Investors need to ensure they fully understand the nuances of asset-backed finance (ABF), experts have warned, amid rapid growth of the asset class.
ABF is increasing in popularity, as private credit investors look to diversify their portfolio and earn higher returns, with the benefit of security.
But it is important for investors to understand the assets behind the ABF debt itself.
Read more: TwentyFour AM launches new ABF fund
“The idea behind ABF is that lenders will gain exposure to collateral that can be liquidated in an enforcement scenario,” said Luke Chan, partner and head of private credit at HighVista Strategies. “However, if collateral is low quality, lenders may sustain losses.”
Chan has also warned new investors to avoid making false comparisons with other areas of private debt.
“Unlike EBITDA-based lending, which can be executed upon by a generalist team, ABF requires specialised teams able to underwrite and work with each underlying collateral type,” he added.
Read more: ABF an “evolutionary step” for private debt investors
Albane Poulin, head of private credit at Gravis Capital Management, explains that stakeholders need “deep expertise” in assessing the quality of assets.
“It’s not just about understanding the asset’s intrinsic value, but also about knowing the legal framework around enforcement in the event of default, such as whether to appoint a receiver or initiate administration proceedings, and how quickly the asset can be liquidated under current market conditions,” she said. “As a result, asset-backed lending calls for a blend of skills: asset valuation, legal and structuring expertise (especially around security agreements), and strong credit underwriting capabilities.
“When lending against infrastructure assets, an additional layer of insight is needed – specifically, a thorough understanding of regulatory frameworks and the underlying technology – to properly assess the long-term value and resilience of the collateral.”
