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 came the social crisis, then COVID-19, and finally the war in Ukraine. Volatility has reached historically high levels in traditional asset markets—including stocks, currencies, and fixed income.  Some traditional safe havens, such as gold, have also failed to perform as they used to. Commodities and metals in general have experienced high volatility due to the potential 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, though it has not been immune to significant volatility.

In that regard, one of the best-performing asset classes in recent years—one that has maintained positive returns and avoided volatility—has been private debt. Combining this strong performance during uncertain times with the highly valued attribute of liquidity is what alternative asset managers are seeking, leading to the emergence of new investment alternatives in recent times.

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

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

Invoice financing funds provide short-term financing, with an average term of 40 days, by purchasing invoices from companies that specialize in financing small and medium-sized enterprises (SMEs), known as factoring firms.

What is factoring?

Factoring is primarily aimed at small and medium-sized businesses and consists of a contract under which a company transfers the future collection of existing receivables and invoices owed to it, and in exchange immediately receives the funds from those transactions, albeit at a discount, with the factoring company retaining the difference.

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

At the same time, factoring companies turn to banks for funding and, increasingly, invoice investment fundsto finance the large number of small and medium-sized enterprises (SMEs) with working capital needs.

Low-risk alternative

The risk associated with factoring funds is low if they are managed properly. First, the average duration of the portfolio is 40 days, which allows for continuous monitoring of the portfolio’s status. Furthermore, 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 the bill.
2.   If payment is not received, the factoring company assumes responsibility to pay it or to transfer the invoice to the fund.
3.   The SME that initially sought financing also has a responsibility to meet its obligations.

Therefore, for every financed invoice, three companies must default before the fund incurs a loss.

For these reasons, the alternative invoice financing option is gaining increasing traction among investors. These funds are an excellent alternative for avoiding high volatility and taking advantage of high nominal rates in the market. Today, a fund of this type can offer nominal annual returns of around 14%–15% with low risk, making them very attractive.

Matías Castro

AGF Team