The world of finance is being shaken up in myriad ways. Companies like Hong Kong-based Velotrade are slotting into niches, such as accounts-receivable financing, and taking off. We spoke to the firm’s co-founder and chairman, Vittorio de Angelis, about how it all works.
In May, the Hong Kong-based accounts-receivable financing platform, Velotrade, announced that it had completed its first cross-border trade financing transaction between a Chinese state-owned enterprise and a medical equipment manufacturer. Through its partnership with Ping An-backed Shenzhen Qianhai Financial Exchange (QEX), Velotrade’s transaction marked the first time a foreign investor – based offshore – had participated in onshore trade financing.
The transaction involved a state-run hospital buying medical equipment from a supplier on the mainland with a payment term of 90 days. The supplier had needed RMB1 million to pay rent and salaries. Velotrade stepped in, via the QEX, took the AR, paid the supplier, and charged a fee for the time it took to settle the payment from the hospital.
Velotrade, which began only two years ago, came out of Shenzhen-based financial conglomerate Ping An’s fintech accelerator program. Vittorio de Angelis, the company’s co-founder and executive chairman, says it is now off to the races for his company. That RMB1 million transaction will likely grow into an annual volume for Velotrade of US$100 million this year. “Prior to Velotrade, for corporations on the mainland to obtain working capital, it was very difficult to go outside of the mainland for financing,” he says. “Likewise, it was also very difficult for offshore investors to get exposure to transactions on the mainland.”
As De Angelis explains, Velotrade plays an important middleman role between offshore investors and onshore firms. “We want to offer institutional investors an asset class that can be complementary to money market instruments: something that is extremely stable and short-dated so that the investor can allocate excess liquidity with the ability to reevaluate pricing every time the instrument expires,” he says.
Angelis, who with his co-founder Gianluca Pizzituti worked on the derivatives desks of investment banks for many years, is obviously proud of the company’s tech capabilities. The Velotrade platform is fully digital, with streamlined know-your-customer and validation procedures. But even he admits that is not enough. When a Chinese creditor sells an asset such as an account receivable to a foreign investor, it must comply with foreign-exchange regulations and get approval from the National Development and Reform Commission. That is where the QEX comes in.
China’s largest financial asset exchange is located in Shenzhen’s Qianhai Free Trade Zone. A private company, it was launched by the Shenzhen government in 2011 and bought out by Ping An Group in 2015 in a bid to attract more credit asset, trust product and wealth management product transactions to its online platform as the financial conglomerate stepped up its efforts to develop internet-based financial products.
The QEX works with the State Administration of Foreign Exchange (SAFE) to secure a foreign debt limit. Any foreign debts that arise from the cross-border transfer of claims on the QEX are incorporated into, and managed, as part of the QEX’s foreign debt limit, obviating the need for the transferor or the transferee to apply for approval or recording on each occasion.
With the QEX readily available in effecting cross-border claim transfers, Velotrade has been able to offer a stream of similar trade finance transactions to institutional investors on its platform.
QEX’s vice general manager, Zhan Yu Hong, says the exchange plays a strategic role in developing China’s financial markets. “By launching cross-border trade transactions of debt-based assets such as accounts-receivable factoring, QEX supports ‘One Belt One Road’ and the development of the Guangdong-Hong Kong-Macau Greater Bay Area, to provide better services for the real economy. The collaboration with Velotrade is an excellent example.”
“This is a transformational deal for Velotrade,” De Angelis said. “We are delighted that Velotrade has been able to open the door for foreign institutional investors to Chinese trade receivables.”
Last November, Velotrade became the first trade finance platform to win a Type 1 regulated activity license from Hong Kong’s Securities and Futures Commission, after a 20-month long application process, which enables it to deal in securities.
The receivables are not securities unless Velotrade splits it into tranches and creates a “collective investment scheme,” which under SFC rules counts as a security.
Velotrade counts a mix of hedge funds and wealthy individuals among its investors. Each must commit a minimum of US$100,000. “We have been trading at an average of US$200,000 per invoice and the amount is increasing as trading volume doubles by month,” De Angelis says, adding that the company is targeting US$100 million of trading volumes this year and intends to triple that next year.
Regulatory boxes ticked
An added benefit of the regulated activity license is to make it easier for Velotrade to get on fund management companies’ accepted-exposures lists.
For a fund house, the level of know-your-customer work they have to do with a regulated platform is much lower than an unregulated one. “When we talk with hedge funds, the second question they ask is, ‘Are you regulated?’” says De Angelis. “And when we say yes, all of a sudden, it’s a different story.”
“Asset managers are sitting on huge pools of liquidity. They look at China and they see this great opportunity, but they’re also scared. For them a market like China is almost impenetrable,” he says. “But once they have a regulated counterpart like us, they see us as a body of international acceptance, an entity that is based in Hong Kong which is a recognized financial center with very strong rule of law and at the same time close to China.”
The platform offers short-term exposure, averaging 55 days, with an annualized return of 5% to 9%. This is modestly higher than what a corporate bank yields on its SME trade finance. De Angelis says the company is pitching corporates that have periodic need for alternative sources of financing. “A bank often faces a situation in which its risk exposure against a large corporate is maxed out; the same works at a corporate level, when a company needs a larger overdraft or a greater loan facility. But, instead of discounting its invoice over the bank, it can now discount with Velotrade to free up availability in the bank,” Angelis says.
Another target borrower is manufacturers in the mainland whose exports are seasonal, with boom periods that require credit facilities with banks to be renegotiated – a lengthy process. They are also vulnerable to sudden changes in the central bank’s monetary policies and attitude toward cross-border capital movements.
Velotrade has been trading in a number of Asian jurisdictions including Hong Kong, mainland China, Singapore, Taiwan and Vietnam, across a range of sectors such as automotive, electronics, healthcare, retail and clothing. “Hong Kong is a great place to be based in because when you call a hedge fund in London, people there know what Hong Kong stands for and at the same time, it is a gateway to China,” De Angelis says. “Given that we’re the only regulated player in this place, we offer a lot of comfort to institutional investors across the globe. So now, our job is to basically go out and track as many investors as possible and originate as much business as we can.”