What is asset-backed finance?
Asset-backed finance (ABF) forms part of the private credit universe. The defining characteristic of ABF investments is that they are secured (or backed) by a pool of assets. The performance and total return on the investment are therefore primarily dependent on the cashflows generated by the asset pool, rather than external market factors that can create volatility in public markets such as stocks and bonds.
The term ABF is sometimes used interchangeably with asset-based lending, specialty finance or structured credit, and should not be confused with its more widely known cousin, the asset-backed security (ABS), which is typically a liquid, syndicated and publicly traded instrument. ABF investments by contrast tend to be less liquid, bilateral (one investor and one originator of the assets), and private transactions.
Whatever the term used, the basic principle such investments all share is exposure to an asset pool. Where they can differ is in how the asset exposure is obtained, as well as the legal structure wrapped around the investment. This could be via a conventional bond structure, a loan, or a guarantee, but all will be focused on creating, acquiring and taking exposure to a pool of assets and taking an income from the cashflows generated by those assets.
ABF investments aim to deliver a consistent, uncorrelated income, in addition to limiting downside since the regular repayment of the underlying assets naturally deleverages the portfolio and reduces credit risk over the life of the deal.
Investment universe
The vast majority of the ABF opportunity falls under either consumer or corporate debt.
The ABF investment universe dwarfs the rest of private credit (see Exhibit 1). The global ABF market is thought to total around $5.2tr, and this is expected to grow to around $7.7tr by 2027, according to data from Citi.
The European ABF market, about 20% of the global total, benefits from strict regulation, uniform consumer lending and conservative corporate lending, which have contributed to historically stronger credit performance than comparable assets in the US.
Asset pools range from €200m to several billion, containing thousands of loans. Investors have access to detailed, standardised, and decades-long historical data, supporting transparency, stress testing and performance forecasts.
Why invest?
The opportunity
With the strengthening of banking regulation following the global financial crisis now being finalised under the Basel “endgame”, the pressure on banks to optimise their balance sheets and direct precious capital to higher priority businesses is growing.
An unprecedented era of ultra-low interest rates and market stimulus has also come to a close, further eroding the competitive advantage banks had enjoyed over alternative capital providers on funding and capital costs for a number of years.
Through various forms of ABF, private credit investors can now acquire or gain exposure to high quality pools of loans or other assets that would traditionally have been held by banks.
For investors with the expertise to analyse and source high quality asset pools, and the strength of relationships to maximise their opportunities, we believe the levelling of the playing field between traditional lenders and private capital creates an attractive entry point.
ABF at TwentyFour
ABF is a complex area of private credit where an investor’s relationships can be extremely valuable. Relationships with banks, specialist lenders and other loan originators are essential to sourcing asset pools either through acquisition, partnerships or structured exposures, as well as potentially disposing of assets when required. Investors often take an active role in structuring and funding asset pools in the capital markets, so strong relationships can help investors add value to ABF transactions by tailoring deals to their own structure and risk preferences.
Relationships are formed through repeated engagements over an extended period of time. When looking for partner investors, lenders tend to look for scalable, long term, stable and responsible custodians of assets. This gives investors with an observable track record in the market an advantage in sourcing assets, and also serves as a meaningful barrier to entry.
TwentyFour is a well-known presence in European securitisation, active in both public and private markets right across the risk spectrum and working with policymakers to guide regulation in the sector. Our relationships broaden our ABF opportunity pipeline, improve our access to preferred assets and enhance our ability to add value by working with trusted partners on structuring and pricing.
Team
Alistair Wilson
Insights
Frequently Asked Questions
1. What is the difference between asset backed finance, asset based lending, structured credit and speciality finance?
Asset-backed finance, asset-based lending, structured credit and specialty finance are interchangeable terms that all refer to lending that occurs outside traditional corporate and commercial real estate markets, and is secured by financial or hard assets.
2. What is the difference between ABF and ABS?
ABS refers to the public market for securitisations. ABF investments are structurally very similar to ABS, and they are both backed by a pool of assets – often thousands of similar loans such as mortgages, car finance agreements, or trade receivables.
The key difference is that ABF investments are private, which means they tend to be less liquid and bilateral (one investor and one originator of the assets).
Another crucial difference is that ABF transactions are primarily motivated by capital, whereas ABS deals are primarily motivated by banks or other lenders looking to “fund” their assets. Stricter regulation has made certain lending activities very capital intensive, so ABF is one way for lenders to manage their loan books by transferring credit risk to a more appropriate home.
Important Information:
Past performance is not a reliable indicator of current or future performance. Returns may go down as well as up there is no guarantee that all or part of your invested capital can be redeemed. There can be no assurance that investment objectives and/or targets will be achieved. Investing involves risk, including possible loss of principal.
Information provided should not be considered a recommendation to purchase, hold, or sell any security nor should any assumption be made as to the profitability or performance of any company identified or security associated with them.
The principal risk when investing into Asset-Backed Finance is the loss of capital. Transactions of the type described herein may involve a high degree of risk, and the value of such instruments may be highly volatile. Such risks may include without limitation risk of adverse or unanticipated market developments, risk of issuer default, and risk of illiquidity. In certain transactions, counterparties may lose their entire investment.
Private market investments also involve a number of risks, including illiquidity, potentially lower transparency, longer investment commitments; leverage; and may engage in speculative investment practices that increase the risk of investment loss. Prospective investors should understand such an investment is typically only suitable for persons of adequate financial means who have the necessary liquidity with respect to their investment and who can bear the economic risks associated with such an investment. Prospective investors should always consider their risk appetite and perform thorough due diligence before investing.
Any projections or forward-looking statements regarding future events or the financial performance of countries, markets and/or investments are based on a variety of estimates and assumptions. There can be no assurance that the assumptions made in connection with such projections will prove accurate, and actual results may differ materially. The inclusion of forecasts should not be regarded as an indication that TwentyFour considers the projections to be a reliable prediction of future events and should not be relied upon as such. TwentyFour reserves the right to make changes and corrections to the information and opinions expressed herein at any time, without notice.
