Investment

Good returns, low risk, and invested in Africa…a fund that is proving popular with family offices

The decision of banking groups to roll back their involvement with African trade finance has brought family offices a unique opportunity to bank annual returns of 8% in recent years.  

Barak Fund Management, registered in Mauritius, offers the best-established products as the largest specialist on the African scene. As well as a standard, one year, package, it has put together five-year trade-supported credit and structured an impact fund to finance exports of agricultural goods and imports of goods like mobile phones and solar panels desperately needed by local communities. 

Shortage of financing continues to create a funding gap, which provides an opportunity for​ investments to benefit from higher yields compared to other emerging economies

Trade finance has existed for thousands of years, going back to ancient Babylon in 3000 BC.  Financiers offer it to pay producers as soon as an export order is finalised and collect their own return, secured by a letter of credit when goods arrive with buyers. It is a vital funding tool for farmers and industrialists who need to be paid for goods as quickly as possible to maintain and develop their own business.

Family offices and wealthy investors have learned to appreciate the returns on offer, and the ethos behind them. They were Barak’s main supporters at inception in 2008 and account for 29% of its client base. Sovereign funds are strong supporters, as well as institutions. Barak’s funds now total $1.4 billion.

The banks have never been overly active in servicing small and medium-sized businesses in Africa. They withdrew from the sector after the credit crisis of 2008, to concentrate on big-ticket business which offers less risk to their balance sheets. 

Nature abhors a vacuum. As UK provider Africa Trade Finance says on its website: “Shortage of financing continues to create a funding gap, which provides an opportunity for​ investments to benefit from higher yields compared to other emerging economies.”

A group of former bankers and commodity traders led by chief executive Jean Carver, a champion swimmer, put together Barak to help fund the gap in 2009.  It currently has 1,200 deals on its books, involving 180 borrowers, who take responsibility for finding buyers for their products, although Barak can assist with this.

Barak deals with nearly every African country although it has a bias to South Africa. It advises exporters on transportation, insurance and purchasing requirements. Because its trades are 80% designated in dollars, Barak does not have a particularly challenging exposure to weak currencies.

Its one year fund is scheduled to offer investors a return of 8.5% this year, just ahead of 7.3% in 2018 and 8% in 2017.  In prior years, annual returns have often been in the teens. Barak’s five-year project finance fund is on target to offer its clients a yield of 12%, secured on borrower assets and future trading profits. 

Its impact fund is on target to offer 7.5%, slightly lower than its standard fund after stripping out mining and fossil fuel trades. Apart from the returns on offer, investors like trade finance because it offers diversity compared to the stock market.

Evan Feldman, chief of operations at Barak UK, believes a growing number of exporters can use its trade finance in an innovative way, supported by third-party loans. “They could use it to increase the content of iron in their ore. They could de-husk cashews. They could do such things more cheaply than an importer, and add to the value of their exports.” This could provide more jobs, as well as higher profits, for Africa.

Feldman believes that credit fund would provide even greater help to African finance. But he says this would rely on Barak tapping the world’s largest institutions with long-term liabilities to service. He stresses that Barak will remain a trade-based financier. It has no plans to get involved in bond and equity issuance.

To some extent, Barak will be vulnerable to movements in commodity prices although funds are protected by diversity. If needed Barak can also ask its borrowers to hedge their prices. There will be sovereign risks in dealing with less developed African economies, but these are rare and deals are insured against this kind of risk. Barak has only rarely pulled out of country hit by warfare. A sharp fall in returns could lead to redemptions, as has taken place at other trade finance funds.

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