Unlocking Capital: Transforming Assets into Opportunities

In a world where traditional lending models are increasingly strained, a powerful financial paradigm is emerging to unlock hidden value and drive economic growth.

Asset-based finance (ABF) represents a transformative approach that shifts the focus from borrower creditworthiness to the intrinsic value of collateral assets.

This strategy is not just about securing loans; it's about tapping into a vast reservoir of untapped capital that can fuel innovation and expansion.

The Core of Asset-Based Finance

At its heart, asset-based finance is a credit investing method where loans are backed by identifiable assets that generate contractual cashflows.

Instead of asking, "Will the borrower repay me?" investors focus on a more targeted question: "Will these assets generate enough cash flow to ensure repayment?"

This fundamental shift reduces reliance on unpredictable corporate earnings and enhances security through tangible backing.

A Diverse Universe of Assets

ABF covers a broad spectrum of underlying assets, providing investors with multiple avenues for diversification and risk management.

• Tangible hard assets include aircraft, equipment, vehicles, real estate, and inventory.
• Financial assets encompass consumer receivables, student loans, credit card receivables, and auto loans.
• Specialized or esoteric assets involve royalties, franchise receivables, trade receivables, and insured receivables.
• Business assets range from accounts receivable and intellectual property to brand names and leases.
• Residential assets cover mortgages and residential transition finance.

This multi-sector diversity is a strategic advantage, allowing investors to capture distinct pricing dynamics and respond flexibly to macroeconomic changes.

Market Scale and Exponential Growth

McKinsey estimates that the global scope for ABF could exceed $30 trillion, driven by consumer lending and securitization markets moving away from traditional banks.

The market is expanding meaningfully through 2026 as banks retrench and fintech platforms scale, positioning ABF as a core component of the private debt landscape.

This growth reflects a broader trend toward more secure and data-driven financial solutions.

Structural Advantages: Security and Yield

ABF offers robust structural benefits that enhance both security and returns for investors.

Collateral security provides stronger recovery rates than unsecured loans, with lenders typically offering 60-80% of an asset's appraised value.

• Ring-fenced collections and enhanced structural protection.
• Liquidation capability in stressed environments to support repayment.

On the yield side, ABF strategies deliver competitive returns that often exceed conventional bonds.

• Short-duration, investment-grade ABF strategies yield around 6% net.
• Residential transition finance and franchise receivables offer net returns in the 8-10% range.
• Trade receivables lending provides higher yields, such as Euribor +450 basis points, with historically low default rates.

These features make ABF an attractive option for income-focused portfolios.

Duration and Liquidity: Key Characteristics

ABF structures are typically short-dated with floating rates and amortising cashflows, reducing refinancing risk.

Scheduled amortisation provides strong visibility over cashflows, making it suitable for investors managing liquidity buffers.

The self-liquidating properties contribute to lower volatility compared to private equity or listed equities, offering consistent income streams.

Benefits Across the Investor Spectrum

Different investor types can leverage ABF to meet specific financial goals and enhance portfolio performance.

For institutional investors and asset owners, ABF provides portfolio diversification by reducing reliance on the corporate credit cycle.

• Generates steady cashflows with lower volatility for uncorrelated alpha.
• Supports stable distributions for long-term commitments by endowments and sovereign wealth funds.
• Improves capital efficiency, reducing Solvency II charges for insurers by over a third.

Corporate borrowers benefit from higher loan amounts, with limits potentially reaching $5,000,000.

• Covenant-light structures offer flexibility in business decisions.
• Financing acquisition targets by leveraging assets when cash flow-based lending is unavailable.
• Working capital solutions for businesses with seasonal sales fluctuations.

Family offices and private wealth investors gain real economy access without the complexity of traditional private equity.

• Customizable mandates around themes like SME lending or aviation leases.
• Attractive entry points as traditional lenders retrench and capital costs recalibrate.

Loan Structure and Mechanics

Loan-to-Value (LTV) ratios vary by asset type, influencing funding percentages and interest rates.

• Accounts receivable typically have higher LTV ratios.
• Inventory involves moderate LTV ratios.
• Equipment and machinery come with lower LTV ratios.
• Real property has the lowest LTV ratios due to lower liquidity.

Advanced structures like FILO tranches can increase borrowing capacity, adding flexibility to financing arrangements.

Comparing Asset-Based Finance to Traditional Lending

ABF differs significantly from conventional corporate lending, offering enhanced protection and data transparency.

This comparison highlights why ABF is gaining traction as a more secure alternative.

Market Drivers and Context

Several macroeconomic factors are fueling the growth of ABF, making it a resilient choice in volatile times.

• Higher-for-longer base rates provide income resilience through float rates on ABF.
• Inflation risks are mitigated by tangible collateral-backed exposures.
• Stricter capital regulations support capital efficiency with ABF solutions.
• Tighter credit spreads maintain attractiveness due to collateral-backed security.
• Bank retrenchment creates deployment opportunities for institutional investors.

These drivers ensure that ABF remains relevant and adaptive to economic shifts.

Practical Applications and Use Cases

ABF is applied across various sectors, demonstrating its versatility and effectiveness.

In securitization, examples like Domino's Pizza $2 billion deal use ABS structures with single-term tranches and revolvers.

• Consumer and retail assets include student loans, credit card receivables, and auto loans.
• Business applications cover machinery financing, accounts receivable factoring, and inventory financing.
• Specialized uses involve luxury asset loans for items like watches and art.

These applications show how ABF can be tailored to specific needs and industries.

Strategic Positioning for the Future

ABF is positioned as a true portfolio diversifier, smoothing volatility and enhancing resilience in investment strategies.

It serves as a scalable toolkit for navigating changing market conditions and meeting long-term funding needs.

By capturing complexity premia in private, bespoke opportunities, ABF challenges direct lending as the next growth frontier in private credit.

This strategic role supports government policy goals by channeling capital into productive sectors like housing and SME lending.

Embracing ABF can unlock unprecedented opportunities for growth and stability in the financial ecosystem.