Idle Capacities and Trade funds

Idle capacities in trade funds are primarily due to the timing mismatch of liability capacities of a fund with asset origination and asset maturities of trade as an asset class. We have not considered PE backed trade finance in this analysis, as the margins are higher (10-36% p.a.) but the day access is provided, a lot of these small lop sided geographical models will collapse. Pricing should be risk and efficiency based but majority is still access based.

The following idle capacities are worth attention:

a) Unfunded commitment stage to funded asset stage till the first drawdown

b) Lack of matched origination source leading to excess liquidity investments in low yielding alternate investment as per the fund mandate.

c) Gap in origination, leading to Trade Fund size being small and serving niches.

This mismatch when added to the management fees (1.0-2.0% p.a.) of the funds leads to the requirement of higher yields for the trade assets for the residual periods of utilisation. Most of the funds generate net returns between 3.0-8%, other smaller few Africa focussed funds with 20/1 or 15/1.5 being the split. The yield criterion leads to product choice and client segmentation.

As the ICC survey showed this year, a lot of trade gaps are origination gaps as well. When we developed Interlinkages, we worked on the basic principle of idle capacities and mismatched origination gaps.We have only discovered more liability pools.