In 2022, we saw the end of ultra-low interest rates and stimulus for markets that had driven a decade of lending where banks had a competitive advantage in both funding and capital. In the years following the global financial crisis, private markets managed meaningful growth as poorly capitalised banks, bogged down with legacy issues, sold non-core assets, retreated from some traditional lending arenas, and shifted strategies. In 2023, we saw the start of a similar pattern with the higher cost of capital and regulatory headwinds creating new opportunities for non-banks to acquire or take exposure to such high-quality asset pools traditionally held by banks.
Since then credit risk premiums have widened and fundamentals remain strong, providing what we believe to be an attractive entry point for ABF investments.
ABF is a complex area of private credit where an investor’s relationships can be extremely valuable. Relationships with banks, specialist lenders and other loan originators are essential to sourcing asset pools either through acquisition, partnerships or structured exposures, as well as potentially disposing of assets when required. Investors often take an active role in structuring and funding asset pools in the capital markets, so strong relationships can help investors add value to ABF transactions by tailoring deals to their structure and risk profiles.
Relationships are formed through repeated engagements over an extended period of time. When looking for partner investors, lenders look for scalable, long term, stable and responsible custodians of assets. This gives investors with an observable track record in the market an advantage in sourcing assets, and also serves as a meaningful barrier to entry.
TwentyFour is a well-known presence in European securitisation, active in both public and private markets right across the risk spectrum and working with policymakers to guide regulation in the sector. Our relationships broaden our ABF opportunity pipeline, improve our access to preferred assets, and enhance our ability to add value by working with trusted partners on structuring and pricing.
ABF is a generally accepted market term and the one we use at TwentyFour but within private credit it is sometimes used interchangeably with asset-based lending, specialty finance or structured credit.
Whatever the term used, the basic principle such investments all share is exposure to an asset pool. Where they can differ is in how the asset exposure is obtained, as well as the legal structure wrapped around the investment. This could be a conventional bond structure, a loan, or a guarantee, but all will be focused on creating, acquiring and taking exposure to a pool of assets and taking an income from the cashflows generated by those assets.
ABF is not a niche industry. In fact, it dwarfs the rest of private credit (see Exhibit 1). Citi estimates the global ABF market currently totals $5.2tr, and it is expected to grow to $7.7tr by 2027.
