Australian banker Lex Greensill’s Greensill Capital, a start-up that provided short-term cash advances and spun off its loans into bond-like securities has filed for insolvency protection. This after bondholders Credit Suisse stopped investors from moving money in or out of $10bn in supply-chain investment funds when Greensill lost coverage from credit insurers. Backers such as German municipalities and Japan’s SoftBank stand to lose billions. Now South Africa’s Barak Fund, which has a strikingly similar business model to Greensill, is crumbling too, according to the Bloomberg article below. – Melani Nathan
Another trade finance fund implodes in echoes of Greensill
By Nishant Kumar
(Bloomberg) – Barak Fund Management’s $1bn money pool is preparing to sell its frozen assets in the latest case of implosion at a provider of trade finance.
The Mauritius-based fund is seeking investor approval to move ahead with a restructuring plan that involves spinning off illiquid holdings into separate vehicles for clients who want to hold on to their assets, according to documents sent to investors last month and seen by Bloomberg. The move follows the fund’s decision a year ago to freeze its money pool as some investments became trapped in a series of hard-to-sell assets across the continent of Africa.
The firm “has not seen any significant improvement in the liquidity position of the funds and as such has had to proactively manage the risk components linked to the mismatch between the liquidity of the underlying assets and the liquidity offered to investors,” Barak told clients in the proposal document.
Barak’s troubles are a reminder of how plowing money into higher-yielding yet hard-to-sell assets can hurt investors when they want their money back quickly, a danger exacerbated by the global pandemic as prices began tumbling across financial markets last year.
They also come at a time of growing scrutiny toward trade finance companies. London-based Greensill Capital, among the biggest such independent firms, was left fighting for survival this month as investors cut ties over concerns about the creditworthiness of its borrowers, and Credit Suisse Group AG moved to wind down a $10 billion group of supply chain finance funds linked to financier Lex Greensill because of valuation concerns.
Barak’s auditor, PwC, resigned last year before completing the 2019 audit of the fund. A spokesman declined to comment when contacted by Bloomberg on Wednesday. PwC was replaced by Macintyre Hudson, the document shows.
A Johannesburg, South Africa-based spokesman for Barak declined to comment.
Barak, founded by Jean Craven and Prieur du Plessis, launched its flagship Structured Trade Finance Fund with $300,000 in 2009. The fund grew to manage in excess of $1bn by 2018 as banks retreated from the sector, prompting cash-strapped businesses to seek alternative sources of finance.
Barak was one such provider. The fund extended loans to about 150 borrowers, disbursed $4 billion and in the process provided a steady return to investors with not a single down month until the pandemic began ripping through financial markets a year ago. On April 6 last year, the fund froze all subscriptions and redemptions because of “valuation uncertainty.”
Last month, the firm told clients that the investment objectives of the funds it ran were no longer “reasonably achievable” and asked its board to maintain the suspension and proceed with liquidation, according to the document, which details the extent of the fund’s exposure to assets so illiquid that they may take years to sell. The fund previously allowed investors to take money out every quarter.
The fund’s current exposure is spread over 97 borrowers in transactions including working-capital financing, according to the restructuring document. As much as 54% of its assets are deemed illiquid, with the heaviest concentration in sectors such as coal mining, consumer goods and fertiliser production in countries from South Africa to Kenya and Congo, the document shows.
The firm has provisioned $184m – about a fifth of its assets – for potential losses against liquid and illiquid investments. It has also sought investors’ permission to hire an undisclosed advisory firm managing $300bn to help oversee the process.
Clients opting for liquidation will get their cash back when the firm is able to sell holdings. Those remaining invested will get allocations in a relatively liquid part of the fund, which will continue to put money into the private debt market, and a “side-pocket” created to park illiquid holdings.
“We understand the path to recovery will be challenging,” Barak said in the client document.