Asset-backed finance (ABF) is evolving from a defensive niche into a central pillar of private credit’s expansion, offering investors yield, security and diversification as banks pull back on lending, said senior portfolio managers from global investment firms at ASK 2025.
ABF is a specialized, bespoke financing instrument backed by assets that generate cash flows.
They span a wide range of the economy, covering hard assets such as homes and aircraft as well as intangible assets including music royalties, legal claims, natural gas development rights and equipment leases.
“Asset-backed financing bridges the gap between syndicated loans and distressed debt, historically providing for higher risk-adjusted returns with less volatility through its asset-based nature,” Kyle Asher, managing director and co-head of alternative credit solutions at Monroe Capital, said at ASK 2025 on Oct. 29.
ABF is one of the four main subsectors of private credit, alongside direct lending, distressed loans and venture capital.
“Asset-backed financing continues to be viewed as the most promising of the emerging strategies in private debt, with 60% of investors indicating it offers the greatest opportunities in the coming 12 months,” he said during a presentation, citing a Preqin survey.
SHORTER DURATIONS, HIGHER YIELDS
Lending decisions in ABF are based on predictable cash generation, rather than the borrower’s creditworthiness.
ABF structures are designed for shorter durations of two to three years, targeting low-to mid-teen returns on invested assets. That compares with maturities of five years or longer for direct lending.
They provide customized financing to borrowers, typically individuals and small and medium-sized enterprises, in exchange for yield premiums.
HOW IT DIFFERS FROM ABS AND ABL
ABF differs from asset-backed securities (ABS) and asset-based lending (ABL).
ABS are tradable securities backed by assets such as auto loans, credit card debts and mortgages. They tend to have higher loan-to-value ratios with cash flows from principal and interest payments.
By comparison, ABL involves loans secured by receivables or inventory, while generateing interest income from secured loans.
DEFENSIVE STRATEGY
Unlike traditional private credit, which relies on the borrower’s cashflow profile, ABF is collateralized by assets that generate predictable, contract-based cash flows, said Charles Dunlap, head of global financial opportunities at Cerberus Capital Management.
This structure also makes ABF intrinsically defensive, he added.
Cerberus characterized ABF as a credit class with low correlation to macro volatility, underpinned by conservative loan-to-value ratios and robust underwriting standards.
Right Source: FCA, PIMCO, HRA (Aircraft Transactions), CFPB, Goldman Sachs (Music Revenues), McKinsey, Equifax (Consumer Installment Loans), Enterval Analytics (Private Student Loans)
FUTURE OF PRIVATE CREDIT
PIMCO, one of the world’s largest fixed income, frames ABF as “the future of private credit.”
According to data provided by PIMCO, the cumulative capital raised in ABF has surged 139% to exceed $25 billion since 2020. But available capital still trails the investable opportunity set across sectors such as mortgages, aircraft and AI-linked infrastructure.
Its ABF themes span four major areas: consumer lending strategies for homeowners; aviation finance amid post-COVID aircraft shortages; private debt linked to AI infrastructure; and originator partnerships enabling “asset-light” models for banks and fintech companies
ABF DEAL WITH HARLEY-DAVIDSON’S FINANCING ARM
Its loan purchase from Harley-Davidson Financial Services represents one of PIMCO’ flagship transactions in ABF.
This year, it purchased $2 billion of existing retail finance loan and receivables from Harley-Davidson Financial Services (HDFS).
It has also agreed to purchase $5 billion of retail finance loans from the motor cycle company’s financing arm over the next five years, aiming to capitalize on its forward cash flows.
As part of the deal, PIMCO will acquire a 4.9% stake in HDFS at a 1.75x post-transaction book valuation.
“The forward flow agreement provides a predictable pipeline, enabling PIMCO to capture steady, risk-adjusted returns without the operational burden of origination,” said Kyle McCarthy, executive vice president and alternative credit strategist at PIMCO.
Meanwhile, global portfolio managers played down concerns over the ripple effects from the September bankruptcies of US auto parts maker First Brands Group and subprime auto lender Tricolor, which had unsettled parts of the private credit market.
They noted that US small and mid-sized companies have continued to post steady gains, making it hard to view the sector as deteriorating or distressed.
