserves.
Trade Examples and Track Record
A client contacted Artis to request funding for its construction and lighting business. The company needed to stock its store with locally based goods and raw building materials for families preferring DIY for their home projects.
The client was looking to accumulate a variety of goods from different sellers all over the country to put these packages together. We investigated the company and its business partners to find that the business model, although new, was well received in the small but affluent local town.
We purchased the imports for the buyer with an open account and put the tenor at 30-60 days. If our client paid the amount owed to Artis in the first 30 days, they would benefit from a small discount on the total amount due (remember the Walmart model). The importer met the 30-day tenor and asked us to reinvest.
As a result, our investment had a gross return of 11 percent at the end of a year, while at the same time the borrower saved close to 25 percent on their annual purchase cost by continuously paying ahead of the agreed tenor date. Prepayment does not reduce revenues as it allows us to reinvest earlier. Both parties win and develop a long-standing business relationship that continues to provide positive gains.
The Omani Miller and Corn Trader
In many countries outside Asia, corn accounts for a very high percentage of daily food intake. While corn used to just feed humans and animals, it is now used to produce ethanol, an important ingredient in gasoline production and so also now feeds car engines as well.
Although corn isn’t as glamorous as, say, diamonds, it is a highly sought-after product. Our Omani miller had to pay for the corn upon transfer of documents when the merchandise was loaded onto the ship at a port on the Caspian Sea. The miller had a cash-flow shortage until the corn was paid for by the final buyer. He used some of the corn in his own mill to produce bakery products. Artis facilitated a purchase-and-sales agreement.
We had to analyse the trader and the importer, as well as the business history and payment history of the importer. We decided to take on the purchase and sale transaction. Once the agreement was signed, Artis financed a vessel full of corn − about 3,000 metric tons − with a tenor of 45 days. This has become a repeat business and works like a Swiss clock.
Trade agreements go smoothly when the necessary legwork has been done at the outset. If a trade transaction runs into issues it is often due to a lack of insufficient analysis or documentation.
Dieu est dans les détails (God is in the details), as the French say rather than the proverbial devil that the German language refers to in the same situation.
So far, we have never had to absorb a loss. Investment returns range from an annualised eight percent to a rare 36 percent per annum, averaging out around 10 percent per annum net to the investors. Much depends on the type of investment, the structure and the jurisdictions involved.
Is it a purchase-and-sale agreement with entitlement to a profit-margin share or a case of pure financing with a margin? The best deal sometimes is the deal not done. We consciously decline many transactions.
Of course, we are in business to do trade deals, not to turn them down, but a critical mind is crucial. Our reinvestment rate is above 95 percent. When an SME successfully closes out a contract or a financing agreement is scheduled to end, we redeploy the funds immediately, often by extending the current facility or alternatively, adjusting the funding to the client’s new needs.
A high rate of reinvestment ensures that funds are not sitting in the bank account producing at worse negative yields, hence costing revenue. Reinvestment gives confidence to buyers and sellers to successfully grow their businesses, together with a positive impact on the world of trade. The high reinvestment rates make trade business sustainable and offer continued room for portfolio growth. Artis has become our hub for profitable trade- finance investments.
If a transaction gets delayed and the tenor date cannot be met, discussions are held immediately with the debtor. In most cases the delay is a matter of days, not even weeks. Of the 0.02 percent default rate in trade finance we spoke about, 77 percent of those accounts were rectified with payment extension. Trade firms can roll over accounts more easily and with less administrative burden than institutional structures like banks.
Should a borrower show signs of default or if signs of fraud become a sudden concern during the execution of a trade, we immediately notify the credit insurer who takes over the management of the case. Where a trade is not insured, the lender must jump into action on its own or its investor’s behalf. In a non-credit insured case, it is good to have the additional collateral in place, as discussed earlier. While such collateral might serve as leverage for renegotiation, it should always cover the outstanding amounts plus accumulated recovery costs. There is an obvious reason why we stick to credit-insured trades.
Letters of Credit
Letters of credit (LC) can only be issued by banks, not by a commercial entity like a manufacturer or a trader. A letter of credit is the obligation of a bank to pay upon completion and confirmation of pre-agreed contractual terms. The LC terms assure the buyer and the seller that payment shall be made if the services are performed as agreed in quality, quantity and time.
Despite relevant paperwork, LCs remain a commonly used and trusted method for financing trade, securing both parties. Transactions and legal requirements are fulfilled through the bank. For financiers, the process is straightforward since the payment is guaranteed once the customer receives the LC from the issuing bank.
Bank Guarantees (BG)
A bank guarantee is a financial instrument issued by a bank that guarantees that an agreed-upon amount will be paid to a financier at an agreed-upon date. Unlike an LC, the sum is only paid if the counterparty in the transaction did not fulfil the stipulated contractual obligations. Thus, a BG is a mechanism that protects a buyer or seller against losses that might occur due to the non-performance of the other party. It is a layer of protection after the fact rather than an LC which acts as a bank-backed ‘I-owe- you-and-I-pay-you’.
While generally an appropriate tool to protect a transaction in some jurisdictions, BGs can only be executed after a favourable judgement which might involve tiering litigation.
What is a Banker’s Acceptance?
A banker’s acceptance (BA) is a form of payment that is guaranteed by a bank rather than an individual account holder, guaranteeing payment later. They are most frequently used in international trade to finalise transactions with relatively little risk to either party and are traded at a discount in the secondary money markets.
Receivable Discounting and Factoring
Receivable discounting is used primarily to assist growing businesses to gain access to funding secured against secured invoices. This type of discounting can help prevent companies from running into working-capital shortages by leveraging a short-term loan against the receivable account.
Receivable discounting is an integral piece of any factoring agreement. Without a discount on the invoice, there is no incentive for investors and financial companies to buy them. Discounts are the fuel of all factoring deals.
With less involvement in the value chain and more of a fund-management role, factoring is a different form of investing and can provide outstanding results to investors. Value-chain financing and factoring should have their places within a diversified investment portfolio.