Private credit 2024 outlook — Part 5 The rise of asset-based lending

Shubham Saharan

28 December 2023•4 min read

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Lower middle-market LBO financings and jumbo unitranches are cool and fun, but there’s a lot more to private credit than that.

As we covered in our Cloud 9fin podcast over the summer, asset-backed financing is coming into vogue. In recent months, private credit firms have touched on everything from bank portfolios to consumer finance to music rights.

If we covered the entire spectrum of asset-backed lending in this article, we’d miss the holidays. So we’re choosing to cover two of the most exciting parts: private credit’s growing interest in bank assets after the March meltdown, and the booming world of NAV lending.

SRT wave

If you’re a bank, transferring risk is all the rage these days.

These can take various forms: regional banking deals like Ares’ $3.5bn portfolio acquisition from PacWest, or the KKR-led takeover of a $7.2 billion portfolio of recreational vehicle loans from BMO, all the way to deals involving much bigger firms like JP Morgan and Morgan Stanley.

The second category — so-called significant risk transfer deals — is what many market participants in private credit expect to be the most significant driver of activity in 2024.

According to Joel Holsinger, co-head of alternative credit at Ares, portfolio sales like the PacWest and BMO deals we mentioned above are likely to continue in dribs and drabs, with banks “only selling the short-duration assets that are high quality”.

SRTs could be more substantial, he said: “The biggest wave we're seeing is SRTs, and that's something we hadn't really seen for four or five years prior, yet recently we've been active in this space."

These kinds of trades are becoming more commonplace as banks (whether smaller regional players or bulge-bracket firms like JPM) find creative solutions to skirt higher capital requirements by punting junior risk to outside investors.

Essentially, these deals help banks hedge losses on a portfolio of loans by transferring much of the risk to hedge funds, private credit shops, insurance firms or other third parties. For a more detailed explanation, check out our 9fin Educational piece on SRT deals.

These transactions have been commonplace in Europe for some time but are becoming more popular in the US.

NAV boom

Net asset value lending isn’t a new idea, but it’s certainly becoming more prevalent. And private credit firms are eager to get in on the action.

In recent weeks, we’ve reported on Pemberton, Hunter Point and AllianceBernstein raising funds for NAV lending. There are a few use-cases for NAV loans, which we covered in this piece, but here are some of the main ones:

Borrowing against a portfolio of assets (e.g. a PE fund) to provide leverage at the fund level, in order to boost returns
Borrowing against fund assets to generate cash that can be injected into portfolio companies, e.g. to support a refinancing deal or fund acquisitions
Borrowing against fund assets to return capital to investors

The second two of these use-cases became increasingly popular this year. As company earnings struggled, the cost of borrowing rose, and M&A activity plummeted, sponsors were forced to prop up struggling portfolio companies or find ways to return capital to investors without exiting investments at unsatisfactory valuations.

"We're seeing interest and activity in NAV transactions tick up across segments, from mid-size managers up to large cap multi-asset firms,” said Dave Philipp, head of fund liquidity solutions at Crestline Investors.

When it comes to sectors like technology, which could be facing more volatility, sponsors will often come to lenders with one or more portfolio companies in need of additional capital, said Philipp.

Two notable examples from this year: Vista used a NAV loan to push a tricky debt refinancing for portfolio company Finastra over the finish line, and Warburg Pincus tapped Apollo for a $1bn loan to pay down bank debt in an older fund.