Key Facts
• Asset-backed finance (ABF) has seen rapid growth, supported by insurance demand.
• KKR raised $6.5 billion for ABF, with the market projected to exceed $9 trillion by 2029.
• Collateral types include mortgages, music royalties, and physical assets like aircraft.
• Recovery rates depend on collateral liquidity and condition, e.g., deteriorated wine or fixed factory equipment.
• In 2023, Cartezia Asset Finance faced challenges reselling specialized factory equipment.
• Current focus is on mobile assets like helicopters, monitored with surveillance cameras.
• ABF loss rates are low, typically 10–20 basis points, reflecting minimal investor losses.
• Cartezia reported a cumulative annualized loss rate of 19 basis points as of March 2024.
• Investors are concerned about the expanding variety of collateral types in the growing ABF market.
• Real estate is a common collateral, with residential properties easier to sell than unfinished malls.
• Durable goods like pharmaceuticals are preferred over perishable items as collateral.
• ABF offers higher safety compared to direct lending due to stronger creditor rights.
Summary
Asset-backed finance (ABF) has emerged as a rapidly growing sector, driven by demand for investment-grade products and higher yields. With a market size projected to surpass $9 trillion by 2029, ABF relies heavily on the quality and liquidity of collateral, which ranges from real estate to music royalties and physical assets like aircraft. However, challenges arise when collateral is difficult to liquidate, as seen in Cartezia Asset Finance’s 2023 experience with specialized factory equipment. To mitigate risks, firms now prioritize mobile and easily monitored assets, such as helicopters. ABF is considered safer than direct lending due to stronger creditor rights and low loss rates, typically 10–20 basis points. Despite its advantages, the expanding variety of collateral types raises concerns among investors about recovery rates and market stability. Durable and easily sellable assets, such as residential properties and pharmaceuticals, are preferred over perishable or highly specialized items. As the ABF market grows, maintaining robust collateral standards will be critical to sustaining investor confidence and minimizing losses.
