The appeal of alternative investing in supply chain finance comes from the unique combination of an attractive yield and short duration. The investment is based on self-liquidating, insurable account receivables resulting from clearly identifiable events in the physical supply chain.
Low correlation to traditional equity and bond indices underlines the role of supply chain finance as a diversifier within the context of modern portfolio theory. Adding supply chain finance exposure to a diversified portfolio can provide a complement to traditional fixed income allocations.
Traditionally, investment in supply chain finance has been dominated by large international banks. A McKinsey & Company report published in October 2015 estimated that more than 95% of the market was covered through bank programs as recently as 2005.
A major turning point unfolded in the aftermath of the financial crisis in 2009. Three converging trends led to the ongoing disintermediation of banks and the emergence of institutional as well as private capital as funding sources.
Banks had to curb their lending activities following the credit crunch thereby curtailing the availability of capital which pushed the cost of capital upwards.
Regulatory changes introduced in the Basel II Capital Accord1 imposed higher capital requirements on banks for trade finance exposure in general.
Fintech companies developed innovative solutions to automate and digitalize the complex documentation process within the supply chain. Once implemented, collaborative platforms opened access to a larger variety of liquidity providers.
1 The capital requirements have since been eased – see BIS “Treatment of trade finance under the Basel capital framework”, October 2011