Specialty Finance, Asset-Based Lending, an Asset-Backed Finance are interchangeable terms that all refer to lending that occurs outside traditional corporate and commercial real estate markets and is secured by financial or hard assets.
Asset-Based Finance: The Next Frontier of Private Credit
Why PIMCO?
PIMCO has been at the forefront of asset-based finance markets with decades of experience investing in public and private opportunities.
As of 30 June 2024. SOURCE: PIMCO. For illustrative purposes only. The views and expectations expressed are those of PIMCO.
Frequently Asked Questions
Specialty finance investments can be categorized into 3 main types: consumer-related debt (e.g. student loans, auto loans, personal loans); non-consumer assets (e.g. aviation finance, data infrastructure, equipment leasing); and mortgages (e.g. U.S. residential mortgages, European mortgages, home improvement loans).
Many investors have allocated heavily to corporate direct lending in recent years. Adding asset-backed financing may be an attractive complement and diversifier, with the potential to increase returns and reduce volatility within a private credit allocation. This is driven by a borrower base, economic risk factors, and contractual cash flows that are all differentiating versus corporate direct lending. A backdrop of tighter regulations also creates an attractive entry point as banks pull back and barriers-to-entry are high. This is a key area of strength for PIMCO given asset-based lending's close ties with fixed income.
Specialty Finance is a sector where PIMCO has carved a niche, being one of the earlier entrants into private asset-based finance markets post-GFC. Leveraging our fixed income DNA, detailed loan-level underwriting and robust data analytics, we have become one of the largest investors in the space, with over US$165 billion deployed across mortgage, consumer, and asset-backed sectors (as of 31 Dec 2023). As a prominent liquidity provider and strategic partner to global banks, we navigate complex regulatory environments and offer alternative credit solutions. Our size and scale enable us to secure better loan terms and access non-mark-to-market financing.
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Disclosures
All investments contain risk and may lose value. Investments in residential/commercial mortgage loans and commercial real estate debt are subject to risks that include prepayment, delinquency, foreclosure, risks of loss, servicing risks and adverse regulatory developments, which risks may be heightened in the case of non-performing loans. Mortgage and asset-backed securities are highly complex instruments that may be sensitive to changes in interest rates and subject to early repayment risk. Structured products such as collateralized debt obligations are also highly complex instruments, typically involving a high degree of risk; use of these instruments may involve derivative instruments that could lose more than the principal amount invested. Private credit involves an investment in non-publicly traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.
Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s obligation, or that such collateral could be liquidated. Collateralized Loan Obligations (CLOs) may involve a high degree of risk and are intended for sale to qualified investors only. Investors may lose some or all of the investment and there may be periods where no cash flow distributions are received. CLOs are exposed to risks such as credit, default, liquidity, management, volatility, interest rate, and credit risk. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be appropriate for all investors. Investing in distressed loans and bankrupt companies are speculative and the repayment of default obligations contains significant uncertainties. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor there is no assurance that the guarantor will meet its obligations. Sovereign securities are generally backed by the issuing government, obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The current regulatory climate is uncertain and rapidly evolving, and future developments could adversely affect a portfolio and/or its investments.
This material contains the current opinions of PIMCO and such opinions are subject to change without notice. Any views expressed herein are those of PIMCO as of the date indicated, are based on information available to PIMCO as of such date, and may not have been updated to reflect real time market developments. There can be no assurance that such opinions are or will remain accurate, or that other opinions or methodologies would not produce different results. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. None of the funds, PIMCO or any of their affiliates shall have any duty to update any of the information presented herein. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2024, PIMCO.