Inventory Monetization Offering New Route For Investors To Access Private Markets
Much of the conversation around SME financing post-GFC has revolved around direct lending, and understandably so; there’s a multi-billion $/£/EUR funding gap now that banks have all but turned off the tap. Indeed, direct lending investment funds have raised $494.54bn globally since 2009, according to Preqin.
Not all SME owner/operators want to get into debt to fuel their expansion, however. Even in this zero lower bound interest rate environment, the interest rate they would typically pay to a direct lending fund is higher than they would have paid a bank a decade ago. On the investor side, some remain wary of the asset class due to liquidity issues, both straightforward in terms of redeeming, and less so in terms of a mismatch of redemption terms and underlying assets.
Those investors looking to access opportunities in the private SME market that don’t want to allocate to a debt vehicle have an emerging asset class to allocate to, namely, inventory monetisation. Alessandro Zamboni, Founder and CEO at London Stock Exchange Listed Supply@ME Capital, says that it’s important investors don’t confuse this with inventory financing.
“Inventory monetisation is not financing,” he said. “It’s not asset backed lending. The SME literally sells their inventory to a platform like ours, using the proceeds of the sale as they would normally, for reinvesting in their business, paying suppliers, staff, whatever they need it for. Investors should view this as a private equity / debt hybrid.”
Firms like Supply@ME Capital pay – via special purpose vehicles - book value plus a margin for the goods and charge a storage fee to the SME, generating fee income from the companies they have purchased inventory off of. When the SME needs to fulfil a customer order, they simply buy the inventory back off of Supply@ME Capital.
“Our clients – the SME – sees us as a semi-equity facility. In the world of working capital, the only alternative for those SMEs that can’t get asset-backed finance or a loan from a direct lender – or don’t want to – is to go to private equity, which have stringent requirements. By selling their inventory to a platform like ours, the SME is essentially getting an alternative way to recapitalise their business without giving away an equity stake, moving from a principal role to an inventory sales agent mandate,” said Zamboni.
Investors buy shares of a fund – in Supply@ME Capital’s case, they raise funds via an alternative fund multi-compartments (depending on the regions underlying) and receive returns based on the increase in value of the fund, exactly the same way that an investor would in any fund. Alternatively, they can subscribe to the notes that the fund issues via its special purpose vehicles (“Stock Companies”) if their risk appetite is a touch lower, or they prefer the consistency and predictability of fixed income investing.
Risk-wise, firms like Supply@ME Capital ensure covenants exist which enable their Fund to sell the inventory if the SME can’t for some reason, like a customer blow-up. These situations are rare, however, due to the types of companies that Supply@ME Capital works with.
“This asset class works with companies which are healthy and at a normal operating stage of their evolution. It’s not a distressed play, and not a venture play. That’s important because we need to ensure that we can resell the inventory at market levels if something unforeseen happens,” said Zamboni.
Inventory monetisation is another asset class that is enabling the resurrection of ‘normal’ business operations as world economies recover from the effects of the Covid-19 pandemic. Manufacturing firms, often with excess stock stuck in a warehouse, can avail themselves of this opportunity to realise working capital and get back on their feet more quickly. Early investors with Supply@ME Capital tend to be hedge funds and family offices on the equity side and debt funds and Asset Based Lenders on the notes side of their products, but Zamboni says that it’s only a matter of time before larger investors begin to take a look at this emerging asset class, not least because the nature of the business – short-term capital flows – offers a liquidity benefit.
“Private equity and banking lending will always have a role, of course,” he said. “But until very recently, SMEs had to choose between one or the other. As I said, inventory monetisation offers the SME a new route to access working capital without giving up equity or going into debt. Whilst there is definitely a short-term play for SMEs looking to get back on their feet, there is a longer term play more fundamentally. For investors, inventory monetisation supports smaller duration investment funds because of the nature of the business. It offers them a more liquid way to get exposure to the private markets as their capital doesn’t need to be locked up for a decade or more.”
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