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.
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:
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
This ABF segment 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.
Investors 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.
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