Private asset-based finance (ABF) has grown with impressive speed since the Global Financial Crisis (GFC). As traditional banks continue retreating from lending to certain markets and asset classes, private, non-bank lenders like KKR are filling the gap. The last decade favored direct lending, which became a well-traveled path for investors with private credit allocations. Now ABF is taking a similar road, grabbing the spotlight with its historically attractive yields, diversification benefits, and vast market size.

Importantly, ABF investing demands scale, sophistication and capital flexibility. In our view, this will favor managers with specialized credit expertise, deep relationships, and an ability to deliver complete solutions. Before walking through the basics of ABF – including how it differs from direct lending and the role it can play in investor portfolios – it’s worth explaining what this thriving sector of private credit is all about.

What is asset-based finance?

At its core, ABF is a form of credit investing where each investment is backed by large, diversified pools of assets. These assets come in many forms, including financial assets (such as pools of auto or consumer loans, or accounts receivable) and hard assets such as airplanes, industrial equipment, or residential real estate (Exhibit 1). ABF also supports contractual assets such as music IP and healthcare royalties. Simply put, today’s ABF market provides the credit that our modern economy runs on.

EXHIBIT 1: The Economy Runs on ABF