Asset-Based Lending: The Next Frontier of Private Credit

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What is Asset-Based Lending?

In the fast-growing private credit universe, interest is building around asset-based lending (ABL), a sector that offers compelling and consistent diversifying return potential. Also referred to as asset-backed or specialty finance, we consider it the US$20+ trillion^* next frontier of private credit.

Often secured by hard assets as collateral, it provides critical funding across the global economy in residential mortgage, consumer credit, and non-consumer lending.

^*As of December 31, 2023. Source: PIMCO.

Consumer Credit

Unsecured consumer loans, credit card receivables, auto loans, student loans

Non-Consumer Lending

Aviation finance, equipment finance, data infrastructure, small business loans, intellectual and insurance related

Residential Mortgage

U.S. residential mortgages, European mortgages, home improvement

Why is ABL Attractive for Investors?

Kyle McCarthy, private credit specialist, demystifies asset-based lending and outlines three key reasons why we believe investors should consider it today.

Potential Benefits of Asset-Backed Finance

Income Generation

Focused on assets that seek to generate stable, front-loaded cash flows.

Diversification

Complements corporate-focused private credit exposure.

Structural Protections

Loans often backed by hard assets as collateral.

More to Know

Asset-Based Lending: Common Myths and Misconceptions Busted

ABL is often misunderstood; we dispel common myths that may be holding investors back from exploring the asset class.

The Why and How of Allocating to Asset-Based Lending

Why is asset-based lending considered the next frontier of private credit, and how does it fit within a broader allocation? Kyle McCarthy, private credit specialist, explains.

PIMCO's Highest Conviction Themes in Asset-Based Lending

Consumer lending, aviation finance, and digital infrastructure: learn more about these exciting sectors in asset-based lending from private credit specialist Kyle McCarthy.

Asset-Based Lending Provides Diversification to Private Credit

Higher interest rates and increased regulatory pressures have challenged traditional lenders, creating opportunities in private asset-based specialty finance markets.

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Actionable Alternatives: Synthetic Risk Transfer (SRT)

In this series, discover exciting private market opportunities and examples of how PIMCO pursues them to benefit our investors.

Why PIMCO?

PIMCO has been at the forefront of asset-based lending 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, 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.

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.

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