Can Trade Receivables achieve greater recognition to become a leading alternative asset class? – Part 1
Today’s low interest rate is obliging investors the world over to look for better returns and Trade Receivables have grabbed the attention of Private Equity, Hedge Funds, Family Offices, Pension Funds and Corporate businesses alike.
What are Trade Receivables? In simple terms, a Trade Receivable is the amount invoiced by a supplier for goods shipped or services delivered to a customer. Since invoices are typically payable within 30 to 90 days from the date of issue, the supplier must finance the work required for each transaction during the intervening period and this can lead to cash flow complications.
However, there is a straightforward solution: because each invoice represents a tradeable asset which can be financed (‘sold’) through an Invoice Discounting or Factoring service, the supplier is able to obtain immediate access to a large percentage of the invoiced sum (usually around eighty percent) with the remainder payable when the client settles the invoice (minus transaction fees).
Trade Receivables enjoy the important advantage of being non-correlated with traditional investment classes such as Equities and Bonds. Whereas popular alternative investments (with a similar low correlation) like Private Equity, Venture Capital and Real Estate, tend to be illiquid and lack the flexibility that allows for a rapid withdrawal or change of investment strategy when faced with fast moving market circumstances.
Most investors want to enjoy a high rate of return with a low level of risk. However, their investment horizons may vary between short and long-term frames. A typical portfolio may hold a balance of equities, bonds and cash and this asset allocation is likely to change from time-to-time as investors look for new opportunities to rebalance their holdings in light of market changes. Trade Receivables can play an important role in this process due to their reliability, versatility and to the wide range of choices available.