Schroders: Asset-based finance is no longer niche

Asset-based finance (ABF) is no longer a niche asset class within the private credit space and has become a necessary component of a diversified portfolio, according to Schroders’ global head of asset-based finance and co-head of private debt and credit alternatives, Michelle Russell-Dowe.

Speaking at the Pensions UK Investment conference, Russell-Dowe said interest in ABF has been growing over the past few years partly because of growing awareness of it, and partly because people are increasingly looking for ways to diversify their portfolios away from direct lending.

“Many people start [investing in private credit] with direct lending, but people are increasingly looking for diversification and that’s where asset-based finance comes in,” she said. “ABF cuts its teeth on being a diversifier and I think that’s been a principal reason for its growth. It offers some respite against volatility.

“I think the biggest misconception still out there about ABF is that it’s niche and small and new. ABF has been around for years and there’s now a lot of data and history around it. People view it as more risky because they think it’s niche, and that’s not true. It’s just a newer term and I think that jargon doesn’t help,” she added.

She said that pension schemes looking to invest in asset-based finance now should ask their manager to explain the inefficiency premium they are aiming to monetise in their stratetgy. “Every manager should be able to explain that clearly,” she said.

Going forward, she said she believes a challenge for ABF and private markets more broadly will be the “mismatch” between liquidity expectations and what is deliverable.

“When I look at private markets, I think the main issue is the mismatch between the liquidity promised to be delivered and what is actually possible to be delivered. I think that will domiante headlines.”