Asset-based finance provides much of the financing for the real economy and a compelling proposition for investors. But what exactly is it, and what makes it a different breed from other private credit investments?
It starts with the sprawling, vibrant consumer sector, which is more than two-thirds of economic activity in many of the world’s major economies—including the US and Europe. Consumers borrow money for a lot of reasons—to acquire property, buy cars and purchase household goods. Companies use asset-based finance, too.
A New Chapter in the Private Credit Story
Who provides the vital capital that supports the needs of the real economy? Historically, banks did, but the picture has changed over the past few decades. Pressure from crises, tighter regulation, financial innovation and consolidation have crimped banks’ balance sheets. They’ve struggled to keep up with growing loan demand from consumers and businesses.
After the global financial crisis, private lenders stepped in to fill this capital gap, providing capital to companies in the US middle market owned by private equity firms. Today, this form of private lending is a well-established market with many lenders jockeying for business.
Today, we’re seeing a new chapter in private lending unfold.
Banks remain under pressure, unable to meet the borrowing needs of the real economy, and private credit investors are again stepping in to fill the void. New entrants to lending markets, specialty finance companies, are one of the driving forces. Harnessing new technology and taking advantage of changes in financial markets, these non-bank lenders have provided capital to underserved consumers and small businesses.
Unlike banks, specialty finance companies don’t have big balance sheets to hold loans, so they partner with outside sources of capital such as private credit investors (Display). Specialty finance platforms source, originate and service the loans; private credit investors set the parameters for borrowers and collateral types, provide the capital and own the loans.
