October 28, 2020
Our Pactum Corporate Finance Fund (PCCF) is special. Therefore, it is important to understand how it differs from other products in the marketplace. In a first step, we need understand the difference between receivable working capital and supply chain finance: yes, the underlying is similar but the method of investment would be as dissimilar as long/short equity compared to high frequency trading!
Supply Chain finance is where a major company offers its suppliers a program to settle the invoices owed to them by the company earlier (for a fee). However, often the major company first extends its payment terms so effectively the suppliers are just paying a fee to get their own cashflow back on track. The company then has extra liquidity which they have borrowed from their customers, who are paying for the honour.
Supply Chain finance can also extend as far as literally funding the supply chain of goods from initial manufacture, via a shipping company, to a plant where value might be added, via local delivery. In this case it is important to be wary as, especially in times of recession, you have many potential points of failure in the chain which could all adversely affect the value of the goods you have financed: any one of the links in the chain could go bankrupt.
On the other hand, receivable working capital finance is where a company has a portfolio of customer invoices which they choose to borrow money against. They may wish to extend payment terms for their customers so those clients can afford to carry more stock or free up cash to make an acquisition. Either way, it is money that is owed to them that they are paying to receive earlier. Of course, given the portfolio of customers might be a superior credit risk to the company itself, it may mean they can borrow more cheaply against the client invoice portfolio than they could normally themselves.
If we now consider the various competing funds in the marketplace, we note more areas where PCCF distinguishes itself from other offerings:
Firstly, some of the best-known Supply Chain Finance funds in the marketplace source all their investments from one company who often control the investment decisions thus causing rise of a question of conflict of interest.
Secondly, the credit quality/ return profile of these funds compares very poorly to our own PCCF. Not least in that the credit risk is much less diversified than in a receivables fund: the credit risk is to a number of major companies who owe their suppliers, while a receivables fund has a very diverse credit exposure across the full spectrum of corporate customers. This diverse credit risk is also insured in our PCCF fund against non-payment by an investment-grade insurer giving the portfolio an investment grade cover.
There have been other receivable working capital or factoring funds in the marketplace that have run into trouble. But instead of buying the receivables like PCCF does (on a true-sale basis into an SPV) they simply made loans to 3rd parties who were supposed to purchase eligible receivables with the funds but don’t appear to have always done so. We retain control of the capital at all times with cash only being released in return for a credit-insured receivable.
So whilst we are all “working capital” investors, like equity funds, there are many different types and approaches, some more secure than others.