Asset-Based Finance in a Strategic Asset Allocation - Incorporating ABF: four portfolio takeaways

Asset-based finance can improve private-credit portfolios by diversifying borrowers and risk premia, providing more resilient cash flows and shortening the path to capital recycling.

• Institutional private-credit portfolios built around senior direct lending can become concentrated in corporate borrowers exposed to EBITDA volatility, leverage, refinancing cycles and sector risk.
• ABF instead pools hundreds of thousands of loans, leases or mortgages backed by homes, aircraft, trains, equipment, receivables or other contractual cash flows, reducing reliance on any single obligor.
• Many ABF investments amortise through scheduled repayments rather than relying on a single bullet repayment, progressively reducing exposure and adding collateral-based recovery support if performance weakens.
• ABF maturities generally range from less than one year to less than five years, versus approximately seven years for corporate bonds, while amortisation can make the weighted-average life shorter than contractual maturity.
• The opportunity set spans consumer, mortgage, equipment, lender and receivables finance, as well as real assets, with returns potentially driven by credit, prepayment, illiquidity, inefficiency and cash-flow-timing premia.
• The broader ABF market is estimated at approximately $40 trillion of debt outstanding, and diversified strategies can reallocate capital across asset types, borrower groups, regions and structures as relative value changes.

Takeaway: Investors with sizeable direct-lending allocations should consider diversified ABF as a complementary private-credit exposure, while recognising that manager selection is important because strategies differ in flexibility, sector coverage and structuring.