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Signs of Drying Liquidity in SME Financing

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Stockholm (HedgeNordic) – Faced with a more challenging economic environment driven by surging inflation, higher costs related to energy prices and higher financing costs, some SMEs are struggling to keep their businesses afloat. Danish asset manager Formue Nord, which focuses on providing financing solutions to smaller companies in the Nordics, started seeing smaller businesses having more liquidity concerns.

“Liquidity in capital markets has dried up significantly and companies have a hard time raising capital compared to 1-2 years ago,” observes Formue Nord’s CIO Rasmus Viggers. Formue Nord is a specialized asset manager offering tailored financing solutions to listed micro-, small- and midcap companies in the Nordic region via its two hedge funds: Formue Nord Markedsneutral and Formue Nord Fokus. Both vehicles maintain beta-neutral portfolios at all times through the use of equity index futures or other derivatives.

“Liquidity in capital markets has dried up significantly and companies have a hard time raising capital compared to 1-2 years ago.”

Formue Nord Fokus had two loans within its portfolio written down in October, one of which was written down due to a company going bankrupt. “The bankruptcy occurred less than six months after the company last raised money, and is therefore very surprising,” says Viggers. Formue Nord Fokus edged down 1.0 percent over the first ten months of 2022 after booking a loss of 4.4 percent in October due to the two write-downs. Formue Nord Markedsneutral, which engages in transactions with shorter maturities, is down 5.6 percent year-to-date.

The liquidity drying and challenging economic environment have been reflected in the performance of both Formue Nord Fokus and Formue Nord Markedsneutral. “This impacts our portfolio and investment strategy,” acknowledges Viggers. “We, of course, also get better terms/payment for our capital, and going forward we expect slightly higher returns than normal, but with increased volatility as well,” he continues. “Luckily, we have our hedges that help out in this investment environment, but that does not change the fact that event risk is higher now than ever before in Formue Nords existence.”

“Luckily, we have our hedges that help out in this investment environment, but that does not change the fact that event risk is higher now than ever before in Formue Nords existence.”

Formue Nord Markedsneutral has generated an annualized return of 6.8 percent since launching in late 2015, while Formue Nord Fokus has achieved an annualized return of about 10 percent since its inception in September 2018. “Our returns have been very stable for a long time now, but we expect increased volatility in the coming months,” concludes Viggers. “With historically high risk, it is evident that we are extremely selective with our investments, just as it is also natural that we receive historically high interest and other payments on the loans/investments we make,” he adds. “We, therefore, have a special focus on risk diversification and quality, and the market is still full of opportunities, which have historically given us very good returns.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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