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Private asset-based finance (ABF) has grown with impressive speed since the Global Financial Crisis (GFC). As traditional banks continue retreating from lending to certain markets and asset classes, private, non-bank lenders like KKR are filling the gap. The last decade favored direct lending, which became a well-traveled path for investors with private credit allocations. Now ABF is taking a similar road, grabbing the spotlight with its historically attractive yields, diversification benefits, and vast market size.
Importantly, ABF investing demands scale, sophistication and capital flexibility. In our view, this will favor managers with specialized credit expertise, deep relationships, and an ability to deliver complete solutions. Before walking through the basics of ABF – including how it differs from direct lending and the role it can play in investor portfolios – it’s worth explaining what this thriving sector of private credit is all about.
What is asset-based finance?
At its core, ABF is a form of credit investing where each investment is backed by large, diversified pools of assets. These assets come in many forms, including financial assets (such as pools of auto or consumer loans, or accounts receivable) and hard assets such as airplanes, industrial equipment, or residential real estate (Exhibit 1). ABF also supports contractual assets such as music IP and healthcare royalties. Simply put, today’s ABF market provides the credit that our modern economy runs on.
EXHIBIT 1: The Economy Runs on ABF
Today’s ABF opportunity is too big to ignore
The private global ABF market is over $6.1 trillion today—a figure nearly twice as large as its pre-GFC peak of $3.1 trillion in 2006 (Exhibit 2). By 2029, we estimate the global private ABF market could reach $9.2 trillion. That’s larger than today’s syndicated loan, high yield bond, and direct lending markets combined.
How did ABF grow so fast? On the whole, banks are doing considerably less in ABF today. Following the GFC, traditional banks were subject to stricter regulations, higher capital requirements, and tighter underwriting standards – a tale that’s been well documented and discussed. Bank consolidation is another contributor to the ABF market’s ascent as the number of U.S. commercial banks has halved since 2000, with further downsizing probable.
Structurally, today’s demand for credit isn’t slowing; it’s growing. Indeed, U.S. household debt surpassed $18 trillion last year, up from $8 trillion in 2004. Taken together, current market dynamics signal sustained opportunities for ABF investors. More importantly, when markets dislocate, like in 2022 when inflation and rates spiked or in 2023 as Silicon Valley Bank failed, private lenders’ market-share gains often accelerate as their capital becomes more valuable to borrowers.
EXHIBIT 2: ABF Is a Fast-Growing Market with Room to Run
What role does ABF play in a balanced portfolio?
Improving portfolio diversification
The risk-return profile of ABF offers clear diversification benefits in investor portfolios (Exhibit 3). It can diversify allocations to public fixed income and private direct lending and has one of the lowest average correlations to other common asset classes. This is largely attributable to ABF’s emphasis on non-corporate credit exposures.
How diversified? ABF covers a wide variety of underlying financial and hard assets. Consumer auto loans may be expected to perform differently than railcar leases and music royalties. And as we explain further below, each individual pool of assets contains a multitude of underlying assets — thousands of home mortgages or car loans, for example — across different borrowers, credit profiles, and geographic regions.
Beyond asset class diversification, making an allocation to ABF also offers some inflation protection. The value of underlying loan collateral, particularly hard assets, tends to rise along with consumer prices. As for yields, the vast majority of ABF investments are fixed-rate, which can complement private direct lending strategies where exposures are predominantly floating-rate.
EXHIBIT 3: ABF Has Low Correlations with Public Credit, Private Credit, and Equities
How does ABF differ from direct lending?
While both are part of the private credit ecosystem, ABF and direct lending represent two distinct approaches to private lending. Combined in a portfolio, these two private credit approaches are complementary.
In direct lending, corporate borrowers receive loans directly from private non-bank lenders like KKR. Setting loan terms requires assessing the company’s creditworthiness. Ultimately, the borrower’s ability to pay regular interest, plus the full principal at the end of the loan, is a function of the company’s future operating cash flows from selling goods and services. (Exhibit 4).
In ABF, lenders don’t focus on operating cash flows for loan repayments. Instead, the primary source of repayment is secured by hard assets or diversified pools of financial assets. How diversified are these pools? When it comes to auto loans and mortgages, for example, it’s thousands of underlying loans across different borrowers, credit profiles, and geographic regions.
EXHIBIT 4: Direct Lending and ABF Explained
