Q&A: TriLinc Global's Paul Sanford

TriLinc Global was founded in 2008 by Gloria Nelund, who was previously head of private wealth management for Deutsche Bank in North America. The firm pursues impact investments – primarily through a pan-emerging markets private credit strategy focused on term loans and trade finance – with a view to delivering market-rate returns. It has $500 million in committed capital, raised through two channels: mass affluent high net worth clients and institutional ultra-high net worth investors. Paul Sanford joined in 2011.

Q: In which emerging markets geographies are you active?

A: We focus on middle-income economies. We avoid MENA [Middle East and North Africa], mainly for our US investor base. That leaves Latin America, emerging Europe, sub-Saharan Africa, and emerging Asia, which is mainly Southeast Asia. We can’t get into India because we do US dollar-based lending and there are capital controls. We will work with Hong Kong-based companies with mainland China operations, but we don’t do anything direct in China. We apply a top-down assessment model that involves 30 different indicators across growth, stability and access. It’s like a heat map: something shows up red and you’re out; green and you’re good; yellow and it is approved with mitigating factors, which are addressed in the underwriting. Then you have the reality on the ground. For example, the Philippines was the darling for a long time and bond yields came way down. But it was very hard to do a private deal because you have these big families that control everything. Even though it looked great on paper, in practice it’s not that easy.

Q: How much has been invested in Southeast Asia?

A: We have deployed $1.2 billion in total and $300 million of that has gone to Southeast Asia. I’ve been disappointed by our deployment. When I was first working on the allocation it was during the Obama administration and the pivot to Asia. I thought we would take a core-satellite approach – Asia as the core, a narrow slice in sub-Saharan Africa but with high alpha, and Latin America and emerging Europe in the middle. It hasn’t turned out that way at all. We’ve seen opportunities but a lot of capital swarms in at any given time, hits the returns, and so you think the risk isn’t appropriately priced. The new target for Southeast Asia is 20%. Africa has blown us away; the target has gone from 15% to 40%. The other two markets are exactly what we thought.

Q: Where in Southeast Asia do you have the most exposure?

A: The trade finance exposure is diverse, but on the term loan side we are almost entirely Indonesia. It requires some more expertise; hot money can’t just come in and be thrown at a project that some investment banker is floating. And then the folks who are qualified to do the level of analysis we need are relatively few. Getting to different parts of the archipelago requires more effort as well.

Q: What do you do about downside protection?

A: We have hard assets and financial collateral. We like controlling cash and we like to be able to set up offshore collateral in remote-type trusts. It’s difficult to put hard assets into those trusts, so we have receivables books, share pledges, and subsidiaries. With hard assets, there are issues around collection and liquidation, but even if it’s hard to liquidate, you can still make someone’s life uncomfortable. If it’s not about an ability to pay, but a willingness to pay, there can be a stick that gets people to do the right thing. You really need to look at the jurisdiction and asset type, and everything must line up for a deal to work.

Q: Whereas trade finance is easier because the goods are the collateral…

A: Yes, but the deals are smaller, and the return is 300-400 basis points lower than for senior debt.

Q: How big are your investments?

A: Investments are $5-25 million and for anything above $25 million we need investment committee approval. Smaller than $5 million is hard to do. I’d say $15 million is the sweet spot for term loans. With trade finance, the facilities might be $5-10 million but each draw could be hundreds of thousands of dollars because it relates to specific purchase orders. The line is usually renewed every year, but each transaction is underwritten on an individual basis. Every time you have a shipment you want to finance it has to go through the documentation process and compliance regime.

Q: Don’t you need a lot of people to oversee this?

A: We have three different partners and if you add up all their investment staff it’s probably at least 50. And we have another 15 in-house. There is no way to streamline it, too document heavy.

Q: Why is TriLinc’s fundraising model focused on the high net worth segment?

A: As the CEO of big bank asset management firms, Gloria was dealing with products in every channel, so she didn’t have a bias towards institutional, retail, or high net worth. But she knew that institutional investors are usually the last into a new idea. They want to see at least a five-year track record, a significant amount of capital deployed, and the same team and strategy before they will even consider something. Most new firms start with family offices or high net worth investors. It is very had to find at scale, so the funds are usually small. Gloria wanted to scale quickly, not just for the economics but from an impact perspective – the view was the market would gravitate to whoever the biggest players are. Raising money from retail investors is systematized, expensive and onerous in terms of compliance burdens, but if you do it right it becomes a machine. We did that and got $350 million from retail investors for Fund I.

Q: Your funds have now been in operation for six years…

A: Institutions look for one, three, five, seven and 10-year track records. Seven is the next number of meaning in that list. Having $1 billion in assets is another important metric for consultants and we should be there a year from now. We are expecting an influx of institutional interest based on us showing up on these screening tools in the next 12-18 months.

Q: Institutional investor interest in the impact space is rising. When do you think it will reach an inflection point?

A: I think we’re there. It was a very different environment when we launched – you couldn’t throw the word impact around and people would want to give you money. It’s not just about the distribution network, it’s the process. You must make US-oriented investors comfortable with the governance because a lot of the time they just don’t trust emerging markets. We have the compliance boxes checked. A year ago, we started to come on the radar for some institutional investors and we did some meetings. One guy said: ‘I love what you’re doing but our minimum commitment, even for our emerging manager allocation, is $100 million. We don’t write tickets for less than that, and we can’t be more than 10% of the fund. Call me when you are at $1.5 billion.’

Q: Do you see many other investors doing what you are doing?

A: Some of the big firms are active, but they operate way upstream from us and they are going to do an impact overlay. That’s different. We are true SME [small and medium-sized enterprise], lower middle market, where that real access to capital is missing but so developmental. The IFC [International Finance Corporation] estimates there is a $4.5 trillion financing gap for SMEs in emerging markets. The World Economic Forum says a lack of access to financing is one of the top three constraints to growth and prosperity in all these markets. I don’t see anyone else sizeable and with a global footprint targeting this area.

Q: How do you track impact?

A: At the fund level, we track five different indicators correlated to economic development: job creation, wage growth, increased revenues, increased net profits, and increased taxes to local governments. Then we have company-specific impact objectives based on the industry. For example, if you’re a water treatment plant, you are going to track access to clean water. We aim for total transparency in reporting. We will present case studies as well as the aggregate performance for the five key indicators. If there is a recession in certain markets and some of our investees had to cut employees, which is the opposite of what we are going for, we disclose it.

Q: When will the industry be able to deliver an impact IRR?

A: There’s a big debate around this. A lot of these things take years to realize, by which point we would have been paid and got out, so how do you track the causality? Is our funding what set the stage for a few things to percolate and ultimately fully realize down the road? I don’t think there is any question that debt capital is needed, and it is usually developmental. The j-curve effect of the impact IRR hits later, but we’ve kicked it off by putting these companies on the right path. The debate is academic, and while it is good and important, we can’t let it slow us down.

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• Topics
• Southeast Asia
• North America
• Credit
• Credit/Special Situations
• Impact investment
• Structured finance
• TriLinc Global