Asset-backed finance (ABF) forms part of the private credit universe, the defining characteristic of ABF investments is that they are secured (backed) by a pool of assets.
Asset-backed finance (ABF) forms part of the private credit universe. The defining characteristic of ABF investments is that they are secured (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.
ABF 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, typically without a rating.
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.
ABF is a generally accepted market term and the one we use at TwentyFour but within private credit it is sometimes used interchangeably with asset-based lending, specialty finance or structured credit.
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 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 is not a niche industry. In fact, it dwarfs the rest of private credit (see Exhibit 1). Citi estimates the global ABF market currently totals $5.2tr, and it is expected to grow to $7.7tr by 2027.
In 2022, we saw the end of ultra-low interest rates and stimulus for markets that had driven a decade of lending where banks had a competitive advantage in both funding and capital. In the years following the global financial crisis, private markets managed meaningful growth as poorly capitalised banks, bogged down with legacy issues, sold non-core assets, retreated from some traditional lending arenas, and shifted strategies. In 2023, we saw the start of a similar pattern with the higher cost of capital and regulatory headwinds creating new opportunities for non-banks to acquire or take exposure to such high-quality asset pools traditionally held by banks.
Since then credit risk premiums have widened and fundamentals remain strong, providing what we believe to be an attractive entry point for ABF investments.
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 structure and risk profiles.
Relationships are formed through repeated engagements over an extended period of time. When looking for partner investors, lenders 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.
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.
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. Additionally, there can be no assurance that targeted returns will be achieved, that TwentyFour or any securities discussed will achieve comparable results.
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 Vontobel considers the projections to be a reliable prediction of future events and should not be relied upon as such. Vontobel reserves the right to make changes and corrections to the information and opinions expressed herein at any time, without notice.