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Anna Russi

Shubham Saharan

Asset investing is less healthcare and tech and more planes, trains, and automobiles. And among PC firms there is increasingly more of it.

For what Carlyle’s aviation investment arm issuing of $428m in secured notes to purchase 12 aircraft fleet and KKR’s purchase of $7bn of RV loans from BMO shows is that there is a continued transfer of assets that would have been historically financed in the bank market moving into the PC market.

Part of the move is driven by PC firms knowing they need to diversify beyond direct lending, for in that market lenders are slashing pricing, offering looser covenants, or coming up with more imaginative financing solutions as they are in a mad dash to win deals.

And there is more asset-backed financing and asset-based lending opportunities and less competition as the banks retrench from these markets. Castlelake, for instance, is in the hunt for $1.5bn for its third asset-based private fund, confidence of the opportunities out there.

LPs, perhaps tapped out on direct lending strategies, are also just as enthused: last week, 9fin reported on AB CarVal possibly closing a $200m commitment from the New Mexico State Investment Council for its latest asset based finance fund. Earlier this month, Victory Park received a $75m commitment from an LA-based public pension.

But, why asset based financing in a world where sponsor-backed direct lending is set to continue to grow?

In the direct lending market, unitranches that were once issued with SOFR+600bps just last year have now come down to roughly SOFR+525bps. But for many asset based credit facilities, you’re still seeing relatively higher returns.

One recent example includes FS/KKR’s investment in pharmaceutical ingredients manufacturer Curia Global. Earlier this year, KKR provided a $125 million off balance sheet SPV structure trade receivables facility, secured by Curia’s US receivables, Pietrzak noted during the earnings call. Pricing on the facility came out to SOFR+625bps with a 2% upfront fee.

Secondly, there’s a world of opportunities to choose from, be it is in student loans or aviation.

For example, Carlyle and KKR recently won a $10bn US student loan portfolio from Discover Financial, Bloomberg reported. Carlyle already acquired at least $415m in student debt from US bank Truist. In 2020, Wells Fargo sold about $10bn worth of student loans to private equity firms Apollo and Blackstone.

The combination of these factors plus greater protections for lenders compared with sponsored-backed lending means many PC firms relish the opportunity to get into asset investing.

“The high and close monitoring of asset based loans gives the lender a great level of comfort regarding liquidity and risk management,” Victor Des Laurier, a partner with Thompson Coburn, told 9fin.

“This has been an avenue for them (private lenders and investors) to deploy capital where they can really manage their risk, obtain very good returns, and really build a portfolio around something,” he said.

Still, getting into asset based lending isn’t for everyone, as it requires a considerable amount of sector and collateral expertise. There remains high barriers to entry.

"To do ABL, especially in the middle market, it really requires a lot of back office infrastructure. It also requires a lot of expertise in determining the borrowing bases,” Cedric Henley, a partner and chief risk officer at SLR, told 9fin.

“Those characteristics make it hard to get into the market. I'm not seeing a lot of new entrants. It's really been the same cast of characters that have been there historically,” he added.

The world where you can put money in this market is continuing to grow. Lenders are becoming more comfortable expanding their asset-based loan borrowing bases to include new types of assets, allowing them to enter different industries. These include patent and trademark rights, as well as crypto.

“We're seeing a lot in terms of a kind of stretching and expanding of the borrowing base,” Jim Markus, a senior counsel with Haynes Boone, told 9fin.

But that borrowing base is also expanding to include the very PE firms that regularly seek direct lending funding, motivated by a sponsor seeking extra funding, but not wanting to find another debt provider to support their move. It’s an unusual route, but an increasingly well travelled one.

“I know some private equity backed direct lenders are collaborating with term lenders, whether it's their own affiliate or another, and trying to provide a more complete solution,” Markus said.

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