Nicolas Clavel, Scipion Capital: “We expect alternative sources of trade finance to expand and secure the market share vacated by European banks”
Nicolas Clavel (pictured), chief investment officer of Scipion Capital and manager of the Scipion African Opportunities Fund, sees increased interest in the firm’s Commodity Trade Finance sub-fund as a wider range of investors look to the strategy in search of absolute returns and a genuine source of alpha.
GFM: What is the history and background of your company, principals and funds?
NC: I began my career with Credit Suisse in Switzerland, and joined Citicorp Investment Bank in London covering EMEA structured trade finance in 1984. I left Citibank in 1992 as chief executive of Citi’s West African head office in Dakar after having been headhunted to start DOC Finance, a merchant bank based in Geneva focused on trade finance in Latin America and Africa.
I returned to Africa seven years later as chief executive of Standard Bank’s Congo-Kinshasa subsidiary, before joining Standard Chartered Grindlays in Switzerland two years later. I then spent four years with Barclays Bank in Switzerland managing a portfolio of African clients immediately before setting up Scipion Capital.
The Scipion African Opportunities Fund, which currently comprises three segregated share class portfolio strategies, was established in July 2007 with the launch of the world’s first pan-African equity index tracker fund, the Africa Investor Ai40 Index Tracker, a long-only passively-managed fund for which Scipion is also exclusive distributor.
This was followed in August 2007 by the Commodity Trade Finance fund, Scipion’s flagship. In January this year we launched a strategy focused on African mining and resources, which blends investments in junior mining equities with mining-related commodity trade finance and hard assets. The fund is advised by Dr Elena Clarici, a qualified mining engineer and current chairman of the Association of Mining Analysts.
GFM: What is the structure of your funds?
NC: The Scipion African Opportunities Fund is a segregated portfolio company domiciled in the Cayman Islands. The Scipion Active Trading Fund is our loan syndication platform and a subsidiary of the umbrella fund. Scipion Capital is also registered in the Cayman Islands, with a branch in Geneva and a subsidiary in London, Scipion Capital (UK) Ltd, which is authorised and regulated by the FSA to carry out corporate finance and marketing activities.
GFM: Who are your main service providers?
NC: Our custodians are Banque Audi (Suisse) and Standard Chartered Bank, and our bankers are JPMorgan Chase, Arab Bank (Suisse) and Clydesdale Bank. Our auditor is Deloitte, our administrator is Centaur Fund Services, and our legal advisors are Appleby (Cayman) and Addleshaw Goddard.
GFM: What is your distribution strategy and targeted client base?
NC: Scipion’s client base comprises various types of investor located in the UK, Switzerland, Europe, Asia, and Africa (we recently opened the fund to US investors for the first time), including ultra-high net worth individuals, family offices, IFAs, funds of funds, private banks, and other institutional investors.
We target a diversified investor base, with a common interest in absolute returns, expert management and genuine alpha. The fund is distributed directly, with performance reported via numerous hedge fund databases.
Scipion expects to join a new emerging markets managed account platform soon to streamline access for the IFA and wealth management market. We also run managed accounts, as we see growing interest in the transparency and control they offer.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
NC: When I launched the Scipion African Opportunities Fund in 2007, I could see that the Basel II and Basel III accords and the tightening of capital adequacy they were bringing would force banks, traditionally the dominant players in trade finance, to hold more capital against the asset class.
The sovereign debt bubble that has been inflating for the past decade or so has exacerbated the situation, and may become permanent for Europeans. French banks in particular have been hit hard, and have shrunk their trade finance books accordingly. The knock-on effect has been a reduction in credit lines to African banks and many traders. This has intensified the shortage of trade finance in Africa, leaving a gaping hole for alternative financiers such as Scipion to fill.
GFM: Please describe your investment process.
NC: The nature of Africa forces Scipion to take an extremely rigorous approach to risk management, which drives the investment process. With regard to our trade finance strategy, we first look at countries where we can do business; obviously we avoid nations in a state of conflict, but we work in English- and French-speaking countries as we can understand the language. We will move into Portuguese-speaking countries soon, and have just launched a Portuguese language version of our web site.
We make a qualitative and quantitative assessment of transactions using Moody’s risk analytics software and our own bespoke risk grading system, and work with our clients to adapt transactions to reduce certain risks. If a transaction passes the initial risk grading, we conduct a personal due diligence visit to make our final assessment. Only when we have the relevant paperwork in place will we disburse. We retain collateral managers on the ground to monitor transactions and take action to protect our collateral if necessary.
GFM: How do you generate ideas for your funds?
NC: Working alongside me on origination is Anthony Kukielski, who has spent more than 30 years trading in commodities in Africa. I have spent 35 years in trade finance, transacting hundreds of millions of dollars, and our combined network of contacts delivers more deal flow than we’re currently able to service.
Our philosophy is to finance only non-perishable commodities to mitigate risk. Fresh flowers, fruit, and vegetables are inherently risky, as delays en route can lead to the goods – our collateral – going off. Nor do we finance very high value goods such as gold, platinum, or diamonds, which are well-serviced spaces where spreads are lower and risks are higher.
We direct financing toward agricultural products including coffee, cocoa, grain, seeds, and nuts, as well as minerals such as iron ore, manganese, cobalt, nickel, salt and tin. This is where our logistics skills and knowledge of the countries adds alpha. As the middle-class population in Asia and Africa grows, demand is increasing for goods that Europeans and North Americans take for granted. This is one reason why trade finance strategies were largely unaffected by the global financial crisis; people don’t tend to cut back on things like coffee and salt when they are squeezed financially.
GFM: What is your approach to managing risk?
NC: Offering trade finance in Africa successfully means focusing on risk and taking action to mitigate risk before transacting, then closely managing transactions once they are live.
Our approach to managing risk is split into four main areas, country, commodity, counterparty, and logistics, and our philosophy is to transact only where we are comfortable with levels of risk in all areas. That’s why we have developed sophisticated risk grading tools to analyse each part of a transaction and highlight risky aspects, and to take mitigating steps before we advance capital.
For example, where a transaction involves moving goods from an inland country that we are uncomfortable with (perhaps for political reasons) to a port, we may suggest to our client that we begin financing when goods are over the border in a less risky jurisdiction. We put political risk insurance in place where necessary. Additionally, the finance we provide is secured by the commodities as our collateral against default. Goods are always insured en route or while in storage. Loan to value ratios are below 100 per cent, as we like our borrower to have some skin in the game.
GFM: How has your fund performed?
NC: The star performer is our Trade Finance strategy, which has never had a negative month in its near five-year history, while returning a net annualised average of nearly 12 per cent to investors. A well-managed finance strategy should never lose money if you get paid back, and the rate of default in trade finance is spectacularly low at an average of less than 0.3 per cent, according to a study last year by the International Chamber of Commerce and the Asian Development Bank.
The Ai40 Index Tracker has tracked the Ai40 index very well, but in 2008 African markets were particularly hard hit by the credit crisis. They’re now in a strong growth phase, so we expect the index to reflect the consumer story that is changing the face of the continent.
Our Mining and Resources strategy is only four months old at time of writing, so it is hard to draw meaningful conclusions, but it is performing well within the range of volatility that we expect from a portfolio of junior mining equities blended with the steady returns of trade finance. Our equity holdings suffered in March’s month of fear, and became even further undervalued, but our performance in April was positive as the trade finance element of the portfolio performed very well. As confidence returns these are likely to bounce back, making now a great time to invest!
GFM: Are you looking at any particularly attractive opportunities right now?
NC: We have a number of exciting opportunities in mining, from coal to silver.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year?
NC: We expect alternative sources of trade finance to expand and secure the market share vacated by European banks. A number of large trading firms are considering launching trade finance funds, but avoiding conflicts of interest (i.e. do you share your trading margin with the trade finance fund or use the fund as a cheap source of finance?) is a challenge that that will be hard to resolve satisfactorily.
GFM: How will these developments affect your firm?
NC: We expect the Trade Finance fund to grow assets under management as more investors discover and understand this strategy.
GFM: What do investors currently expect from managers?
NC: They expect a strong process, an experienced team, an understanding of the investors’ own goals, performance that matches promises, clear reporting on their investment, and a fair level of fees for the work involved.
GFM: What differentiates you from other managers in your sector?
NC: Scipion’s management team has unrivalled experience in African markets and proven ability, as demonstrated by the 100 per cent track record of our Trade Finance strategy. Scipion also stands out as an innovator; the Ai40 was the world’s first pan-African equity index tracker fund, while the Commodity Trade Finance fund is the oldest trade finance fund dedicated to Africa.
GFM: How do you view the environment for fundraising over the coming 12 months?
NC: Fundraising has been very difficult since 2008, when fund managers with USD200m or less in assets were told by the big prime brokers to leave as they didn’t have the money to finance them. This led directly to the huge brand-name funds with multiple billions in assets under management scooping up most investment since then.
Is this fair or logical? Of course not, but the big funds pay banks the biggest fees! However, investors are realising that maybe their cash isn’t so safe in a vast fund. There are substantial difficulties in deploying tens of billions of dollars in a strategy that worked well with USD500m. Nevertheless, a wider range of investors than ever are looking at trade finance in search of true absolute returns and a true source of alpha.
GFM: How do you expect your business to be affected by current and proposed regulatory changes?
NC: The AIFM Directive will never work in its current form, and will be vigorously challenged, which will delay implementation. The EU has ignored the recommendations made by AIMA, a very foolish move but not unexpected. But regulations change all the time, so if you are not prepared to adapt, you should not be in business, anyway.
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