Pimco has highlighted the need for asset-based finance investors to look at the relative value of assets, to avoid falling into “value traps”.
In a new report, Pimco portfolio managers Kristofer Kraus, Harin de Silva and Jason Steiner estimate the asset-based finance market (excluding commercial real estate lending) to be worth in excess of $20tn (£15.7tn).
The trio pin-pointed particular opportunities within residential mortgage lending, US consumer lending, aviation finance and data infrastructure.
Read more: Pimco adds $2bn to asset-based private lending strategy
Having seen certain markets experience inflated pricing across cycles, the Pimco trio said they “apply a relative value lens to aim to avoid value traps”. They highlight several areas where this may be the case.
Read more: Asset-based financing platform Tranched raises $3.4m in pre-seed round
These include music royalties, where the firm says it remains selective, focusing on smaller catalogues with under-monetised assets, synthetic risk transfers which Pimco does not consider a standalone asset class, and finally, new consumer loan products, such as buy-now-pay-later loans, which it says are still maturing and offer little insight into origination practices.
Pimco says the outlook is optimistic for private credit but that this “optimism must be tempered with discipline”.
It warns investors to evaluate different asset-based finance areas individually for issues that could undermine credit performance, taking a “relative-value-oriented approach” to the rapidly diversifying array of opportunities.
Read more: Pimco says private credit is overvalued amid rising risks
