How the Asset-Backed Finance Universe Works

Asset-backed finance (ABF), a form of lending that draws income from and is backed by a range of underlying assets, is an increasingly important strategy within the broader private credit universe. We view ABF as a versatile component across credit allocations: it can stand on its own or complement corporate direct lending and other private credit, with the potential to boost income and enhance diversification.¹

ABF is hardly a recent innovation. The concept of securing contractual income from a loan backed by some sort of collateral is well established. What is new is how ABF has expanded into the modern economy and the significant role that it plays in our everyday lives. Today, it spans industries as diverse as aviation financing, consumer lending and music royalty earnings streams.

This paper focuses on how ABF works. We detail its structures and cash-flow dynamics across financial assets, hard assets and intellectual property. We then highlight the sourcing and underwriting that managers consider when constructing an ABF portfolio.