Greensill: What went wrong?

Greensill, a financial services company focused on the provision of supply chain financing, founded in 2011 by Lex Greensill and advised by former U.K. Prime Minister David Cameron, filed for insolvency protection on 8th March 2021.

Greensill was regarded as a rapidly growing, disruptive company, operating in 175+ countries, surpassing 8 million customers and suppliers, and $143bn of financing in 2019. It was formed on the simple belief that access to working capital should be easier, better priced and more readily available, with an overall goal of changing finance to change the world. During the pandemic, Greensill was hailed for its role in ensuring that those most in need of real-time pay had immediate access to their earnings. It also fast-tracked the rollout of this service to NHS workers, to provide support to financially stressed staff. This supposedly ‘radical’ and ‘new’ approach was facilitated through the concept of supply chain finance.

What is Supply Chain Finance?

In theory, it speeds up payments owed by businesses to their suppliers, who may have a shortage in cash. Third parties, traditionally banks, and now also independent intermediaries backed by investors such as Greensill, pay suppliers the value of their outstanding invoices minus a discount. This arrangement is considered to leave all sides happy: Buyers get their goods weeks, or even months, before having to pay for them, while sellers get paid more quickly. The intermediary closes the loop by collecting the full invoice amount from the buyer at a later date and profits from the spread.

As a final year student looking to embark on a career in finance, I too, was inspired by their ground-breaking work and exciting vision to make finance fairer. My interest led me to apply for a graduate role, reaching the final stage. However, days before I was expecting to undertake the final stage assessment, in December 2020, I was informed by the recruiter that the business needs have changed and that they are no longer recruiting for the role. Although, this took me by surprise at the time, the recent headlines of Greensill’s downfall could explain their decision.

The Downfall

On Monday 1st March, a credit insurer covering Greensill’s invoice-backed loans, which is crucial to Greensill’s business model, failed to renew a $4.6bn insurance contract. Lawyers warned that this could cause a wave of defaults among its clients. Indeed, Credit Suisse also felt the threat as, a day later, it froze funds worth about $10 billion, which were backed by Greensill assets. This decision left the SoftBank-backed Greensill in an unenviable situation, deprived from its key source of funding. This is because, as part of the business model, Greensill arranges funding for companies, either through Greensill bank, that it owns in Germany, or by packaging supplier bills up into bond-like investments for the Credit Suisse funds.

Credit Suisse said it had “suspended the redemptions and subscriptions” in the funds “to protect the interests of all investors.” It added: “A certain part of the [funds’] assets is currently subject to considerable uncertainties with respect to their accurate valuation.”

A major portion of these concerns’ ties to Sanjeev Gupta, the Indian-born industrialist who is one of Greensill’s largest clients. In fact, up to two thirds of Greensill’s loan book, according to a report from Scope ratings in 2019, is linked to the British steel magnate Sanjeev Gupta, whose opaque business empire is subject to increasing regulatory scrutiny due to its complex financing. BaFin, the financial regulatory authority for Germany, was not oblivious to this, with the Financial Times reporting in February that it was pressuring Greensill’s banking subsidiary to reduce its exposure to the metals magnate Sanjeev Gupta.

What next?

The U.S. private equity firm Apollo Global Management is racing to strike a deal to buy the most attractive parts of Greensill, which is likely to exclude financing lines related to Sanjeev Gupta. Although the collapse of Greensill could put 50,000 jobs at risk, Apollo and its affiliated groups could cherry pick parts of Greensill’s operating business and take on hundreds of its staff, according to the Financial Times. However, there has been caution that these details have not been finalised and may change. A rescue deal by Apollo is likely to wipe out Greensill’s shareholders such as SoftBank’s Vision Fund which poured $1.5bn into the business in 2019. However, it has obviously already substantially written down the value of its stake.

How predictable was this collapse?

Although to many, Greensill was a pioneering success story, boasting a monster valuation in the pages of the Wall Street Journal of $7bn, it also had its critics. These critics questioned for years its business model due to its controversial use of supply chain finance which they claimed can be used to disguise mounting corporate borrowings.

The collapse of Greensill echoes the strained relationship between regulators and fintechs. Fintechs remain a regulatory headache, as regulators, for years, have struggled to keep up with the constant innovation of fintechs. Greensill Capital loaned money to companies and not to individuals, allowing it to sit out of the British regulators watch. However, supervisors in the U.K. and Germany were still informed of its activities that raised red flags. It may be troublesome to assume that regulatory holes may have led to inaction.

I have previously covered the story of the failed IPO of Ant Group in another article which you can read here. There is the potential to draw comparisons between Greensill and Ant group – both being fintechs operating like a bank and sitting outside the regulators watch. These failings show that Greensill’s business model was indeed flawed, and may have serious repercussions for German and British taxpayers.

Final thoughts

To close, I feel it is important to shed a light on Greensill’s government ties. The Australian financier Lex Greensill had close links to former prime minister David Cameron, which brought him closer to the U.K.’s corridors of power. In 2017, he was awarded a CBE “for services to the economy.”

Greensill, indeed, benefitted from this greatly, propelling its rapid growth and expansion, whereby it was involved in high-profile government work. Examples include being an accredited lender for the government’s Covid crisis loan as well as teaming up with fintech company Taulia to help public-sector bodies in the U.K., including the NHS, speed up invoice payments.

The collapse of Greensill certainly raises difficult questions for his friends and associates in government and raises questions about fintech regulation more generally.