Feb 07, 2024

Asset Backed Credit (next wave of private credit after Direct Lending)

All - curious as to views on Asset Backed Lending / Specialty Finance (sub-stragies to include: Asset backed cashflow loans, structured credit, specialty finance (rights, royalties, lender finance), trade finance, special situations) 

Talks around it being ripe for disruption - private debt funds are increasingly to raise capital for this strategy as banks retreat / inc. in volatility / inflation / PE valuation uncertainty

Particularly curious on its appeal vs. direct lending - in terms of how interesting it is, opportunity etc.

 

"What I’m trying to get around is that it’s historically seen as unsexy as lower risk / returns, financing old economy businesses, and covered by commercial and investment banks like Wells Fargo. DL is relatively fast paced and pretty flexible across sectors. Is this changing / wrong?"

lol, who you do think did direct lending before the suits at apollo/bx/ares/hps started doing it? This was boring work for commercial banks 10yrs ago but supersexy today with SOFR at 5m spreads at 550= LT returns with back-leverage. 

Now those same suits are targeting the asset-backed space. DL/PC has taken a big chunk out of public corporate markets and from bank balance sheets. If you think that asset-backed markets go through the same shift with private firms taking a higher portion, you'd want to aim for asset-backed PC. In other words, if DL/PC has taken 50% of corporate market but only 10% of asset-backed market, why not join the latter to rise with the tide of market share capture? 

I'm making these numbers up but I'm sure every megafund (KKR esp) has put out a piece on their asset finance efforts over last few weeks.

 

Super gross space. Everyone should continue being a public corporate distressed investor that can play up and down the cap stack and stay away from the asset based private credit garbage. There's zero alpha or chicks to be found there. 

 

Super gross space. Everyone should continue being a public corporate distressed investor that can play up and down the cap stack and stay away from the asset based private credit garbage. There's zero alpha or chicks to be found there. 

One of the biggest smoke-shows I've ever seen was actually in an ABL.   

https://www.sec.gov/Archives/edgar/data/1857853/000119312521208779/d128…;   

 

Honestly, the capital markets / ABS space is ripe for relationship people who can use being super hot as a competitive advantage. I have to work with way too many people who are dumb as rocks and can't write full sentences but "know a dude that LOVES this risk" and manage to convert that into a whole ass career.

I can't fault them.

 
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If you include structured products - its a huge space that will keep growing to rate and jam into insurance company balance sheets.

Other fun places a few hedge funds have been playing have been off-balance sheet inventory financings in mid-teens, FILO ABLs, "securitization facilities" which are just dropdowns and others. 

For private credit nice also to be able to offer both the ABL and the direct loan to a company, though most traditional companies should be able to raise more term loan than ABL.   

 

More action here than people think. Most interesting roles aren’t at MFs IMO. If you have to deploy major $$$ then you’ll be chasing more boring low-yield deals. But if you’re at a fund that is in that $3-15bn range you can see some cool stuff. Especially if you’re willing to focus in on some more unique sectors. 

 

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