Trade Finance as uncorrelated and stable asset class with Andreas Schweitzer Episode - 540

This would be my recommendation. If you, if you want to invest in your local community or state or canton or Bundesland comes and says, I have a trade opportunity, I would look at this with great interest, like you would look at any other private debt product.

Trade finance delivers strong, secure returns, but it also carries some of the darkest fraud risks in global markets. Today we ask, is this a frontier for smart investors or a minefield waiting to be exploded? Welcome to Streams to Impact. I'm your host, Dr. Allen. This show is for professionals and entrepreneurs who are thriving in their careers, yet know their capital can and should work harder than they do. Together, we explore some smart ways to diversify, preserve, and grow wealth with purpose. Here's the reality. Nearly a third of all global fraud costs come from trade-based financial crime, and yet investors are being told this is one of the most secure, stable, high-yielding opportunities out there. How can both of these things be true? Well, today's guest is an expert in trade finance who has seen both the risks and the rewards of this space up close. And I'll be honest, I am skeptical, so I want to know more. With fraud so widespread, so underreported, and in some cases devastating enough to wipe out lenders entirely, why should we investors believe trade finance is still worth their capital? And that's what we're going to dig into. No softball questions today. So join us today as Andreas Schweitzer, a seasoned global trade finance leader and the founder of Artis Trade Invest. For 3 decades, Andreas has guided funds, advised corporations, and helped bridge the $2.5 trillion global trade finance gap by opening access to secured high-yield investment opportunities. Andreas is also an author, board member, and trusted voice in the international community. You have spent more than 30 years in trade and finance, Andreas. So welcome to the show and share with us what first drew you to trade receivables as such a powerful asset class.

Well, a very good afternoon from London, and thank you so much for your time, your interest, and giving me the opportunity to share a passionate topic. So where I started with trade is the question, correct?

Yes.

So I, I got into trade by by zero understanding as a 25-year-old when my boss at the time— I was working for a large Swiss food company, the second largest— put me to Panama from Switzerland, and because they were trading in cocoa and coffee, and that's where I started to, to trade and to learn about trade. So it was— trade was not my decision, but I found it fascinating from day one. But you move across the oceans. 80% of our products or even more go over the oceans, and you buy from farmers, you sell to multinationals, you reship in between. It's— for a young man like me, it was fascinating, and for not-so-young men like me now, it's still fascinating.

Well, thank you, Andreas, for that introduction and bringing us into this world. Many investors, and certainly including myself, are not at all familiar with trade finance. So how would you explain what trade finance is in the simplest terms, and, and why should high-achieving professionals interested in this as an investment opportunity, why should we be paying attention to this?

Trade finance is a subset of private debt. You have private equity on one side, your listeners are of course familiar for. You have private debt, and private debt is a very growing market with banks less and less financing, especially the Mittelstand, the SME, the small and medium companies. They have a very hard time to be financed. But trade must happen. You know, you need to ship pencils, you need to ship toothbrushes, you need to ship very basic things. It's steel, you need to build houses. Everything that ends somewhere has eventually been shipped and has eventually been financed, even by the company's own balance sheet, but more often than not by a third party, which used to be banks and now the private sector hedge funds, private debt funds are coming into this. very, what I consider, broadly stable and from a yield perspective, very interesting market space. Of course, like in every market, you have disasters and you have fraud. You have it on the stock market, you have it in the debt market, you have it in the currency market. So trade finance is not sort of the virgin out there. But it's also not worse than any other market if you pay attention. You always have crooks, you always have a fraud somewhere. So I, I would say trade finance is— I don't know if trade finance is better off. I would say yes from a risk perspective. Have a very low failure rate, extremely low failure rate if you look at the statistics. But when you have a fraud— and I address this now because in your opening you addressed it, so I want to get it out into the open— when you have a fraud, it's normally a big one, and you read in the Financial Times and in the Wall Street Journal. I mean, the very big case was Greensill, a $10 billion issue which affected half the world. You had thing with Gupta in the paper. I mean, all this is public knowledge and you just look it up in the newspaper. But just because you have very big disasters doesn't mean that 99% of the trade doesn't work normally. If you have a stock market, if you have a a crisis in a listed company because a huge fraud happened, that doesn't affect the other companies. So this is a little bit my take of reality on that, that we also have been affected by fraud. So, so you just need to make sure you know what you're doing and you do it properly from A to Z, and you follow the money and you don't give your money out of hand. I think this is probably the critical thing You follow— you have a meticulous system to follow the trade.

Just according to some of the basic research that I did, just looking at the big picture, nearly a third of all global fraud costs are coming from trade-based financial crime. So with that perspective in mind, Why would investors want to consider putting their money into this sector, particularly those of us who've never done that before?

Well, look, I can only talk about myself. I cannot suggest anything to any investor, and I'm not giving investment advice. I give investment advice to myself, which might already be a bad idea. But be that as it may, I decided to finance trade in Central Asia about just before the pandemic. So I was in trade for a while, then I went into private equity. Maybe I shouldn't have done that. Then we run a— we run a fund, uh, a few hundred million, and that was a market timing fund. And then I was active in Central Asia, and this is where this trade became so a big demand that we got approached by many. Can you help us because we are lacking the help from the banks? So we did this, and when we retracted from that market, mainly for geopolitical reasons, it just become— became very complicated, this whole Middle East and Central Asia topic around 2015, 2018. I, I took the first year of the pandemic and sat down in London now garden, and said, you know, let's look at Europe. And I realized that in Europe you have a lot of problems also, not in my home country Switzerland. A few nights ago the news said that SMEs have a serious fundraising problem for trade. So is Germany— so this is not a Global South, as it used to be called, Third World problem, not at all. This is a worldwide problem in every country. no doubt also in the Americas, North and South. So we researched this very intensely and found out that this, that this global problem is also here in London, that banks don't finance an SME company even if they get a letter of credit from a very valid bank. And So we decided we play this SME market. I'm happy to look at your statistics. I don't know if your statistics of a fraud of a third— is it by numbers of trade? Is it by numbers in, in dollars or something? But as I said before, when a fraud in trade has happened and hits the newspapers, it's normally in the many billions. So it's only the big cases hit the newspaper, but you have very large fraud cases, that's true. But who is investing in these things? This is normally— trade is not a retail product, and that you will not find many funds by banks, and probably because banks do it with institutional investors. And that's why often trade finance is also— is not regulated in every country, because the regulator says it's not a retail product. It's for professional investors. They know what they do. So we like to, to finance trade where we know the parties and where we are basically the operator. So we would take, for example, cannabis. Let's take medical cannabis from Canada to Europe. We buy the cannabis product and we own it and we sell it, and we have a credit insurance from the buyer, or we have a down payment from the buyer, or We have a letter of credit from the buyer, one of these three things. So we take we take ownership of the product and then we sell it. We replace in a way the trader in the middle because we don't want to give money to a third party. We take the product to us. So this is what we do to protect it. And you know there are a lot of very good trade is a local game. We looked at the American market and I found out we don't understand the American market. We have no U.S. business, but if look at the US, for example, in Florida, there was a company, all they do is financing bicycles to local people. That's all they do. Probably a huge business in Florida. Everything in America is bigger than somewhere else. More people, huge market. So we like niche markets, which pay an above-average rate, and the banks don't do Banks don't do cannabis for ESG reasons. Sugar, often banks don't do it. Why? Sugar kills. So you're allowed to eat chocolate, you're allowed to buy chocolate, but the banker is not allowed to finance the sugar. Fuel, when you finance petrol station, most of us, nearly all probably, go from time to time to a petrol station to finish, to fill in a, fill up a car or a bike. Banks consider this a product they should not finance, but we can consume it. So there is a discrepancy what we consume and what gets financed. So everybody wants to look very holy. Defense, you know, defense is a case where, and ESG, you cannot finance defense. So if you finance a defense product that is defensive, you're allowed to do it and invest in it. If it's offensive, you're not. Now, is your missile attacking or is it defending? Is your plane defending or is it attacking? You know, we are here for 3 hours if we discuss this philosophy, but this is how the world runs now with various regulations. So to make this all very short, We like small trades which we can oversee. We would not go into being a big wheel in a big trade we have absolutely with many counterparties we don't know. So this would be my recommendation. If you, if you want to invest, or if in your local community or state or canton or Bundesland comes and says, I have a trade opportunity, I would look at this with great interest, like you would look at any other private debt product. If you go— if you give someone money to do something in a startup or something else, you're also very careful. So you apply the same rules to trade finance. It's not more— yeah, it's not more complicated or less complicated than that. But it is pretty much an unknown area. I agree with you, Allen. It's not a broadly known topic. And this is what we realized when we researched it, and that's why I wrapped at the end all the research in a piece of paper, wrote it up in a book to explain to the non-financial investor what it all entails, trade finance. It's a business, and it's a very interesting niche business.

Andreas, I really appreciate you taking us through, through this with much more concrete examples. It's starting to make a whole lot more sense. To me, and you just mentioned your book. If you could, why don't you just go ahead and hold that up so we can see that on the screen and just tell us just a tad bit about your book and where our audience can find that.

Oh, you're very kind. Trade Works, my brother-in-law felt this is a good title because I didn't know how to call this, so we call it Trade Works. And we believe it is what I have written, the smart investor's path to uncorrelated returns, because it's not correlated to the stock market. I'm not a stock market guy. I don't understand the stock market. But I believe we understand a bit of trade. Now, in this book, I try to talk also about the history. Now, you know, we have all these crises and 2009, we have 1987, we have the dot-com crisis in 2000. And one of the charts shows each time there's a crisis, regulations shoot up, and then they came down again. Next crisis, regulations shoot up. This is how it ticks. But some of us might remember the Kuwaiti stock market crisis, and in the '80s, for example, the pairings problem. The British Merchant Bank, I think in 1600, 1700, Britain had such a crisis, it took down the GDP by 20% and destroyed 5 banks. So, I mean, we have enormous crises. We have the tulip crisis, but this is more than a trade crisis. This is a worldwide economy issue at the end. So in this book, we also cover the risks in trade, the political, the supply chain risk, then with the legal requirements, You have something called the Basel framework, Basel in Switzerland, where the regulators come up with strong regulatory criteria and they number this through. We are now at Basel III and soon at IV. You find a lot in the paper and it means it's the underlying equity for banks and many other things what you can do a lot. Decentralized finance Blockchain is a big issue. If I can move, and this is something why should one invest, we are now moving the whole trade business on blockchain. And then we believe it becomes very complicated that money goes the wrong way if you base this on smart contracts. To put it all in a nutshell, I was in Saudi Arabia last November with a business organization I'm a member of for 20 years, started in the US called YPO, Young President Organization. So we spent some time in Saudi, and Saudi is a phenomenally interesting trade market, as is the Middle East again. So, and then we cover some opportunities. And, uh, yes, I obviously— you find it in, in your bookshop and on, on the big online, uh, on many online platforms. And I just published the German version today, and the Arabic version hopefully be up before the end of the year. And we also have websites if you want to share this, Alan, where there's a lot of information on our website about trade, where we publish every article we have, and your readers are most welcome to have a peek at that, or otherwise give me a shout if someone is fascinated about the topic. We also write in Forbes, so— We try to share the knowledge.

And we will put that information in our show notes so that our audience can find the Forbes connection as well as your website where you have additional information and beyond what is just in your book publication there. Well, Andreas, I'm going to be really hard on you. So we're coming back to this issue of fraud and theft and forgery, which is endemic in the blockchain environment overall. But what has been happening certainly in this, not just on large scale, but there has been tremendous amounts of faked invoices, forged documents, impersonated companies, and fabricated Shipping records. So how can we possibly, as investors, how can we even begin to do our own due diligence so that we don't find ourselves swallowed up in some of these scams?

Again, I can give you my humble perspective from my view, because I've never invested in, in other people's trades. And you're right, if you look, trade funds went bankrupt also. But some of the trade funds went out of business because they did not stick to their own rules. If you say you are shipping, you are financing the shipment of packed sugar let's say half a pound or a pound or a kilo, you ship it to, to a big wholesaler. That's one thing. A finished product goes to the wholesaler. Then you say, maybe you have to manage, maybe why don't I finance last— next year's harvest and then I buy the sugar? So, and I'm telling you a real-life course of a fund who did exactly that. The name of the fund is irrelevant here. And then maybe the next step is, but if I finance the harvest, maybe I should go down the value chain a little bit, and why don't I buy and own the sugar farm? But now you are in the agricultural business and not anymore in the trade. And now you harvest, you have a typhoon, your harvest goes bad, your trucks are destroyed, your whole farm is destroyed and you're destroyed also by your own fault. So having a good risk, I would look at, and this is part of the due diligence when people come to us, especially institutions, what is your risk process? Who is on your risk team? Who is your board? Or are you a one-man show? We are a small organization, but we are far from a one-man show. Family offices invest with us and look at us Individuals invest with us. The large companies, the large funds don't yet because our tickets are too small. So I have a hard time to put away 50 million in one trade. That that's a small tanker, and we are not in in that business. We we like to stay in our niche. So I'm a bit shy to take on these larger deals because you need a much larger organization. So if I were an investor in trade. I would do exactly the same as if you're an investor in private— in another private debt, if you give a private loan, or you put money into any equity-related business, being a startup or ongoing. You look at the management. Normally, half of— half the deal is the product, half the deal is the management. Can the team execute? Can they deliver value? And this is unrelated to trade. This is in general to investments. Will they make more money for me or at least give me my money back? Then getting less back— less is of course the worst case, or losing it all in some disaster. Just look at it closely and understand what that company in the trade is doing and how are they doing the trade. And it depends how much money you put in. you know, it's— 10,000 is a different due diligence than 10 million, of course. But know the counterparties, and that's— we need to know, and we hope that someone will check and question us if we do know our counterparties. And we know, we always visit them. We are very operational. This was the big discovery before I— when I started first investing in trade. that we said very quickly became operational because this is the only way you have to be very close to your product, which means you're very close to your money. And I would not give money to a third party. I would only buy the product and resell the product or have good insurance on it.

So I appreciate that clarification. So Just so that we understand actually your business model a bit more clearly. So investing with you, if we brought your— brought funds to you to invest, would we know the entity that we're investing in? Or so in other words, are we investing in a specific entity? Or are we investing in a fund, essentially a fund of funds where there are a number of entities in that one investment? How is your operation structured?

Yes, we moved to a fund model. We have SPV models where you sell the transaction. You say, I need $5 million. and investors come and everybody gets a share of this €5 million in the SPV. That was a model. We can still do this on larger deals, but by and large, the fund, a certificate or a fund, we're just setting up a new EU-regulated certificate now, it's easier because money comes back. For example, we put up money between a week and 3 months. Now, 3 months— 1 month, 2 months, 3 months— that's a product. That's pharma, that's glasses, that's books. That can be anything, roughly 3 months. You have shipment of a few weeks, you have transportation, so the buyer wants to have a 3-month timeline. 7 days is, for example, petrol station. You deliver them fuel on Monday on credit and they pay you on Friday.

So essentially, you have 2 models, you prefer the fund-to-fund, but you still offer the special purpose fund. Did I understand that correctly?

For larger ones. But you see, I cannot ask each time the investor, can I reinvest? We, uh, my— the model we want is now, or we are doing in German, at least in Germany and in the German-speaking Europe where we have a focus now, we take the money for a year. So the investor commits for a year, and by the end of that year, he takes it out or recommits more or less. Because I need to plan. I cannot suddenly tell a bottle manufacturer, so sorry, in August and September I cannot finance bottles because I'm out of money. So, you know, we lose the deal. We have— we want reliable customers, but we have to be reliable to the customer as well. So we— cash planning is very important, and that's one of the annoying things in trade. A lot of trades are late, but they are late a few days, sometimes a week, sometimes maybe a few weeks. But it's very rare— it's very rarely that a trade does— is not getting paid. And if you're short, you get paid by the insurance. But you remember the Suez situation with this big boat stuck in the Suez Canal for delayed the worldwide supply chain by weeks. There's nothing you can do, but you also don't lose your money. It just comes a few weeks later. Now, do you get an interest on it? Maybe, maybe you don't. So, uh, you try your best, but sometimes you sec— you, you have to sacrifice a bit of margin, but you want your money back in order to finance the next round very quickly. And so I like a pool of money where we can reinvest very swiftly.

So is this fund a blind fund, or is it—

Cash flow is key.

Okay.

Correct, yes. So is it a blind fund? The investors, we put your money in and then you make You have the discretion to determine which entities are going to be invested in, or do investors have some say in terms of what's going to be invested in or not?

It's a little bit the other way around. We say what we are doing. At the moment, we invest in fuel. We will say who are the counterparties. We disclose the counterparties. Then we have a risk committee, we have a board, and they represent us. Now, these trades are between half a million and maybe 2 million on a repeat basis. So this— there is no discretion there. The discretion stays with us. If we do bigger tickets like 10 million— there's an 11 million sugar trade coming up, for example, from Malaysia. from Brazil to Malaysia. There we— that's sort of a, a one-off where then the investor says, yes, I like it, I do it, or I don't, because we have to raise more money for it. So on this, on the smaller trades, I mean, we, we know, of course, we study whom we deal with. We spend a lot of time investigating counterparties, and more often than not, we don't deal with the counterparty. But if we do deal, then we like repeat business. because also of the cost, and the counterparty also wants to be financed every month or every 35 days. Now, if money comes back late, that's always a bit of an issue, so you always should have a bit of cash to cover a delay and not miss the next trade, because it gives you a bad reputation. We don't know all of our investors because if someone invests in the certificate through a bank and just say, buy me ISIN number so-and-so or ticker so-and-so, then we only see the bank or the broker but not the individual. But if an individual company or person can identify themselves as an investor, we will give them access to the software we have where every trade is registered. So everything is transparent. They can see which trade, how much, and who are the parties. So investors don't have a say in the small trades, but they have complete transparency. And if for some reason someone doesn't like it, then of course they just take their money out. And on the large trades, if you have, you know, if you have a vessel of 10 million of fuel, then this is a consortium and there the investors look at it anyway and decide to invest or not. So it's very much size-driven.

Yeah. Well, Andreas, it's been very informative, and I really appreciate you being very open about the business and how it operates and introducing me and probably many of our investors to this world of trade finance. it's a brand new game for me, to, to be sure. So thank you, Andreas, for being with us today. We have just heard from a specialist in trade finance, Andreas Schweitzer. He has been very open with us how trade finance works, and he has been very open with us in terms of how his business operates in this unique field of investing. So despite all the fraud, the forged documents, the shadowy underreporting, and 7-figure blowups, investors still have the opportunity to look at trade finance as a serious option. So here's the question that I leave each of you with. Are you convinced? Is trade finance really a secure high-yield asset class, or is it a minefield that only the bold, or maybe the reckless, dare to cross? Andreas has given us a lot of information, and in the show notes there are the links to even additional information, as well as a link to find Andreas's book on the topic. So I'd love to hear from all of you. I'd love to hear your thoughts. So drop me a message, connect on LinkedIn, and let me know if you think trade finance is the next frontier, or could it be the next fiasco? I'd love to hear from you. And Andreas, once again, thank you so much for being with us, being open and honest about how All of this works and really being open about your particular business plan in the trade finance world. Thank you, Andreas, for being with us. Enlightened Investors, I look forward to being with you in our next episode.

Thank you very much, Alan. My pleasure. You're welcome.

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