Private credit beyond direct lending the role of asset based finance for insurers 1

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Private credit beyond direct lending: the role of Asset Based Finance for insurers Alok Bedekar, Senior ABS Fund Manager, explores the key features and dynamics of Asset Based Finance, and the role it can potentially play in insurer portfolios.

In an environment characterised by higher interest rates, ABF hides in plain sight: greater macro uncertainty and evolving regulatory constraints, insurers are increasingly focused on assets Where you live: Financed by mortgages that can deliver resilient income, capital efficiency and predictable outcomes. In this article, we make the Financed by credit card case for why we believe Asset Based Finance (ABF) is How you buy: receivables and consumer a complementary addition to fixed income portfolios, loans and could align closely with the needs of insurance balance sheets. Financed by auto loans, What you drive: leases and rentals What is Asset Based Finance? Asset Based Finance (ABF) is a subset of the private credit How you pay Tuition financed by private market and refers to a range of financial solutions where for school: student loans companies use their assets as collateral to secure funding; or, put more simply, it refers to debt instruments secured against a diversified pool of loans or receivables with Big and small ticket What you consume: similar characteristics. purchases

It can offer institutional investors access to short-dated, Media contracts financed typically floating rate, asset-backed cashflows that sit outside Who you cheer for: by broadcasting rights traditional public bond markets, potentially providing a compelling combination of high income and low duration. The privately originated and bespoke nature of ABF allows The cashflows are contractual in nature and secured against managers to shape exposure across geographies, maturities, tangible assets, such as property, equipment, receivables and credit quality and collateral types. This makes it valuable not inventory, or intangible assets such as accounts receivable and only as a source of income, but as a portfolio construction consumer loans, meaning returns are driven primarily by the tool: one that can help investors diversify away from traditional performance of underlying loans, rather than broader market corporate borrower risk. Within a private credit allocation, sentiment or refinancing conditions. ABF complements corporate direct lending by introducing different underlying assets and cashflow profiles, broadening the potential sources of return available to investors.

Key features of Asset Based Finance Fixed income portfolios are facing renewed challenges: 3. Floating rate refinancing risk has re-emerged, volatility has increased, and the Many ABF structures pay floating-rate coupons which can help compensation for corporate credit risk has reduced. Against this reduce duration sensitivity and support income resilience in backdrop, ABF offers a combination of features that we believe higher interest rate environments. make it a compelling consideration for investors: 4. Investment grade 1. Contractual cashflows Investments are typically structured at senior levels, secured ABF cashflows are contractual: underlying borrowers are over entire pools of diversified collateral, with bespoke covenants expected to make payments in line with agreed schedules and and performance triggers linked directly to asset performance returns are driven primarily by borrower behaviour. By contrast, and the quality of the loan servicing and administration. corporate lending relies on a company’s ability to generate These structures are set so that they can tolerate asset operating cashflows and is therefore exposed to business price declines, reinforcing their defensive characteristics. performance and earnings cyclicality, introducing additional sources of volatility that are typically less prevalent in ABF. 5. Access to Illiquidity premia

2. Self-amortising ABF provides access to illiquidity premia that in our view, are difficult to capture in crowded public markets. By investing ABF structures are self-amortising with…