ABF an “evolutionary step” for private debt investors
Asset-based finance (ABF) is an “evolutionary step for many private debt investors seeking diversification from material direct lending allocations”, according to TwentyFour Asset Management analysis.
Doug Charleston, portfolio manager and partner at the asset manager, said that ABF “represents a growing European and global opportunity to acquire exposure to consumer, corporate and other esoteric asset portfolios as lenders seek to evolve their business strategies and respond to regulatory changes.”
ABF has the “notable potential benefit” of increasing spread over risk-free rates from five to seven per cent to 10 to 12 per cent, he added.
Read more: Asset-backed finance special report: Riding the wave
“This growth is underpinned by the same supportive backdrop that is benefiting asset-backed securities (ABS) more broadly, providing stable cashflow,” Charleston said. “In Europe the ABF opportunity is also supported by stable and conservative lending standards, which gives us greater confidence on credit risk over the long-term.”
Charleston also highlighted growth in the middle-market collateralised loan obligation (CLO) market.
“The emergence of a distinct $250bn (£204.8bn) market for US middle market CLOs continued apace, amid the unstoppable growth of the now $1.7tn global private credit market,” he said. “We saw a first middle market CLO issued in Europe by Barings in the fourth quarter of 2024, and we expect others to follow this path in 2025.”
Read more: More European private credit CLOs expected in 2025
Looking at the European public ABS market, Charleston predicted continued growth after a strong 2024 when higher rates drove income returns and the stable macro backdrop fed through into impressive deal performance.
This year, he expects that income will remain king, noting three factors that bode well for European ABS: credit resilience, continued market growth in supply and demand, and limited movement in spreads that will support elevated yields.
However, geopolitical instability presents a potential tail risk, he said, and ABS investors should limit forays into cyclical assets or inexperienced issuers.
“We continue to feel that liquidity needs to managed carefully, either through lower risk AAA assets or via closed-ended fund structures, though perhaps not as conservatively as we felt was required in 2024,” he said.
“Given we expect modest interest rate cuts and stable if not stellar fundamentals, we expect 2025 to be another strong year for European ABS investors in a market where income will remain king.”
Read more: Ares enters $1.5bn asset-based finance joint venture