The smart money

Capitalizing on its industry roots, Challenger aims to help tobacco companies raise finance as banks have stepped back.

By George Gay

If in the past you had wanted to raise trade finance, the chances are that you would have gone to a bank. In more recent times, however, you might have found such an approach less than fruitful because, for a number of reasons that are easy to speculate about but hard to be sure of, banks have become less supportive of certain business enterprises—and nowhere is this more evident than in the case of tobacco.

Of course, the retreat by the banks has left a partial vacuum, and, because entrepreneurs hate a vacuum, the stage was set in November 2015 for the establishment of Challenger*, a fund that specializes in providing trade finance founded by Paul and Charles Taberer and Gary Isbister.

“The Taberer family have come from a tobacco background, and in our heyday there were many banks, perhaps 15 to 20, that were pretty active in the tobacco trade finance game,” Paul Taberer told Tobacco Reporter in June. “But over the years that number has diminished quite radically, and so we started to see a demand from the market for trade finance funds to take the place of what the banks used to provide or to complement what the banks currently provide.”

So the establishment of the fund was driven initially by this knowledge of and experience in the tobacco industry. “We thought that since we understood tobacco—we knew the suppliers, we knew the majority of the end users, and we understood the risks involved—it was appropriate for us to set up a fund, a pot of money if you like, that could be managed by us and deployed to the industry—to tobacco dealers and tobacco traders,” said Taberer. “We are essentially a hedge fund that is providing finance to enable traders to trade. We are lending money to enable this to be done.”

Managing risk

Tobacco still accounts for an important share of Challenger’s business, but it is now one of about 10 commodities and products for which the company provides finance. Simply put, Challenger’s policy is to have as broad a portfolio as is consistent with maintaining an efficient operation, in part because a narrow portfolio would expose the business to unnecessary risk. Nevertheless, currently 35 percent of the mony in the fund is deployed toward tobacco transactions, and the rest is deployed in the direction of, at any one time, up to 10 other products, such as fertilizer, grains, minerals and fast-moving consumer goods.

In fact, Taberer said that Challenger would look at any request for trade finance—officially termed “collateralized, short-dated, trade-finance transactions”—as long as it did not involve something that was too perishable, something that might go kaput on the boat or the plane. “For instance, let’s say flowers from Kenya to England wouldn’t be our cup of tea because that is far too perishable,” he said. “Fresh produce is OK as long as it has a decent shelf life.”

This is all about minimizing the risks of lending money. If something goes wrong, Challenger wants to be in a position where it can offload the traded product in the market. Security is a vital aspect of the business. For instance, with a view to minimizing risk, Challenger won’t lend 100 percent of the cost of a trade because it wants the trader also to have a financial stake in the deal. And those traders have to have a reputation and a track record to qualify for finance. “Whenever we get a request for finance, we do our due diligence, looking, for instance, at how long the trader has been in business, what is his reputation, what is his track record, what are his financials,” Taberer said. “We do our due diligence on the end buyer, too, and if in either case we are unsatisfied we will dig a little deeper. Finally, if we are still unsatisfied, we will not undertake the transaction.”

While the company is willing to look at most requests for trade finance—leaning toward tobacco—it is a global company with an African bias. “Off the top of my head, I would say that 60 to 70 percent of the goods for which we provide trade finance originate in Africa,” said Taberer. “But while the goods might come from Africa, the end user might be based in Europe, Asia or elsewhere; so we see our risk as not necessarily being African. It is an African product put together by a reputable dealer, but the ultimate risk is going to lie with the guy who is paying for the tobacco.”

Appetite for growth

Challenger is, for the time being at least, a relatively small fund. It deployed about $50 million during the past 12 months, but there is an ambition to expand the current fund and even to add another fund, if that is what investors want.

“We are going to increase the size of the fund,” said Taberer. “There is interest from investors because we are achieving a satisfactory return, and as we get a higher profile and add scale we will become of even more interest to investors. We believe there is an appetite for this kind of financing fund that would support assets under management of around $150 million to $200 million, and we would hope to be there within five years. It’s a gradual process but one that accelerates as time goes on. The slow part is the time behind us and the next 12 months as we build investor scale and develop our pipeline of clients.”

Taberer sounds very confident about the future, and this is not altogether surprising. There are, of course, other trade finance funds in the world—and they have had a head start on Challenger and are doing well—but Challenger has a number of niches, and one of those niches is the tobacco sector. And, importantly, what is on offer to investors through the Challenger fund are forecasted returns of 10–12 percent, though last year the return was more like 8.5–9 percent. The reason for this shortfall, if you like, is that, being a young fund, Challenger can find itself with more funds coming in than it can allocate to the trade deals it has in the pipeline; so it has money sitting in the bank, or what is known as “cash drag.” If it weren’t for the cash drag, Taberer reckons, returns would now be around 12–13 percent, and he fully expects that the trade deal pipeline will settle down soon and that returns will be about 10 percent by the end of this year.

So who are the fund’s investors? Well they comprise about 25 individuals, institutions and companies. Some are those who provided the seed capital—family members, friends and high-network individuals—but now there are also institutions, family offices and funds.

Looking from the traders’ point of view, the downside of all of this is that Challenger has to charge higher rates for the money they lend than would a bank. “We are a hedge fund, and we have investors who expect a decent return, and therefore in order for us to provide that level of return, we have to charge a higher rate than the traditional trade finance banks would have charged. But that is just the nature of what we are,” said Taberer.

Of course, this has to be set against the fact that it might not be possible to find a bank that would be willing to finance a certain trade. “From what I understand, banks generally do not make it easy to borrow from them unless you have a pretty strong balance sheet,” said Taberer. “If it’s just sort of transactional trade finance and where balance sheets are quite thin, then there is a fair degree of reluctance.”

Paul Taberer is based in the U.K., and his brother Charles is based in Zimbabwe. The fund is listed in the Cayman Islands, and that fund is managed by Challenger Management Ltd., which is a Mauritian company. The organization, which employs a small number of people, includes a South African presence to which the management company outsources documentation and administrative services.

*The fund’s full name is Challenger Trade Finance Segregated Portfolio of the South Africa Alpha SPC. It is managed by South Africa Alpha Capital Management Ltd. and advised by Challenger Management Ltd.