Private credit beyond direct lending: the role of Asset Based Finance for insurers

Alok Bedekar, Senior ABS Fund Manager, explores the key features and dynamics of Asset Based Finance, and the role it can potentially play in insurer portfolios. 

In an environment characterised by higher interest rates, greater macro uncertainty and evolving regulatory constraints, insurers are increasingly focused on assets that can deliver resilient income, capital efficiency and predictable outcomes. In this article, we make the case for why we believe Asset Based Finance (ABF) is a complementary addition to fixed income portfolios, and could align closely with the needs of insurance balance sheets.

What is Asset Based Finance?

Asset Based Finance (ABF) is a subset of the private credit market and refers to a range of financial solutions where companies use their assets as collateral to secure funding; or, put more simply, debt instruments secured against a diversified pool of loans or receivables with similar characteristics.

Read in full: Private credit beyond direct lending: the role of Asset Based Finance for insurers

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

Investment Risks

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.

Derivative Risk: Derivatives are highly sensitive to changes in the value of the underlying asset which can increase both Fund losses and gains. The impact to the Fund can be greater where they are used in an extensive or complex manner, where the Fund could lose significantly more than the amount invested in derivatives.

Exchange Rate Risk: Investing in assets denominated in a currency other than the base currency of the Fund means the value of the investment can be affected by changes in exchange rates.

Liquidity Risk: In difficult market conditions the value of certain fund investments may be difficult to value and harder to sell, or sell at a fair price, resulting in unpredictable falls in the value of your holding.

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Leverage Risk: The Fund employs leverage with the aim of increasing the Fund's returns or yield, however it also increases costs and its risk to capital. In adverse market conditions the Fund's losses can be magnified significantly.

Concentration Risk: The price of Funds that invest in a reduced number of holdings, sectors, or geographical areas may be more heavily affected by events that influence the stock market and therefore more volatile.

Liquidity and Dealing Risk: The fund invests indirectly in assets that may at times be difficult to value, harder to sell, or sell at a fair price. This means that there may be occasions when you experience a delay in being able to deal in the fund, or receive less than may otherwise be expected when selling your investment.

Unrated Bonds: Unrated bonds are not rated by a credit rating agency. RLAM ascribes internal ratings for these bonds which will vary for each asset.

Sub-Investment Grade Risk: Lower rated investment grade securities may have large uncertainties or major risk exposures to adverse conditions. The market value of securities in lower rated investment grade categories is more volatile than that of higher quality securities, and the markets in which these securities are traded are less liquid than those in which higher rated securities are traded.

Derivatives Risk for Efficient Portfolio Management: Derivatives may be used by these Funds for the purpose of efficient portfolio management. This restricts the use of derivatives to the reduction of risk and the reduction of cost. Such transactions must be economically appropriate and the exposure fully covered.

Overseas Markets Risk: Funds investing in overseas securities are exposed to, and can hold, currencies other than Sterling. As a result, overseas investments may be affected by the rise and fall in exchange rates.