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Interview with Dino Skandalis, CEO and CIO of P79 Capital Limited

Dino has over 27 years of experience in global trade finance and debt markets both in the banking and investment management sectors. He has served as global head of trade finance related products for Standard Chartered Bank, Standard Bank, and Banco Santander where he managed trading and investment portfolios in the trade finance related sector and market leading origination and trading desks.

He has spent the last 13 years in the DIFC, Dubai where he set up and managed regulated investment management entities and structured, launched and oversaw trade finance related investment funds. He started his career in currency options trading with Midland Global Markets and has also worked in Export and Project Finance at Samuel Montagu and as a senior EM debt trader at West Merchant Bank. 

Dino was educated in the U.K. and holds a B.A. (Hons) in Economics from Coventry University and an M.A. in Finance and Investment from the University of Exeter. He was a co-founder of the International Trade & Forfaiting Association and has previously served as its chairman.

  1. Please share with our readers a bit of background to the P79 Structured Trade Fund, including the key personnel of the team.
  2. The fund was set up as a natural extension of our group’s overall strategy in the precious metals supply chain which spans participating investments in origination, trading, assaying and refining effected in the past five years. Whilst our equity investments in supply chain participations have been bootstrapped with proprietary capital, the stock and flow of the daily business of supply chain entities, being the purchase of feedstock in the form of unrefined gold for refining to gold bullion products for sale has been principally funded via a mix of buyer’s credit and offtake agreements. We saw the logic in structuring an alternative route of funding for the growth of the supply chain as a whole whilst offering investors in the alternative investment space the opportunity to participate in the economics of an asset class without taking directional or volatility exposure to gold bullion.

    Our senior team has a diverse range of experience across different sectors, disciplines and functions including trade finance, precious metals, debt capital markets, private equity, computational finance and fintech. We are well supported internally by operations and compliance and externally by the third party service providers to the fund such as Apex that provide administration and custody services for the fund.

  1. Could you walk us through your investment process, from identifying opportunities to constructing the fund portfolios? What do you think is your fund's competitive edge against other trade finance hedge funds?
  2. The fund invests primarily in collateralised aggregated short term structured trade finance transactions through a closed supply chain which has been built over several years; closed in the sense that counterparties have a trusted and verifiable transaction history. We look at transactional metrics in terms of volume, geography, transacting counterparties as well as hedging provisions and arrangements for hedging the reference LME gold price. Where the unrefined gold is consigned to a refinery for processing to gold bullion, it may be consigned to the Dubai domiciled RJC compliant refinery entity that we are an equity investor of, and have significant oversight and look through. Single shipments of gold cross border are limited in size to average around US$1.5 million each and capital rotation is fast – both of which contribute to lower the risk profile of the fund. Our differentiating factor is our concentration and more narrow focus than most other trade finance funds in a specific supply chain, in which our group has also made equity investments with proprietary capital. Furthermore we also provide for a 10% first loss by co-investing in a separate class of the fund the units of which are tagged to the Class A investors’ subscriptions to provide that cover. Both these factors demonstrate our own capital commitment and attention to the investments and the investment process. Investors additionally have the option to redeem either in currency or in gold bullion.

  1. What is the motivation behind focusing on precious metals supply chain financing, and how does the risk-return profile of this strategy compare to other forms of trade finance?
  2. The motivation was there as a result of our group’s investments in the precious metals supply chain over the past few years. The costs of originating, vetting, structuring and executing investment opportunities through a structured trade finance strategy became less prohibitive. We believe the fund provides an attractive risk return profile in general and also more specifically when compared to other forms of trade finance. The principal reasons are that whilst we are working on a narrower range of investment opportunities we do have the benefit of more depth in oversight and look through on the investments; and the frequency of capital rotation in the supply chain is high relative to other commodities and this enhances the return aspect.  

  1. The P79 Structured Trade Fund completely hedges commodity price exposure at the supply chain level. Please elaborate on how this hedge is created and how it affects the fund’s performance.
  2. The underlying trades of unrefined gold and gold bullion undertaken in the supply chain are hedged when supplier and buyer enter into a physical trade. The price of the metal has two components; the main component and the one that is hedged is the referenced LME gold price based on prevailing screen rates. This is done via the XAUUSD spot market and rolls on a daily basis based on the gold ounces of the physical position. The additional and marginal element is the discount or premium in relation to the LME price that the physical metal is bought and sold for. This is the commercial margin for which the commercial trading entities intermediate the supply chain connecting producing with consuming countries for commercial gain. They purchase from primary sources and then either consign the metal through the industrial refining process so they can sell the resulting investment grade gold bullion or alternatively sell the unrefined gold directly to a refinery if the margin justifies doing so. The premium or discount element is only a very small fraction of the reference LME price compared for example to the size of the discount margin in relation to a corresponding Libor rate used to discount a usance letter of credit. Where the fund may end up in a situation holding the physical collateral underlying the investments it can liquidate same within twenty four hours. Furthermore the fund provides the 10% co-investment from the sponsor in the separate share class to protect investor outcomes.

  1. What is the rationale behind choosing Dubai as the fund’s base of operations? How conducive is the country for a hedge fund structure, in terms of tax and regulatory environment, as well as availability of talents?
  2. Dubai is a main global hub for precious metals trading. It is also known as the city of gold. Its geographical position pivots Europe, Asia and Africa in terms of time zones, provides an excellent and modern infrastructure in communications and international and local transport. We are domiciled and headquartered in the Dubai International Financial Centre (DIFC), one of two financial free zones in the UAE, a USD denominated self-contained major international financial centre with its own common law legal structure and courts. We are regulated by the Dubai Financial Services Authority, a world class financial regulator with a track record of 16 years. The neighbouring Emirate of Abu Dhabi provides a similar framework in the UAE capital through the Abu Dhabi Global Market (ADGM) financial free zone, albeit with a shorter history than DIFC. In addition to a robust regulatory environment there is a large pool of talent in the centre for front, middle and back office functions as well as supporting service providers for legal, auditing, custodial and administrative services. Other than the introduction of a 5% VAT regime that came into force last year the centre remains free of other principal taxes and therefore a more cost effective jurisdiction to base operations.

  1. Given the risk profile of emerging markets trade finance deals, comprehensive due diligence on all counterparties is pertinent. Please provide our readers some insights on the due diligence processes performed by the team.
  2. Trade finance is a very significant asset class with several sub sets, each of which addresses the differing requirements of the myriad of commercial enterprises around the world that make up global trade in merchandise goods. The common themes in terms of the due diligence process are mostly those related to AML/CTF and the client classification process, assessment and monitoring. As a regulated entity with the required systems and controls in place, and with the fund domiciled in the same jurisdiction as the fund manager, we apply a uniform standard of due diligence. This includes checking entities and beneficial owners in Refinitiv’s world-check database and classifying for risk levels and performing enhanced due diligence where appropriate amongst other. We also look at counterparties supply chain policy and their compliance with the OECD due diligence guidance for responsible sourcing of minerals from conflict affected and high risk areas and any other policies relevant in their jurisdictions. Finally we look and monitor for what is commonly termed as red flags that relate to their transactional activity and patterns.

  1. What is the current level of interest in trade finance portfolio exposure among investors in recent years? What type of investor is the fund geared towards?
  2. Trade finance has traditionally been a domain of the commercial banks with non Libor investors having limited opportunities to access the asset class as banks have had a tendency to distribute and syndicate trade finance risk amongst themselves. This stems partly from the fact that trade finance is an OTC product set and can be cost heavy on the side of originating profitable investments and deploying large chunks of AUM in a timely fashion compared to listed and publicly quoted mainstream assets classes such as bonds or equities that can be homogeneous and traded instantly onscreen. Trade finance professionals, therefore, have been more reluctant to make the transition to the fund management world and bring the trade finance product to the alternative investor universe. However, in the past 15 years, we have seen more funds being launched and particularly so in the aftermath of the 2008 crisis when banks retreated further to repair their balance sheets and concentrate on a smaller number of core corporate customers that bought a larger wallet of products from them. The opportunity therefore increased for trade finance funds to play an increasingly important role for both small and medium sized corporates as well as investors looking to deploy AUM in strategies non correlated to the main asset classes. I can only see more opportunities in this space, both for investors and fund managers, given that the principal issues highlighted by the 2008 crisis are yet to be resolved. Our fund is open to all qualifying professional/accredited investors. It provides an attractive risk adjusted return for those looking for decent yield and regular income and has an added appeal for those that may want to have the option of securing  their eventual redemptions in gold bullion if they so choose.

  1. The developments surrounding the US-China trade tension and the rate cuts introduced by major central banks throughout 2019 resulted in a rally of precious metal prices. How has that trend affected the precious metal supply chain financing industry last year?
  2. I think there are larger issues at play of which the state of affairs in the US-China trade tensions and the monetary policy consensus we’ve seen since the breakout of the 2008 are symptoms. The overlaying narrative is the status quo of our current international financial and monetary system and how if affects and effects reallocation of capital between nation states and how cross border trade flows and settles. Gold, besides being a commodity, is also money and a reserve asset with a very long history of preserving purchasing power. A proven store of value, notwithstanding the fact that its past functions as a medium of exchange and unit of account have laid dormant for a long time. As we approach the time where utility from fiat money created through debt experiences ever increasing diminishing returns it is natural to see increased demand for precious metals and gold in particular which can not be printed at the push of a button and has a steady and modest annual growth rate of its stock. We have seen gold hit all time highs in the past year in a number of currencies and that reflects the perception of these currencies versus gold rather than the other way around. Still, it remains a very small allocation in investor portfolios and as a result positive changes in its perception can have an outsized impact on how it is priced in fiat currencies. The resurgent demand for precious metals has certainly opened more avenues of financing for the supply chain and is an alternative form of participating in its economics other than outright owning the metal. When the plumbing of the current international financial and monetary system gets the renovation treatment, which I believe it certainly will, then precious metals in their physical form may find a more prominent role in the new landscape. Gold has already been elevated, from the macroprudential point of view, to a Tier 1 asset in the past year.

  1. Despite the growth of the trade finance hedge fund industry over the past decade, the sector remains relatively small compared to other established hedge fund strategies. What are the primary challenges faced by institutional investors who intend to increase their allocations into this space?
  2. The trade finance hedge fund industry, despite its growth in terms of AUM deployed and number of funds out there, is indeed only a fraction of the size of much more established asset classes. Certain types of investor, such as family offices, HNWIs and some fund of funds have been the ones that have benefited mostly from the increased presence of trade finance in the hedge fund universe. They tend to be more nimble in their size of minimum allocations, an issue that presents more challenges for large institutional investors such as pension funds and insurance companies where minimum allocations are normally much more sizable and can only be deployed gradually by trade finance funds. The OTC nature of the asset class also presents an initial hurdle for some investor classes but that’s an issue that is being gradually dealt with as trade finance becomes a more established asset class.

  1. Where do you think the key opportunities lie within the trade finance hedge fund industry for the next few years
  2. Globalisation over the past few decades has fundamentally changed the nature of global finance and investment. Digitisation has now taken up the baton and may change the global landscape in even more fundamental ways. The ways and means of intermediating and financing global trade flows will no doubt be significantly be affected by these developments. We are already seeing some examples through developments in the fintech space, such as the plethora of digital factoring offerings being funded through the venture capital industry that are providing a lifeline to a lot of small and medium sized enterprises that have been neglected by the traditional banking sector. Digitisation and tokenisation will alter the way product offerings are constructed, intermediated and distributed. The trade finance hedge fund industry is well placed to tailor its growth around these developments and grow its allocations whilst filling the void left by the traditional commercial banking sector in deploying significantly more AUM where it is really needed.

Contact Details
Dino Skandalis
P79 Capital Limited
+971 4 436 6788