Asset-based finance (ABF), also known as specialty finance or asset-based credit, has grown rapidly over the past decade to a market broadly estimated at over $20 trillion.
Encompassing financial instruments secured by a diverse range of contractual cash flows from financial and hard assets, ABF finances a broad range of real-economy activity—from consumer credit and small business lending to equipment, fleet and infrastructure financing—connecting main street commerce with institutional capital markets.
For investors, that breadth translates into a differentiated opportunity: one that can offer attractive current income, strong risk-adjusted return potential, portfolio diversification and a measure of downside mitigation across market cycles. In this paper, we explore what ABF is, how it works and why we believe it warrants consideration as a dedicated allocation in investors' portfolios.
Executive Summary
- The ABF market is comprised of financial instruments secured by a diverse range of financial and hard assets that usually generate contractual cashflows, including consumer and small business loans, credit card receivables, subscription and invoice payments, autos, airplanes, data centers and equipment.
- This type of finance is, in many ways, the invisible infrastructure of everyday life. The financing surrounds us, funding the purchases, assets and services that consumers and small businesses rely on daily.
- We believe there are five potential benefits of an allocation to ABF:
- Attractive risk-adjusted returns
- Diversification through differentiated cash flows and exposure to shorter-duration assets
- Through-the-cycle portfolio construction to support more consistent returns across cycles
- Downside mitigation through tight covenants and first-loss protection
- Inflation protection (specific to hard assets)
- ABF investing demands the asset manager has extensive industry experience and relationships, deep origination and structuring expertise, and leading-edge technology capabilities to enable sophisticated underwriting and portfolio management.