What can we learn from Greensill’s failure?
By Josh Levy, Chairman of Avenue and CEO of Ultimate Finance
For those of us interested in the commercial finance market and its alignment with technology, Greensill’s failure would always have attracted attention.
However, when you add into this story the alleged role of a former British Prime Minister accused of unlawful / excessive lobbying to MPs, the Saudi Crown Prince and an expensive failed investment from Softbank Vision Fund, on the back of an inflated ‘fintech’ valuation, there is more than just the failure of a company to be understood. There are also allegations of fraud and related party exposure to Sanjeev Gupta’s empire, and the exposure of a very curious ‘prospective receivables’ financing structure. It is no wonder that this has become a corporate and political scandal and captured the attention of the media.
Supply chain finance has seen controversy in recent years on the back of high-profile failures such as Carillion and suggestions that its use can conceal hidden debt by the way it is accounted for on a balance sheet (‘accounts payables’ rather than debt). But it is a commonly used tool by large multinational companies representing strong credit quality, and is generally low-margin, low-risk lending. If working properly, there should be no meaningful risk of loss for anyone – the financier pays supplier invoices on behalf of a large investment-grade corporation, with a small discount for upfront payment, and then receives the full amount from the customer / buyer later.
Most of this lending is carried out by big banks but with a growing number of specialist non-bank lenders seeking to establish a better and higher margin way of providing the facilities. Which is where Greensill entered the equation in 2011, citing the use of technology to assist its mission to help small business, “making finance fairer” and “democratising capital”.
Significant growth and hype around both its technology platform and political influence elevated Greensill to a position as a leading ‘fintech’ with a valuation that peaked at $3.5bn following investment from Softbank and General Atlantic, among others. Yet this growth was a function of stretching their business model far beyond the original premise, with layers of risk that were not easily understood – particularly by the insurance wrappers and fund investors that bought the bond-line packaged debts and will now suffer the losses.
Instead of providing short-term credit to high-quality companies on the basis of actual invoices, it introduced ‘prospective receivables finance’ that issued funding against potential future invoices, in some cases from customer relationships that didn’t exist. What the Invoice Finance industry knows as ‘fresh air’ invoicing and others would recognise as unsecured lending, Greensill were reinventing a new breed of data-driven working capital finance. The technology models would ‘predict’ the next invoicing quantum and timing, and permit repayment cycles that stretched way outside of normal supply chain finance.
Not only did this structure stretch the normal boundaries of receivables financing, but they had extremely concentrated exposure into key customers such as Sanjeev Gupta’s GFG Alliance that bypassed ordinary red flags about related party transactions. By the very end, Greensill were providing funding to Gupta’s companies theoretically secured against future trading with friendly counterparties.
That KPMG have expressed surprise (via the Financial Times) that they were unable to verify the existence of certain invoices is only alarming by virtue of the return explanation that the existence was never claimed nor required under the facility structure. This is easy to confuse with fraud in ‘traditional’ lending circles – lending a client money about ‘receivables’ from ‘customers’ that had no relationship with the client – but this was entirely by design and presumably well understood by Greensill as lender.
For many years, the story that Greensill thrived off, and actively promoted, was that they were an innovator in an otherwise fairly ordinary part of the lending market. Whilst they did manage to secure blue-chip clients with standard facility parameters, for every Vodafone there were facilities of far greater risk.
All parts of the working capital finance process play valuable roles in keeping credit flowing through the economy and are successful in directly funding to SMEs and helping fill the gap otherwise caused by long payment terms and late payment. However, Greensill’s flawed business model is so far removed from the fundamental operation of an Invoice Finance or Supply Chain Finance facility to render any read-across to other lenders as minimal.
No pleasure can ever be taken in a collapse that threatens businesses and jobs, but this serves as an important cautionary tale about the role of technology in receivables finance. Funding predicted cashflows from AI or data models might sound exciting and at one time justify an extravagant ‘fintech’ multiple but is ultimately highly likely to end in a disaster.
There is too much focus within the financial industry on products when in reality, most businesses care simply about the funding they need in whatever form it comes and the quality of the client service alongside. Working capital financing comes in various guises – factoring, invoice discounting, supply chain finance, reverse factoring – but ultimately serves the same purpose in providing liquidity against unpaid invoices, usually due for payment in the next 90 days.