Invoice finance strategies and the growth of loans as an investment asset class.
Investment funds that make use of invoice finance strategies to achieve returns provide loan finance to SMEs.
Invoice finance is an alternative to a conventional commercial loan where the loan is made against the expectation that outstanding invoices will be paid. In effect, the loan is being secured against money owed.
Invoice finance strategies used by asset managers do not differ hugely from those delivered by conventional commercial finance companies. Indeed, an asset manager that makes use of invoice finance strategies may own one or more financing companies that carry out the day-to-day administration of loans.
Invoice finance strategies are more original due to their ability to channel investment capital into the commercial loan market. Investors are interested in these strategies because of their consistent cash flow and lack of correlation to public markets. Such strategies can involve both factoring (taking on ownership of outstanding invoices and lending their value) and invoice discounting (where the lender takes a percentage of the final payment of the invoice while lending the value of the invoice).
With the retreat of many commercial banks from the direct SME lending market in recent years, other firms have entered the space including asset managers. The attractive characteristics of invoice finance strategies include smooth cash-flow and a transparent investment business model that investors can understand and trust.
Invoice finance strategies will typically require that the fund manager and/or the finance companies it controls has a thorough understanding of the market it is lending in. The appointment of specialist invoice financing or factoring teams with experience of the market and extensive client relationships is a necessity.
The appetite for invoice finance strategies and related loan-based strategies in institutional investment and wealth management is likely to increase in the next few years as allocators seek to diversify funds into non-correlated assets like loan funds. Invoice finance strategies will play an important part in this as they represent an effective way to unlock revenue streams and returns in developed markets, especially in under-banked sectors such as agriculture.
Invoice finance strategies add further diversity to a loan-based fund strategy. They are particularly suitable for wholesale businesses such as agriculture or alternative energy. As the invoice financing industry becomes more sophisticated and scalable, thanks to technological innovation, so the overall capacity of invoice finance strategies is likely to increase.