Asset-backed finance continues to attract institutional investors seeking diversification and downside protection, but capturing the asset class’s premium requires specialist expertise, operational resources and extensive due diligence.
Asset-backed finance (ABF) is attracting growing interest from institutional investors seeking diversification, downside protection and enhanced returns. But speakers at Private Markets Profile’s Private Credit Forum argued that the asset class’s appeal stems largely from the fact that it remains complex, operationally intensive and difficult to access.
Barbara Richter, head of asset-backed finance at DWS, argued that ABF offers a compelling combination of downside protection and attractive risk-adjusted returns. Unlike corporate lending, ABF strategies are typically backed by diversified pools of cash-generating assets such as consumer loans, small business receivables and other real-economy exposures.
“The underlying assets we’re funding are diversified and cash flowing, which leads to certain stability in the cash flows that support our transactions,” Richter said.
Combined with structural protections, she argued, this can create a more resilient investment profile than many traditional credit strategies. At the same time, investors can often achieve returns above those available in public markets and traditional direct lending. “I think a lot of that comes down to the complexity and the barriers to entry in the asset class,” she said.
According to Richter, those barriers exist throughout the investment process. Transactions are often sourced bilaterally, relationships with borrowers can take years to develop and managers frequently obtain extensive control rights over underwriting standards and portfolio management.
The asset analysis itself also requires specialist expertise. “We like to get the historical payment data, so every loan ever originated, every payment ever made,” Richter said, explaining how managers build their own credit and loss assumptions rather than relying solely on information provided by originators.
[L-R Barbara Richter, Corrado Pistarino and (chair) Richard Wilson]
Operational oversight remains equally important once investments have been made. “There have obviously been high-profile fraud cases,” she said. “So I think you really need to build up your own data analytics, tracking, and in an ideal case, you’re monitoring bank accounts and reconciling payments.”
Corrado Pistarino, chief investment officer at Foresters Friendly Society, argued that while ABF has become an increasingly popular label, many of the underlying assets have existed for decades. “ABF is an umbrella term for things which are actually quite familiar,” he said.
Rather than representing a new asset class, Pistarino said the growth of private ABF reflects broader changes in financial markets following the global financial crisis, as regulation encouraged banks to retreat from certain forms of lending and opened the door to non-bank lenders.
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For institutional investors, the opportunity lies in identifying areas where complexity and limited competition continue to create attractive returns.
Foresters has invested in trade finance, inventory finance and working capital strategies, including allocations made following the Covid-19 pandemic as economies reopened. “We thought that a good way of doing this was through this granular pool of assets, self-liquidating,” Pistarino said. “And this has been an exceptionally good investment for us.”
However, both speakers stressed that harvesting the complexity premium requires significant due diligence. Pistarino said manager selection often extends far beyond reviewing performance figures. “When we invested in direct lending, probably 80% of my time was in conversation with the workout team,” he said.
Understanding how managers respond when loans encounter difficulties can be more important than assessing performance during benign market conditions, he argued.
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The challenge becomes even greater as investors move into more specialised areas of private credit. “If you believe that there is an access and complexity premium, then you need to put extra work in capturing that access premium,” Pistarino said.
He cited examples ranging from commodity finance to litigation finance, where investors may need to understand highly specialised operational processes before committing capital.
“We all want to move away from more beta-type strategies like mid-market direct lending into more niche strategies in which we believe there is still significant alpha to be captured,” he said. “But that journey becomes bumpier and bumpier as you go along that.”
Looking ahead, Richter argued that Europe may represent one of the most attractive areas for future growth. While ABF remains dominated by US managers, she said European credit performance has historically been more resilient, supported by stronger household balance sheets, more conservative underwriting and broader social safety nets.
The European market also remains less mature than its US counterpart, creating opportunities for specialist managers. “I actually see more potential for growth here,” Richter said.
For investors, however, the message from the panel was clear: the returns available in ABF are closely linked to the complexity of the market itself. Capturing that premium requires not only capital, but also the expertise and operational resources needed to understand an increasingly specialised segment of private credit.