Asset-backed finance is growing fast and drawing new scrutiny
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A version of this article appeared in CNBC’s Inside Alts newsletter, a guide to the fast-growing world of alternative investments, from private equity and private credit to hedge funds and venture capital. Sign up to receive future editions, straight to your inbox. The First Brands Group bankruptcy has cast a spotlight on one of the fastest-growing corners of private credit: asset-backed finance. Private asset-backed finance, or ABF, involves lending against a specific asset, income stream, or loan rather than lending to a company based on its cash flow. According to KKR, the private ABF market has doubled since 2008 to over $6 trillion today – larger than the syndicated loan market, high-yield bond and direct lending markets combined. The ABF market is expected to top $9 trillion by 2029, according to KKR. In a report, the global investment firm said that while direct lending may have powered the private-lending growth last decade, ABF is now “taking a similar road, grabbing the spotlight with its historically attractive yields, diversification benefits and vast market size.” Asset-backed finance is often touted as being less risky than direct lending. While banks have pulled back from ABF since the financial crisis, private direct lenders have poured in. A lender often bundles ABF loans in pools, collateralizing everything from financial assets (accounts receivable or consumer loans) or hard assets like aircraft, warehouses or even music royalties. The pooled approach is aimed at providing a safer portfolio of loans, with more diversification. Yet some experts say that the flood of capital pouring into private credit and ABF strategies has resulted in lower standards and increasingly exotic assets pledged as collateral. First Brands, the auto parts company, borrowed against its receivables, or the money owed by its customers. In bankruptcy filings and lender statements, some lenders say the company…
