One of the attributes that investors have valued most in recent years is liquidity. Both in Chile and around the world, an atmosphere of uncertainty prevails. First the social crisis, then Covid, and now the war in Ukraine. Volatility has reached historically high levels in traditional asset markets such as stocks, currencies, and fixed income.  Some potential safe havens, such as gold, have not performed as they used to. Commodities and metals in general have experienced high volatility due to the possibility of a global recession and as a result of the conflict between Russia and Ukraine.

On the other hand, one of the assets that has appreciated the most is the dollar, which has strengthened against most currencies, but is not immune to high volatility.

In this regard, one of the best performers in recent years, maintaining positive returns and avoiding volatility, has been private debt. Combining this strong performance in uncertain times with the prized attribute of liquidity is what alternative asset managers are looking for, generating new investment alternatives in recent times.

One asset that meets these requirements is investment in invoices. A higher risk-adjusted return than traditional fixed income, stable returns, short duration (under 60 days), and greater liquidity than private debt alternatives are some of its advantages.

Over the past three years, funds investing in invoices have more than tripled, attracting the attention of a large number of institutional investors and family offices seeking predictable returns and stability.

What invoice funds do is provide short-term financing, lasting an average of 40 days, by purchasing invoices from companies dedicated to financing SMEs, called Factoring.

What is factoring?

Factoring is primarily aimed at small and medium-sized enterprises and consists of a contract whereby a company transfers the future collection of existing credits and invoices in its favor, and in exchange immediately obtains the money from those operations, albeit at a discount, with the factoring company keeping the difference.

Factoring plays an important role in providing short-term liquidity to companies, especially SMEs. These SMEs, which provide services to other companies—generally larger ones—receive payment for their services on average 40 days after providing them. In the meantime, they must pay salaries, supplies, etc., so they need a source of short-term financing while they wait for payment for their services.

At the same time, factoring companies seek resources from banks and, increasingly, to invoice investment fundsto finance the large number of SMEs with working capital needs.

Low-risk alternative

The risk of invoice funds is low if they are managed correctly. First, the average duration of the portfolio is 40 days, which allows for continuous monitoring of the portfolio's status. In addition, the portfolio is generally highly diversified, and each financed invoice has three sources of payment:

1.   The payer of the invoice is responsible for paying it.
2.   If payment is not received, the factoring company is responsible for paying it or transferring the invoice to the fund.
3.   The SME that initially sought financing also has the responsibility to fulfill its obligations.

Therefore, for each financed invoice, three companies must fail before there is a loss for the fund.

For these reasons, the option of alternative invoice funds is becoming increasingly popular among investors. These funds are a very good alternative for avoiding high volatility and taking advantage of high nominal rates in the market. Today, a fund with these characteristics can offer returns of around 14%–15% nominal per annum with low risk, which makes them very attractive.

Matías Castro

AGF Team