Africa is home to an estimated one third of the planet’s commodities—from gold and diamonds to coffee and cocoa—yet London-based Scipion Capital is one of only five funds globally financing African commodities. Founder and CIO Nicolas Clavel had over 20 years’ experience in the African banking sector when he launched Scipion in 2007. The firm’s flagship Commodity Trade Finance fund, which celebrated its third anniversary in August, has returned positive results every month since inception.
To find out more about African commodities in general, and Scipion’s approach in particular, FINalternatives’ Mary Campbell spoke recently to Clavel.
Can you tell me something about the inception of the Commodity Trade Finance fund?
The reason I started the fund is that I could see in 2006 that the new criteria of Basel II were so focused on the balance sheet of borrowers that it was going to make it very difficult for some companies to borrow as much money as they needed to fund their trading activity. And Africa in particular is a commodities-centric continent so it was clearly going to be affected. So that’s basically how it started, as an idea that there was going to be one of two things happening—either the pricing for commodity trade finance was going to go up or banks would simply withdraw altogether from the market. And in fact, both happened, because a) generally speaking, credit became more expensive and b) as banks had less money to play with, the capital requirements of trade finance were such that basically a lot of banks exited the market altogether.
What type of commodities do you finance?
Initially our focus was on agricultural commodities. Since we started at the same time as the economic crisis, I focused on commodities that were going to be resistant in terms of price and demand, no matter what happened to the world economy. So, agricultural commodities such as coffee, tobacco, salt and sugar—all the kinds of things you carry on consuming regardless of the economic environment we’re in. Mineral commodities like copper where price collapsed from $8,000 a ton to $3,000 a ton as suddenly demand vanished (it’s back at $8,000, by the way) were out.
How does the fund work? You provide financing to trading companies—what form does the financing take?
Take a tonne of coffee, for example. If the coffee is in a warehouse in Antwerp or Rotterdam or London, there’s any number of people willing to finance it. When the coffee is in a warehouse in the port of Abidjan, this number is reduced to the more experienced trade finance banks. Part of our value-add is that we do consider financing commodities from the point where they are collected inland out to the port (and beyond when necessary). And that particular bit is the one that very few people know how to structure and are willing to finance. In essence our mission, if you like, is to reduce and control the risk whilst providing the financing as much upstream as we can, and that’s where, basically, the margin is.
How do you go about finding companies to finance? Do people come to you?
Yes, they do. A lot of them come. You know, between the buyer in Europe, for example, and where the commodity is there’s often a trading company—very often still in Europe… It’s these people who come to us and often people that I’ve known for a long time, sometimes people that I’ve dealt with in banks.
You invest in many African countries, is there any one you find particularly interesting at this time?
Any number of them, actually. We don’t have a regional focus. There are few countries that we exclude—actually the ones that I tend to exclude are the ones where I don’t speak the language. If I can’t speak the language or read—I always use this example, no matter how good Ethiopia is, I can’t read that script, I can’t speak that language [laughs] so I just don’t do business there because there’s enough business in other countries where you do business in French or English. So, I take that as my first benchmark…You know, the big exporters in terms of agricultural commodities tend to be in West Africa, so the Ivory Coast, we’re also looking at places even like Sierra Leone and Liberia, and Zambia, it’s fairly varied actually.
So you don’t work with translators?
No. I’ve never done it, actually. I want to sort of hear it directly from the horse’s mouth, so you can understand exactly what people are talking about.
Is corruption an issue when doing business in Africa? Is it something you have to be particularly aware of?
You know, where corruption happens is typically for companies in the country—the taxpayer companies, if you want—that’s where they often have pressure to pay some kind of bribe. When you are dealing with exports and you are dealing with private sector companies, you are talking at the owner level, why would he rob himself? So, certainly, we haven’t been confronted by that.
Are there any special challenges in investing in the African continent?
I would say the special challenge on the commodities front is choosing the right commodity. The key principle is that we try to stay away from anything which is perishable. We try to stay away from things that are extremely volatile in price, unless you can hedge the price, so it’s choosing your commodity which is basically, at the end of the day, just security…Then checking your supply chain thoroughly to make sure that you’re dealing with the right kind of people. That’s what we do. Every transaction that we do we do due diligence, we go to the country, we talk to a lot of people to make sure we deal with the right people and we learn. People will always tell you when there’s been a nightmare story somewhere so you see what’s gone wrong in the past and therefore you can think, with regard to your transaction, whether that’s a risk and if it is, how you handle it or remove the risk or indeed turn a transaction down.