What is the net monthly return on the current trade finance portfolio for the last 3 months and for the 2019 annual return?
|April 2019 (Net Return)
||May 2019 (Net Return)
||June 2019 (Net Return)
What is your expected annualised performance and volatility range over the next 12 months?
We expect a STF Fund return of about 8.50% for 2019. Volatility shouldn’t change over the next 12 months. It has been stable at 0.06% to 0.11% each year since inception and we expect it to remain around this level.
What is your expected annualised performance and volatility range over the next 24 months?
This depends on un-foreseen future events. For example, if there is another debt crisis and commodity prices continue to be unstable it will likely impact on forecasted commodity prices and would therefore have an influence on volatility in commodity prices. However, we would still expect fund returns to remain stable in the next 24 months, around the 8-9% mark for the STF Fund.
Do you expect performance to decline over time?
We don’t expect performance to decline below the 8-9% in terms of our selected commodity, country and client criteria. Should we be successful in finding co-funders’ for certain transactions, we would expect returns to increase above the historical recent average. This is dependent on growth of Barak's overall AUM and the investment team continues to monitor AUM levels in relation to net performance of funds.
What is the fund’s targeted return range?
Based on the Fund Managers’ historical performance, the fund manager anticipates US Dollar returns in a range of 8-9% per year.
The target that the Fund Managers are aiming to achieve seems very high compared to the risk-free (Fed USD) rate. Does this not imply an inordinate level of risk?
We believe the return target to be within the expected range for players in our particular market. The Fed Rate has little direct impact on the returns achieved: the returns are dependent on the demand for short-term commodity financing throughout Africa and this demand is exceptionally high at the moment, with financing costs being 12% – 15% p.a. for a 90-day loan. “Africa risk” (mostly geopolitical) as well as trade finance-specific risk is still perceived as quite high by the international financing community – hence margins in financing of Africa trade finance assets still remain attractive. We feel we can manage those risks efficiently with the stringent Barak due diligence processes, credit application policies and risk management team.
What is the current fund AUM and strategy for the Fund heading into a seemingly volatile second half of 2019?
The current AUM of the Barak Structured Trade is c. USD 1 billion including co-investment managed accounts (June 2019), having seen an almost 100% growth from early 2017. Whilst this growth has been particularly strong, the Investment Management team has had to adapt to a growing average deal size and the ensuring of a correctly risk-adjusted portfolio spread across the African continent.
The Fund purchases a commodity outright from the client /off taker at a discount and forward sells it at a fixed future price which incorporates interest and fees. The Fund takes ownership of the commodity for the duration of the transaction, which serves as collateral. The loan to value is usually about 80%.
The Fund is able to avoid market risk because the underlying commodities are bought and sold at a fixed and pre-determined price which does not move with the underlying commodity market price fluctuations. This means that we do not participate in increases in market prices, however an increase in market prices will mitigate risk by making the underlying commodity easy to sell at the fixed price, enabling a quick exit should a client default, given that the physical commodity is held as collateral.
Furthermore an increase in the market price means that the client will be willing to pay the forward-price, since it will likely be more competitive compared to the higher market prices.
Although Barak continues to focus on its short-term trade finance strategies (conventional STF, Impact and Shariah), there is increasingly more appetite in Africa for medium-term development and longer-term project financing. Barak has launched two new funds mid-2016 to target these opportunities in African credit markets.
What is your targeted fund capacity for your flagship fund? By when do you think you will reach it?
By the end of 2019, we expect to reach an amount within the USD1 - 1.2bn, which fits neatly into our current risk-adjusted deal pipeline. At this level we will critically assess our capacity and whether deal-flow warrants the acceptance of any further capital. Although the STF Fund has recently introduced a soft close, this is not to say the demand for trade finance and working capital funding in Africa is depleting; we are merely ensuring we are deploying capital to meet investor inflows and avoiding any potential cash drag on performance. There is certainly capacity to reach USD1.5 billion in the foreseeable future whilst maintaining the current level of performance at +8% net.
Why is volatility in returns so low in the Trade Finance Fund?
In a nutshell: the Fund Managers have been able to roll the loan book quite smoothly over time at similar reinvestment rates, with defaults to date only sitting at the 2-2.5% mark.
The demand for trade finance in Africa remains high. This is driven by the continued lack of liquidity in the market due to red-tape and regulations that apply to banks and their hesitancy towards funding volatile commodities in the market, as well as the long period that it takes to obtain funding from banks (on average three to six months). Demand is further fuelled by Chinese and Indian demand for resources, particularly in the base metals and coal sectors. A combination of these factors provides the fund a steady pipeline and allows the fund to consistently demand gross returns on capital of around 12% – 15%. Given our stable gross charged return to our client base, this will naturally give a net stable return with low volatility, given that there has not to date been a default in the fund. Returns per month also vary slightly due to administration fees charged out to clients from time to time.
Please elaborate on the performance benchmarks used in the fund fact sheet?
In general we have tried to show benchmarks that represent other African opportunities for clients. We do not have clean-enough information on competing funds to be able to show a benchmark for the Trade Finance strategy world-wide.
MSCI EFM AFRICA ex SA
Represents equity index returns for African bourses, excluding South Africa.
MSCI is a leading provider of investment decision support tools.
In 1988, MSCI launched the first comprehensive Emerging Markets Index. Since then the MSCI Emerging Markets (EM) Indices have evolved considerably over time, moving from about 1% of the global equity opportunity set in 1988 to 20% in 2015.
EFM = Emerging Frontier Markets
AFRICA Ex SA – Includes the following countries: Egypt, Kenya, Mauritius, Morocco, Nigeria, Tunisia (excludes South Africa).
The MSCI EFM AFRICA ex SA Index is a free-float weighted index.
S&P Frontier Africa
The S&P Africa Frontier is a benchmark index for the Sub-Saharan African continent, and includes stocks from the frontier African countries of Botswana, Code d’Ivoire, Ghana, Kenya, Mauritius, Namibia, and Nigeria. The index is calculated bottom up with each country aggregating into the composite.
The S&P Emerging Market Indices are calculated daily using data received from correspondents in local markets. A country is classified as emerging if it has a low or middle income economy as defined by the World Bank. In addition, the country’s investable market capitalization must be low relative to its most recent GDP figures and its equity market must exhibit substantial features of emerging markets.
Your monthly returns look very much like a classic example of fat tail risk. If you do not feel there is a high degree of fat tail risk, please explain why?
Short on quantifying the tails, the importance of the old fashioned diversification should not be undervalued. Today, AUM represents investments in over 20 commodity types, across 20+ countries and in excess of 150 active clients at present (split across many more deals and loan batches). Add seasonality to this fact, where commodity and clients roll on and off, you end up with a fairly robust mechanism. But supposing the tails are fat, a scenario where Barak considers the potential for drawdowns due to clients defaulting and all commodity prices in every country simultaneously falling sharply an extremely rare event. Not to overstate this fact consider further the following:
If the fund’s highest exposure client (15%) was to default today and the basket of commodities which the fund holds as collateral for that client were to suddenly decline by 30% on average, it would loosely translate into a 4.8% drawdown in respect of that client. That equates to about 3 months of the fund’s typical positive performance lost in such a case. Note this does not take into account additional collateral cover the fund might have (for example: bonds over property, personal suretyship, cession of debtors or shares or stock etc.) or any other recoveries the fund might make further down the line from that debtor (ie: assuming the Fund does not sell off the commodity, even at a reduced price). This scenario also does not account for the fact that commodity prices lag internationally quoted prices substantially in the markets in which the fund operates due to a lack of physical supply on the ground – this gives the managers some room to manoeuvre and improve recoveries by selling closer to the “old” prices.
Why is track record prior to launching the fund (In the Fund Introductory Document) not audited?
The previous track record was at RMB and Standard Bank where the Fund Managers previously were employed respectively, which would not have allowed for audited numbers since it is not feasible to audit historic performance on trade desks at financial institutions However, the investor can get verbal comfort from the heads at both banks that currently run those divisions. We are happy to provide contact details.
Is ten+ years enough experience by which to judge the fund? The fund did not exist in 2008 when the liquidity crisis hit the markets. A fund like this would have had a good chance of being badly hit in those types of market conditions.
The fund managers have 20 and 18 years commodity trading experience respectively having managed similar funds in the banks where they worked, they have therefore been through the cycles. During 2008 the effect of the liquidity crises on trade finance was one of a non-increase and worst case, non-renewal of facilities by banks. Globally, trade slowed down due to liquidity restraints. Hence, potential liquidity crises would only influence the fund on withdrawals by investors, and not on the investment side, and to mitigate this risk, the fund has a 90 day redemption period.
Can you advise why there was a change in the return profile which tailed off slightly at the end of 2014/mid-2015 when compared to previous years? Do you believe this is the beginning of a trend to a lower annual return or a one-off change?
Over the last year, Barak has been carefully managing risk exposure, moving away from high risk-high return transactions to a more moderate risk-return profile. For example: Nigeria, Tanzania, Angola and Zimbabwe are considered to be countries associated with fairly high country and political risk. From 2009 – 2014, Barak was fairly heavily exposed to these countries which meant that we were able to enjoy higher returns (in the range of 20-25%), for taking on the additional risk. Last year in 2018 we significantly reduced our investments into these countries, and increased investments flowing into ‘lower-risk’ countries such as South Africa and to larger, more established counterparties with low risk profiles. This meant that we took lower returns (in the rage of 12-18%), for investing into lower risk transactions.
The Fund also grew rapidly in 2017 and early 2018, so placing large new tranches of investment assets into appropriate strategies sometimes took more time, creating a cash drag in some months.
Barak will continue to manage risk to ensure that all assets are invested in low-medium risk investments, which will mean that gross returns will remain largely in the 12-15% return bracket. However, the continued pipeline for 2019 is looking very strong, so new funding will be placed swiftly with little cash-drag which means there will likely be an improvement on the net return to investors.
What is the fee structure?
The fund management fees are based on industry benchmarks.
- Management fees – 2.0% fixed per annum of the Net Asset Value of the Fund
- Performance fees – 20% of the annual increase in the Net Asset Value of the Fund subject to a hurdle rate equal to LIBOR. In the event that the annual increase in the Net Asset Value is less than LIBOR, no performance fee is payable. Once the hurdle rate is exceeded, the performance fee is payable on the entire performance. The fixed fee is calculated and charged monthly in arrears and the performance fee is calculated and charged quarterly in arrears. The performance fee is calculated in a manner which ensures that appropriate adjustments are made in order to accommodate the inflows and outflows of capital during the course of each fiscal year resulting from subscriptions and redemptions.
- Hurdles – Libor
- High water marks – Applicable
When is carried interest recognized? Is there a claw-back to the fund manager?
The fund uses a high watermark. No performance fees are earned by the Fund Managers’ until NAV is above the high watermark. If NAV falls below the high watermark, there is no claw-back but no performance fees are earned.
Is the performance fee calculation reset at the beginning of each year?
Sourcing deals: Could you please provide us with an understanding of how you find your best transactions? What is the primary source?
Decisions on which transactions to pursue are country, client and commodity specific. The fund managers use their previous experience and knowledge of African countries and commodity/agri-markets to assess country and market risk. Often, clients are chosen based on existing relationships that they have with the Fund managers’ from past dealings during the Fund managers’ banking days or on successful completion of deals for that client. The fund managers also review research of commodity prices, supply and demand indicators to make decisions on what would be the most profitable transactions. They then overlay this with a diversification filter to make sure new deals do not give too much concentration (by client, commodity and country).
Sourcing deals: How many debt applications do you receive in any given year? How many are accepted?
Thirty new clients were accepted in 2017 out of eighty applicants. Twenty new clients were accepted in 2018, and this is expected to continue to grow as Barak brings on more Deal Originators to source new clients across Africa. However this is also largely a factor of AUM growth; as experienced late 2018 and early into 2019, Barak scaled back on AUM growth and therefore had limited off which to place new transactions. Barak will grow as it sees fit for new opportunities across the African continent, and not purely for the sake of growing fund size. 2019 has seen ten new borrowers introduced to the flagship fund portfolio and this is in line with risk-adjusted portfolio expansion. We have rejected more than 50%.
Sourcing deals: What information do you have in your possession about the parties to the transaction and what analysis do you undertake on the said counterparts? How do you choose new clients?
We have all the normal financial information (management accounts, audited financial statements and forecasts) and FICA information from the client. Our due diligence process is more focused on the client’s track record, trade references and our ability to liquidate the security. We prefer to avoid the waste of time and resources that can result from having to pursue legal action against the client. By owning the commodity we can step in to sell the security (or hedge and hold the commodity until market circumstances allow us to sell).
Track record of our clients is of utmost importance. Many of our clients have been known by the Fund Managers for 6 – 12 years from their banking days, and it is very easy to reference newer clients with our extensive network of banking and market counterparts including Standard Bank, Standard Chartered Bank, RMB, ABSA and Nedbank, with whom we have long standing relationships and deal with frequently. We may also seek additional comfort from existing clients and other agricultural stakeholders as regards the potential borrower’s reputation in the market.
When we evaluate potential clients, acceptance is subject to the subscription agreement and the necessary supporting documents. This involves FICA and KYC which includes identifying the ultimate beneficial investor to prevent money laundering. Having an on-the-ground presence and vetting each potential client face-to-face is an instrumental part of Barak’s process in acquiring new candidates.
Sourcing deals: You mention in your marketing document that “investment decisions are based on a combination of trading and debt principles rather than current norm of debt principles only” please elaborate?
The nature of our clients, being commodity traders must be considered. Often, their balance sheets may appear weak because most of the funds are tied up in working capital – however, this does not reflect that the client is necessarily weak. We look at the transaction itself and build a risk-return profile for the transaction considering risk factors such as market, country, pricing and political risk and we also place strong increasingly emphasis on the track record of the client trading the commodity. If a company looks solid on paper but is weak on trading principles it is greater risk for us.
When we consider a possible default scenario, we want to assess how easily we can possibly sell off the underlying commodity to recoup the costs. This is our first course of action to take in a default scenario. Pursuing litigation against the client will likely be a slow and costly exercise and likely to result in greater losses compared to the option of selling off the commodity, so we consider the trade and commodity over the client’s book size and financial strength.
Investment decision making process: Could you please outline a normal transaction from sourcing to structuring to monitoring? Who is involved and what are the steps? Could you please share the debt application template for new clients or new transactions?
- Client request funding from Barak (via our website, referrals and network sourcing on-the-ground in Africa from the Deal Origination team);
- Barak gets details on the client and the proposed transaction/s and takes it to the Investment Committee (IC);
- If approved by the IC, Barak will conduct a thorough due diligence on the client and get all of the relevant details on the transaction and commodity to build an accurate risk-return profile;
- This is again taken to the IC and provided that the transaction and client are satisfactory in terms of their risk-return profile, the client will be approved;
- The standard Purchase and Repurchase agreement (REPO) and Guarantee Agreement are drawn up and signed by both parties. Any additional security is obtained at this stage;
- Once the necessary security and legals are in place, the client is able to obtain finance from Barak. Once the client chooses to draw down on their facility, Barak considers the supporting documentation for the trade (shipping documents, invoices, warehouse certificates etc.) as well as fund availability and investment limits and makes a decision to finance the transaction;
- The “annexure A” to the REPO agreement is drawn up, with the terms of the trade, and reviewed and signed by the client;
- Barak will pay the client or the supplier directly on presentation of documents;
- Barak monitors the transaction through its life cycle, ensuring the relevant documents and securities are in place and valid and that the loan to value is at a satisfactory level through marking to market;
- At maturity of the deal, the client will repay Barak in US$ and the deal will be closed. If the client wishes to draw down again on the facility, we return to step 6.
Please refer to ‘Sample Deal with Annexures’ for more detail – available on request.
Investment decision making process: How do you make asset allocation decisions? What drives the decision making process?
The asset allocation decisions are driven by a number of factors. First step is to take note of the exposure levels of the Fund: maximum 20% per counterparty, commodity sector and country (ex. South Africa at 30% for strategic and logistical reasons).
For example, seasonality is a big driver of certain commodities which are very seasonal, for example fruit and grains. You will notice that between December 2015 and March 2016, fruit comprised 15% of the book during the season, when fruit was being exported to the United Kingdom and Angola. By June 2016, fruit was below 5% of the book, as the season came to an end. The ending quarter of 2016 saw the exposure/allocation of FMCG (fast moving consumer goods) increase at a good rate given the tough times experienced by ailing global and emerging markets commodity prices.
We also make Investment Committee decisions per transaction based on market and risk factors prevailing at the time that we enter into each transaction. Another example is that we have kept maize (corn) exposure down in recent months due to high volatility and price fluctuations in the market and also owing to the likelihood of export bans which are a risk factor to Barak. For example Zimbabwe and Zambia have both had export bans placed on maize owing to the low productivity levels in these countries and the high demand and price of maize owing to the drought season in the United States.
In all instances risk considerations play a big part in our asset-allocation decisions. We take advantage of market opportunities and transactions which have high profit margins and turnover. We also mitigate political risk and market risk as far as possible.
Investment Policy: It appears you are able to invest in trade finance assets of up to 50% in non-agricultural general goods. Could you please provide some examples?
Some examples of non-agricultural goods we have since invested in include: Fast Moving Consumer Goods (FMCG) such as tomato paste, noodles, canned goods and construction pipes as well as meat products, some mineral/mining goods and some petroleum/energy products. Depending on global demand we may look at some hard commodities such as a variety of raw metals and minerals, which since late 2016 have grown within the trade finance portfolio as prices have increased.
Investment Policy: What is the maximum allowable in any one country? Any one commodity?
Our uppermost exposure to one country would be 20%, excluding South Africa at 30% and to one commodity, 20%. Currently our highest exposure to a single commodity is 18% of the book, and to one country is 30% – South Africa.
Investment Policy: FMCG (Fast moving consumer goods) is listed as a commodity class. What is included in that bucket?
This commodity class comprises down-packed and/or processed food items (for example noodles, rice which has been cleaned and bagged- ready for sale to retailers, tinned goods, pasta, bagged sugar and milk powder) which comprises approximately 5% of the book; textiles (this is leather and other material which is used in the manufacture of shoes and clothes) which comprises 8% of the book; petroleum products (wax, oil, diesel and kerosene) which comprises 10%; minerals which comprises 15% and plumbing and hardware products which comprises 2% of the book.
Investment Policy: At what stage in the production cycle are you financing the goods and what collateral do you have in place?
The Barak flagship fund has a mandate to finance crops on the land, but at this stage we have not done any such type of transaction. Goods are normally financed once harvested. Finance normally kicks in once goods are in storage and finance can be extended to cover goods in transit to final destination as well. Our finance does cover goods in storage under CMA pending export and during inland transportation to the ports for export. In some instances finance will be extended to approved chain stores’ shelves. The point is that we have the means and capability to manage the entire value chain.
Investment Policy: Would financing be for the period when goods are belonging to you?
Yes, the fund is the owner of the goods during the financing period which puts us in the strongest possible situation in case of a default. The fund does not have to enforce its security like a normal bank (having to enforce pledges through lengthy legal routes, sometimes in awkward legal jurisdictions). We already own the asset and can act quickly to recover any potential losses.
Investment Policy: Who is your counterpart in a transaction?
The seller of the commodity (to the fund) and the buyer from the fund is typically the same party. But we can also buy from our client’s supplier and sell to our client.
We never hold a directional position as we always have a purchase leg booked simultaneously with a sales leg to our client. Each deal has a different counterpart – we have over150 different clients on the book (which are “rolled” through as deals materialise).
Investment Policy: Why is the Fund limited to 20% in physical commodities? Isn’t that what you do? Please provide some clarity.
The 20% restriction is an ISE (Irish Stock Exchange) restriction. From an accounting and legal perspective, Barak’s transactions are viewed as loans, with the physical commodities held as collateral. It is not directly investing in physical commodities which is what is covered by this ISE restriction (for example the purchase/sale of 1000 tonnes of maize). Therefore this particular restriction is not applicable in Barak’s case for the foreseeable future.
Investment Policy - Is it possible for you to explain how you "exit" each investment, in other words at what stage and how the investments are redeemed?
Each investment/transaction has a purchase date as well as a repurchase date. This is pre-defined in each deal. On the purchase date: the fund buys the commodity from our client at the prevailing market price or a lower agreed price. At the same time a future sales price and repurchase date is determined with the client, the difference between the purchase and sales price is Barak’s margin plus any other costs that the fund needs to incur. Thus, at the end of each investment/transaction, the client buys back his commodity.
Investment Policy - Why does the number of transactions increase/decrease from month to month and how does this affect performance?
A decrease would imply the settlement of more trades than the number of new trades entered into in the month in question. Provided the new trades entered into are of a higher value than the deals that were closed, while the number of open trades decreases, the value of the trading book remains relatively unchanged. Hence, the performance of the fund also remains relatively unchanged. Conversely an increase in the number of transactions implies more trades are entered into than are settled.
Investment Policy - Please explain the country and commodity allocation?
The Fund follows its clients and enters deals that we are specifically happy to finance, subject to us being satisfied with the country risk and the returns earned. ‘Country’ is defined here as the location where the commodity is physically located during the funding period of the commodity.
We are currently happy with the country exposure. The main issue for us is the liquidity of the underlying physical commodities with which we are comfortable with.
Commodity allocation is not a key driver in terms of investment decision. Commodity allocation is a derivate of deal making with a specific client. Country allocation plays a larger role for diversification purposes. Country risk is a bigger driver of overall risk management. Should risk increase substantially within a country (i.e. an increase in political risk), credit default risk and market risk will both rise, increasing Barak’s overall risk exposure regardless of how thoroughly we have diversified our commodity portfolio within that country. Commodity allocation at this stage of the fund is fairly random and driven by client demand (which is currently in itself diverse enough for our purposes).
Hedging - What percentage of your portfolio is directly in USD and what percentage is hedged?
100% of the portfolio is in USD (0% hedged on exchanges, all our products/commodities are however forward sold to 3rd party off takers or the client himself at a fixed margin). All trades are USD denominated and our clients carry any and all currency risk should they wish to invest our USD debt into another currency. Add: Barak may assist the underlying client to hedge against local currency, but does not itself take direct currency exposure on a transaction.
Hedging - What percentage of your portfolio is hedged against commodity prices?
100% hedged against commodity prices. The Fund is hedged against commodity price risk by the inherent nature of its trade finance transactions, which are market neutral. All commodities are purchased from clients at the start of a transaction at a fixed price and forward sold to these clients or approved 3rd party off-taker at the same price plus an agreed margin. Therefore the fund does not partake in any market price fluctuations of the underlying commodity and avoids market price risk exposure.
Have you ever been on the wrong side of any hedging? How do you mitigate hedging risks?
No. The Fund is able to avoid market risk because the underlying commodities are bought and sold at a fixed and pre-determined price which does not move with the underlying commodity market price fluctuations. This means that we do not participate in increases in market prices, however an increase in market prices will mitigate risk by making the underlying commodity easy to sell at the fixed price, enabling a quick exit should a client default, given that the physical commodity is held as collateral. If the market price falls, risk exposure is higher should the client default. However, this risk is mitigated by the pricing lag that is experienced in Africa (i.e. the physical commodity still need to be delivered to country of destination, so if international prices drop, it will take time for local physical commodity in that to adjust) as well as a margin facility held with our clients, allowing the fund managers to take necessary actions. Alternatively, in the case of a default, the fund managers can exercise the option to keep the stock depending on the managers’ view of the local commodity market and trade out the position over time. In this case exit will take longer but selling stock at a discounted price is avoided. We have however, taken additional security in the form of covering bonds, additional stock or cash deposits from clients when market prices drop by more than 10%- 15%, effectively a margin call.
Hedging - What is the minimum Loan to Value (LTV) on the transactions? When do you have margin calls? How are margin calls paid?
The LTV is between 80% – 95% of the book value, depending on what additional security is held ie: personal suretyship, bond over property, cession of the client’s debtors book, cession of shares, corporate guarantees, or call options. In the event that Barak holds additional security (ie over and above the commodity as collateral) that has a low loan to value, then the loan to value of the commodity collateral can be up to 95%.
The required Cover Ratio is determined on a per transaction basis. The Cover Ratio (CV) = Value of the Loan (being Price x quantity) + deposit held against that loan)/Balance (where Balance = the value of the loan at inception). For example: if we purchase 4000t of a commodity at a price of $25 and 0 deposit is held against this transaction at inception then the CR = (4000x$25)+0/(4000x$25) = 100,000/100,000 =100% cover ratio.
For each transaction, the security that is held in place for that client and the loan to value thereof is considered; as well as the underlying risk of that transaction including country, political and market risk, who the off taker is, the tenor of the deal, fluctuations in the market etc.. The more security held and the lower the risk of that transaction, the lower the cover ratio will be.
Using the above example, say we determine a cover ratio of 98% (ie the loan to value can fall to 98% before we call for margin). If the price then falls to $22 during the finance period, the CR = $88,000 + 0/$100,000 = 88%. We will need to restore the CR to 98% which means that we will call for additional security to the value of $10,000 which will then restore the CR. ie CR = $88,000 +$10,000/$100,000 = 98%.
The additional security that we call can be in the form of cash which is held in our Standard Bank account in Mauritius (Standard Bank being our custodian) in this example $10,000 cash would be called.
It can also be in the form of additional security/products/commodities which will be ceded to Barak and held under CMA along with the stock that was originally financed. In this example we would call for an additional 455tons of stock (ie $10,000/$22) which would be added to the 4000t originally financed.
We may also call additional security as listed above (ie cession of debtors, shares, bond over property etc.) to the value of $10,000 or usually more.
Monitoring - What are the key things you monitor? How often do you monitor them?
We keep track of the portfolio and news flow in our markets daily, but periodic reviews as follows:
On a weekly basis we:
- Mark-to-market commodity prices
- Review of deal fees and income generated in the fund.
- Review of political environment
- Review of delays in transactions and reasons for that
- Review of insurance and or claims
- Review of stock reports and deliveries
- Review of client’s limits vs. exposure and securities.
On a monthly basis we:
- Review exposure and risk on a client, commodity, country and trade basis.
- Review of security vs loan
- Review of returns and projected returns
- Review of new pipeline transactions
- Review of new investors
- Review of fund financials
Monitoring - How do you deal with marking-to-market and commodity price monitoring?
Every commodity in the portfolio is marked to market on a weekly basis Add: Using an independent 3rd party Valuation Agent – Commodity Insight Africa. Given the geographic spread and variety of commodity held, multiple sources are utilised. The most important aspect here is that relevant basis pricing is obtained, i.e. valid, liquid on the ground at location pricing. Commodity Insight obtains the requisite pricing and provides it to Maitland for valuation purposes. The segregation of this duty ensures the most price independence since the managers of Barak do therefore not mark the portfolio internally.
Monitoring - What are the warning signs things are not going well? What actions are then undertaken by the Manager?
Delays on repayments signal that something is wrong with the trade flow. In this case, the investment committee will schedule a meeting with the client who has failed to make the timely repayment, to find out why re-payments are delayed. Should the reasons be acceptable and not a great risk in the fund managers’ opinion (for example a delayed shipment/late harvest), then Barak will show leniency and extend the repayment terms or roll the trade such that the client is given more time to sell the stock and make repayments. If the fund managers’ were not willing to extend the deal tenor, they would then assess the market of the underlying commodity and, when the market is favourable, sell the commodity on the market to recoup the capital portion and then the client would be liable only for the interest portion remaining. The Fund managers can also request more security to be provided until the delayed or extended transaction is completed. In a default scenario and after meetings with funders, shareholder, and other stakeholders, if the fund managers are of the view that a transaction can be restructured it will be considered and a new transaction entered into with new terms and additional security. In extreme circumstances the Fund Managers would take legal action (i.e. liquidation of client, shareholders and stock) to exercise the rights ceded to the fund as per the guarantee agreement, suretyships and cession of book debts agreement.
Monitoring - Give details about the maximum drawdown anticipated by the Fund?
The fund is not allowed to have exposure of more than 20% of the AUM to a single counterparty. If we take a hypothetical event where such a client goes into default because of its inability to buy the commodity back at maturity AND we see a sharp drop in the price of this particular commodity, then the fund could in theory see a drawdown of 6% (= 30% (extreme potential negative movement in price) x 20% AUM). A scenario where a commodity price drop exceeds 30% is considered an extremely rare event while the probability that two or more clients default simultaneously is considered highly unlikely mainly due to the diversification achieved through geographic and commodity spread. The few drawdowns that have occurred in the trade finance industry historically, with clients defaulting, amounted to losses in the vicinity of 5% – 20% where the commodity collateral could still be sold to recoup losses. That equates to a rate of recovery of between 3 – 6 months in the industry.
Monitoring - What measures are taken to manage client risk? Do you use a credit rating tool?
Client Risk – This is managed internally. All documentation required to comply with the provisions of the Financial Intelligence Centre Act (No. 38 of 2001) is obtained from the client. A standard application for credit also has to be completed by the client which indemnifies us to perform enquires and investigation into the credit worthiness of the client. We also require the latest audited financial statements and, if these are older than six months, the latest management accounts as well. If the client provides personal surety or acts as a guarantor in his/her personal capacity, we furthermore require a statement of personal assets and liabilities. Track record and references on the client is standard measure for the Barak Deal Originators when compiling a Credit Application on a new prospective client.
Early 2018 saw Barak introduce an emerging markets SME credit rating tool from S&P which it uses to rate its funds' portfolios, and to provide importantly LGDs (Loss Given Defaults) across all underlying portfolio companies.
Monitoring - Explain what is meant by Barak being a market neutral Fund and what does this mean in terms of risk exposure?
The Fund is able to avoid market risk because the underlying commodities are bought and sold at a fixed and pre-determined price which does not move with the underlying commodity market price fluctuations. This means that we do not participate in increases in market prices, however an increase in market prices will mitigate risk by making the underlying commodity easy to sell at the fixed price, enabling a quick exit should a client default, given that the physical commodity is held as collateral. If the market price falls, risk exposure is higher should the client default. However, this risk is mitigated by the pricing lag that is experienced in Africa (i.e. the physical commodity still need to be delivered to country of destination, so if international prices drop it will take time for local physical commodity in that to adjust) as well as a margin facility with client, allowing the fund managers to take necessary actions. Alternatively, the fund managers can exercise the option to keep the stock depending on the mangers view of the local market and commodity and trade out the position. In this case exit will take longer but selling stock at a discounted price is avoided.
What percentage of your portfolio is co-invested with banks or similar financiers? Has this reduced the risk of the portfolio in your view?
The fund will provide first loss of 20%, against 20% security of the commodity. The bank will provide 80% senior debt using 80% of the security (i.e. pari passu). The collateral will be a warehouse receipt / bill of lading /way bill as well as stock and debtor security – ownership of the commodity will still reside with the fund, if required we can cede this to the bank but the Fund will reserve the right to buy back from the senior debt provider in the case of default. In the case of co-investing with banks, the fund would be the borrower.
This is a more simple structure since it saves a lot of KYC procedures from the banks’ side every time we bring in a new client. We can cede security (warehouse receipt / bill of lading / way bill) as well as the debtor to the bank. Transaction amounts would range from USD5m – USD20mm. Co-investing will also increase our client base and term of transactions since the average cost of debt for clients will be cheaper [senior debt cost of finance will be about 6%, Barak cost of finance about 15% so the average cost of finance to the client would be between 9-12% (80% of debt at 6% and 20% of debt at15%). This allows the fund to access very high credit quality borrowers, the extent to which improves the risk-return profile of the fund in our view.
Regarding trade lines with banks, describe the proposed structure of transactions. Who would be the banks’ counterpart/borrower? What would the range of transaction amounts be? Please provide examples of trade structures.
The fund would provide first loss of 20%. The bank would provide 80% senior debt. The collateral would either be a warehouse receipt / bill of lading / way bill – ownership of the commodity will reside with the fund which we can cede to the bank. We appoint a collateral manager. We have marine insurance or get noted on clients’ insurance policy. The deals on our side are booked as REPO’s – we buy the commodity from the client at the start of the transaction, and sell the commodity back to the client at the end of the transaction, the difference in the purchase and sales price is our interest charge. During the transaction we own the commodity outright. By means of marking to market, we value the commodity weekly, if the value of the commodity drops below the loan value, we have the right to call for margin, whereby the client tops up in the form of either more cash or more commodities.
The fund would be the borrower. This is a more simple structure since it saves a lot of KYC procedures from the banks’ side every time we bring in a new client. We can cede security (warehouse receipt / bill of lading / way bill) as well as the debtor to the bank. Transaction amounts would range from USD500k – USD4m (change to USD5m – USD20m), now and again a vessel of +-USD5m (USD25-30m).
Example of a chrome transaction:
Barak will enter into a Purchase and Repurchase agreement with the client.
The client will buy chrome from various chrome suppliers.
Payments are made by Barak to the client on receipt of an invoice, sales contract to suppliers and including a quality and quantity certificate from independent surveyor.
Chrome is then transported to the Durban port for export to China (currently Metallurgical Corporation of China “MCC”).
Original shipping documents are then sent to Standard Bank and payment is made by the Chinese supplier on a collection basis.
Standard bank will release documents once payment is made to the client, who in turn will pay Barak.
Period/Term of financing 55 days revolving.
Example of a rice transaction:
Barak will enter into a Purchase and Repurchase agreement with the client.
Barak will pay the rice suppliers directly based on the invoice, BL and independent quality and quantity check by SGS etc.
The client provides cession of insurance and therefore carries the risk.
Barak will appoint the client as clearing agent to clear the rice into South Africa.
An inspection agent in South Africa used to verify the rice quality and quality at port of loading compared to discharge.
Rice is then stored in client’s warehouse and down packed according to buyer’s requirements (daily inspection and stock reports are sent by the client to Barak and weekly independent stock reports by inspection agent appointed by Barak).
Currently clients supply rice to Pick and Pay, Massmart and Spar in South Africa.
Because of their credibility these retailers get 30 days terms to the client and on receipt of payment, Barak is repaid.
Repayment risk is mitigated by means of a session of debtors and proceeds, personal guarantees from management, corporate company guarantees and comprehensive all risk insurance covering transport, storage and delivery.
Please explain in some detail, the cash collateral / first loss deposit involved in a co-financed structure?
Barak would ideally like to provide 20% cash collateral or first loss per transaction. However, the fund can only be liable for the cash collateral placed with the bank – i.e. the fund is not allowed to be geared (we cannot lose more than 20% on the transaction).
Additional losses that may arise from an extreme event where the market drops by 30% is mitigated along the way by the loan product’s margining methodology which allows for calling on additional margin for drops of more than 5% in the value of the collateral from the client. If the client does not pay margin (which can be cash, commodity or other securities) within 48 hours, the client is in default and Barak can then immediately sell the commodity in the market.
This mechanism allows Barak (and the Bank) to monitor the loan to value ratio at all times, and acts as an early warning system should the client not have the ability to buy the commodity back. Hence, in theory, the 20% cash collateral should cover unexpected market falls even where the client ultimately defaults. Mark to market data for this purpose is provide by independent external sources and our portfolio gets marked to market by Maitland, our fund administrator, who in turn can provide the bank with a valuation report of the portfolio on a weekly basis.
When have audited financials been available to investors each year?
The 2009 – 2018 AFS are available. 2018 AFS documents will be available in June 2018 and have recently been released. These AFS are audited on an annual basis by PwC, and have been since inception. These are available upon request. No qualified audit has been received to date.
When are investor reports distributed to investors on a monthly basis? Do they come in within 30 days of the month closing?
The monthly fact sheet that is circulated to investors is sent out within 10 business days after month end with estimated returns. The final investor statement is sent out within 15 business days after month end. Furthermore, there are Barak newsflash articles that are distributed when deemed necessary.
Lastly, Quarterly Reports are distributed within 20 working days after Quarter-month end as well as an interactive investor webinar at each quarter-end hosted by the CEO, CIO and Investor Relations team.
Who are your main competitors? How do you differentiate yourself?
Other Trade Finance Funds (predominant Trade Finance Funds focusing on Africa) include:
Scipion Capital: Founded in 2007, Scipion Capital is one of the world’s leading investment managers specialising in Commodity Trade Finance across Africa. Headquartered in key trading centers, London and Geneva, with strategic on-the-ground operations across Africa, Scipion Capital seeks long-term capital appreciation by investing in opportunities across the African continent. It is one of only a handful of Africa-focused managers operating in the multi-billion dollar commodity trade finance industry.
Inoks Capital: Since its inception in 2004 our company has focused on promoting sustainable growth through innovative and impactful investment solutions. Through the funds managed, Inoks actively provide both capital and guidance to commodity value chain participants throughout emerging markets globally.
Kimura Capital: Kimura Capital, LLP is an asset management firm headquartered in London with an additional representative office in New York. Kimura provides an alternative to bank funding in commodity trade finance for Small-Medium Sized Enterprises (SMEs). Kimura’s sector focus is Energy, Base Metals, Softs and Agriculture with sub sector exposure to petrochemicals, alloys, concentrates, polymers and fertilizers and will consider transactions globally. Kimura adopts a stringent client on-boarding process. Due diligence is at the centre of the company’s operational mandate; a thorough review process is conducted on each new counterparty and every transaction.
Challenger Trade Finance: The Fund invests into collateralized, short dated trade finance transactions which involve all facets of the trade cycle including the purchasing, transportation and storing of the underlying products as well as the final sale of the product to the off-taker. The aim is to maintain control and ownership of the collateral throughout the trade to reduce the risk of any defaults.
Africa Trade Finance: Africa Trade Finance “ATF” is an Appointed Representative of Gallium Fund Solutions Limited, which is authorised and regulated by the Financial Conduct Authority. It focuses on the origination of African trade finance transactions, with a target to accompany existing, new and non-traditional ﬁnanciers, such as banks, funds, and alternative lenders in their lending activities on Africa. ATF has a solid network within leading African trade finance institutions, underpinned by a deep understanding of the risks associated with regional and pan African credit markets.
Africa Merchant Capital: AMCTF provides flexible, secured trade finance solutions whilst using a DLC as the underlying collateral instrument. The model is transaction, rather than balance sheet driven, and the aim is to dramatically increase the availability of trade finance to inward trade to selected African countries, with a particular focus on Sub-Saharan African countries.
Importantly, Barak’s main competitive advantage is its track record that it has built up over its 10+ years of operating in Africa, and the experience and knowledge that the founders bought to management. This track record and success has established Barak as being seen as the leading alternative financier across Africa, historically within the short-term working capital and trade finance space, but now recently to complement with the medium and long-term funding offerings.
Main specialty would be the well-placed on-the-ground deal origination/sourcing and investment team knowledge and experience across Africa + the broad network reach and diversification of current portfolio compositions.
What is the logic behind the Irish Stock Exchange listing? Please provide some background to this decision and how it helps investors liquidate their investment.
When the fund initially started, a few investors well known to the fund managers were based in South Africa (and still are). In order for South Africans to invest offshore, they need to obtain exchange control approval (if they invest more than R5m – USD300k offshore). In order to lessen this administrative burden for our initial investors we obtained asset swap capacity from Investec Bank of South Africa, meaning that our investors could invest through Investec Bank into our fund. Exchange control regulations allow banks to use their asset swap capacity only to invest in listed instruments. Hence we had to list the fund, this being only a technical listing i.e. not freely traded. What it does provide the international investor with is another layer of compliance, as there are strict rules which the fund needs to adhere to as well, these governed by the Irish Stock Exchange. It also improves the credibility of the Fund as investors can be assured that the Fund is complying with strict international standards, governed by the ISE.
What is the process for liquidating the investment? What is the hold period? What period of advanced notice is needed? Who is involved in the process? What forms are required to be completed? What is the advanced noticed that is required? When are exit dates (first of business day of each month or last business day of each month)?
Shareholders wishing to redeem all or part of their holding of Participating Shares must send a completed Redemption Request (in the form set out in Appendix C of the Private Offering Memorandum) to the Administrator by fax/email scan (with original to follow by mail) to be received not later than 12h00 British Virgin Islands time one calendar quarter prior to the Redemption Day (being the last Valuation Day in each calendar quarter or such other day as may be determined by the Directors) in order for the Participating Shares to be redeemed on that Redemption Day. Except at the discretion of the Directors, any delay in receipt of the Redemption Request will result in the request being deferred until the next Redemption Day and, in such event, the Participating Shares will be redeemed at the Redemption Price prevailing on that Redemption Day. The notice period may be waived at the discretion of the Directors provided the Fund has sufficient liquid assets to accommodate the late redemption.
A request for the redemption of part of a holding of Participating Shares may be refused, or the holding redeemed in its entirety, if, as a result of such partial redemption, the Net Asset Value of the Participating Shares retained by the holder would be less than US$100,000.00.
Shareholders’ attention is drawn on the fact that at least one calendar quarter between the introduction of the irrevocable redemption application to the Fund and the applicable Redemption Day is applicable. This means that, during this interval, the Net Asset Value will be subject to market effects.
What happens if your single largest investor wants to withdraw, would this withdrawal be subject to gating?
If Barak would have a substantial withdrawal the fund would be able to pay them if not all, very close to all of their capital within the prescribed 90 days without any requirements for gating. The reason for this is that a large proportion of the fund’s instruments are short-dated and would simply be allowed to run off the books within the 90 day period. If the managers foresaw a liquidity squeeze they reserve the right to negotiate a slightly more staggered approach to the redemption, perhaps over 120 days. Add: There is a 30% gating limit as per the Fund Offering Memorandum.
What are the precise redemption terms (fund liquidity risk):*
- Redemption frequency? Calendar-Quarterly
- Redemption dates? The last Valuation Day in each calendar quarter or such other day as may be determined by the Directors;
- Notice period? By when do you need to receive the redemption/selling order to exit from the fund? Shareholders wishing to redeem all or part of their holding of Participating Shares must send a completed Redemption Request (in the form set out in Appendix C of the Private Offering Memorandum) to the Administrator to be received not later than 12h00 British Virgin Islands time one calendar quarter prior to the Redemption Day in order for the Participating Shares to be redeemed on that Redemption Day. Except at the discretion of the Directors, any delay in receipt of the Redemption Request will result in the request being deferred until the next Redemption Day and, in such event, the Participating Shares will be redeemed at the Redemption Price prevailing on that Redemption Day.
- Cash availability? Redemption proceeds will be paid to the Shareholder as soon as possible following the calculation of the Net Asset Value but in principle no later than 30 calendar days following the Redemption Day and in any case before the availability of the Net Asset Value calculated for the following Valuation Day.
* Please refer to Page 37 of the Private Offering Memorandum for detailed redemption policy.
Why is there a 90 day liquidity period?
This is to protect existing investors in the fund should there be large redemptions in one month. It also ensures the liquidity of the underlying investments sufficiently matches the liquidity terms of the fund, this should be a key consideration for any investor and any mismatch thoroughly examined (indeed this exacerbated the credit crisis in the FOHF industry in 2008). In reality, there have only been two large redemptions from Barak and were met within days as the fund had sufficient liquidity to meet the amounts i.e. investors may well receive their redemptions within the 3 month period.
Who sits on the investment committee of the Fund?
The Fund directors are not active in the management and operations of the Fund since all advice comes from Riparian Advisory and all execution on this advice from Barak Fund Management Limited. The investment committee of the fund comprises of five internal members (Head up by Vishlyn Naidoo, as well as Jean Craven as CEO, Prieur du Plessis as CIO, Kevin Ramsamy as CFO and Vincent Freemantle as COO) and 3 external independent members.
Who is running the Fund, deciding which transactions to invest in and following up day to day running?
Investment decisions get taken primarily by Jean Craven (CEO) and Prieur du Plessis (CIO), both being in the position of fund managers. There are twelve fund analysts (Deal Originators) managing the day to day operations of the fund and monitoring the fund portfolio in terms of risk, restrictions, exposure etc. Kevin Ramsamy is the CFO and manages the cash position and transfers relating to the Barak funds. There are four appointed deal administrators for the Fund dealing with payments/repayments etc. Prieur du Plessis and the twelve fund analysts also spends the majority of their time visiting clients, most of whom are well known to both Jean and Prieur and the Deal Origination team.
Apart from Barak Structured Trade Finance Fund, are there any other funds?
Yes – there are three Barak funds that fall within the short-term bucket of Barak other than the Structured Trade Finance Fund. The other two are the Barak Impact Finance Fund and the Barak Shariah Trade Finance Fund. The Barak Shanta Commodity Fund is also within the short-term space in Africa, which is an agricultural trading Fund.
In the medium-term credit space in Africa there is the Barak Mikopo Development Credit Fund, and in the long-term tenor there is the Barak Asha Impact Fund focusing on agricultural infrastructure and development across the continent.
What is investor make up?
Barak has historically had a lot of European and UK-based investors (primarily Family Offices, HNWI’s and small Pension Funds), but as firm AUM has grown so has the extended diversity of this investor composition. Key additional regions for current Barak investors include the Middle East, Asia, Africa, Scandinavia and the US.
Today, Barak’s general investor breakdown is as per below:
% of AUM
Institutional (incl. Banks)
Sovereign Wealth Fund
Fund of Fund
Available upon request, for both investors and client/borrowers
Shareholding in the Fund Manager