The $5tn (£4tn) asset-backed finance (ABF) market presents a great opportunity for alternative lenders after commercial banks scaled back their activities in the space, according to Oaktree.
In the latest monthly round-up from the alternative asset manager, co-chief executives Robert O’Leary and Armen Panossian noted that “ABF has been transformed from a low-return, bank-dominated asset class into a highly attractive area of opportunity for alternative lenders”.
Tighter regulations, higher interest rates, quantitative tightening and risk aversion have led commercial banks to retrench from asset financing, they said.
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ABF comprises lending against, or investing in, pools of contractual assets, such as equipment leases, consumer loans, residential mortgages, and royalty agreements.
Investors are attracted to the diversity of the underlying collateral available in the market, which reduces idiosyncratic risk.
Oaktree also highlighted that ABF assets are contractual payment obligations with predictable cashflows, so investors are typically able to recoup a chunk of their capital within the expected timeframe.
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Additionally, ABF typically offers “meaningful structural protections”, Oaktree said.
If the value of the assets decline significantly, cashflows are usually redirected to pay off the most senior lenders, and forced asset sales or contentious negotiated restructurings are typically avoided.
Oaktree said it believes that the prime drivers of ABL’s transformation into an opportunity for alternative lenders – namely increased regulations and the end of the zero-interest-rate era – are secular shifts, not short-term trends.
“Thus, we believe ABF isn’t a short-term opportunity, but rather the next frontier of private credit,” it said.
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