Asset Based

Asset-based finance (ABF), also known as asset-based lending or commercial finance, has today emerged as a credible investment category worth trillions of dollars and one with a proven long-term track record. Secured by borrowers’ assets or receivables, ABF enables investors to use the collateral to liquidate the given assets and recover outstanding dues from debtors.

Types of Asset Based Finance

Private credit allows investors to bypass banks and other mainstream lenders, and transact directly with borrowers, thus potentially boosting their returns on a risk-reward basis and also reaping the benefits of disintermediation.

Moreover, investors can intervene opportunistically across the capital structure of companies, providing alternative source of funding spanning wide-ranging risk profiles throughout the yield curve.

Investors weighing private credit as a key part of their asset allocation mix today have several options to choose from:

  • Leveraged finance
  • Mezzanine finance
  • Stressed and distressed debt
  • Non-performing loans, life settlements, insurance-linked securities, etc.
  • Direct lending

This stream of ABF covers investments backed by assets that generate cash flows – things like royalty streams, intellectual property, for example.

Many banks refrain from lending to borrowers against such collaterals, given the non-standard nature of the same. This creates opportunities for non-bank lenders, or “shadow banks”, to provide financing against assets like music, film and pharmaceutical royalties.

It also includes financing secured against financial contracts typically in the insurance and asset servicing sectors

Insurance-linked securities are securities instruments linked to insurance risks. As the ILS market has developed, it has provided an alternative source of risk capital, for property catastrophe risks such as windstorm and earthquake, life insurance exposures such as mortality and longevity risk and many other types of risk. CAT Bonds are a specialized type of ILS that are primarily issued by insurance and reinsurance companies. They are designed to manage the financial impact of natural disasters, such as earthquakes and hurricanes. When such catastrophic events occur, CAT Bonds provide the necessary funds to the issuer, mitigating the financial strain on their resources.

The longevity linked ILS, commonly known as Life Settlements, aims to tap into secular demographic trends such as aging population in several countries, wherein life insurance policies worth hundreds of billions of dollars lapse every year because holders no longer need such risk protection instruments. Institutional investors and asset managers here typically snap up settled life policies at wholesale prices and advance a substantial percentage of the policies’ value to the holders – much higher than the low values offered by insurers at the time of surrender.