Introduction

In a world of diversified investment opportunities, asset-based lending (ABL) is emerging as an appealing option for investors seeking stable returns with mitigated risk. As part of Kingsbury & Partners’ commitment to delivering insights into innovative private market opportunities, this guide explores the fundamentals of ABL, its advantages, risks, and considerations for investors.

What is Asset-Based Lending?

At its core, asset-based lending involves providing loans secured by tangible or intangible assets. These assets can range from real estate, inventory, and machinery to receivables, consumer credit and intellectual property. Unlike traditional unsecured loans, ABL offers lenders a degree of security, as the borrower’s assets serve as collateral.

For investors, this makes ABL a relatively lower-risk way to generate predictable returns, particularly in private credit markets where borrowers might seek funding for growth, restructuring, or operational needs.

Why Investors Should Consider Asset-Based Lending

1. Stable and Predictable Returns
   Asset-backed loans often come with regular interest payments, making them an attractive option for investors seeking predictable income streams.
2. Secured Investments
   The collateral-backed nature of ABL reduces risk exposure. Should the borrower default, the assets can be liquidated to recover the loan amount.
3. Diversification
   ABL provides an opportunity to diversify portfolios by accessing alternative investments that are less correlated with traditional equity or bond markets.
4. Access to Private Markets
   With the growth of private credit, ABL offers investors an opportunity to engage with this expanding sector, where demand for non-bank lending solutions continues to rise.

The Growing Demand for Asset-Based Lending

The post-pandemic financial landscape has driven significant demand for asset-based lending solutions. Many businesses, particularly small- and medium-sized enterprises (SMEs), face challenges in securing traditional bank loans due to stricter regulations and risk-averse banking policies. As a result, private lenders have stepped in, creating an attractive market for investors.

According to recent data, the global ABL market is expected to grow substantially in the coming years, driven by industries such as manufacturing, retail, and technology. Investors partnering with experienced asset-based lenders can tap into this growing demand while mitigating risks through structured loan agreements.

Risks to Consider

While asset-based lending offers numerous advantages, it’s essential to be aware of potential risks:

• Asset Valuation: The value of collateral may fluctuate, particularly for assets like inventory or receivables, which can depreciate over time.
• Default Risk: Although secured by assets, borrowers’ financial instability could still lead to loan defaults.
• Liquidity: In some cases, the collateral may not be immediately liquid, delaying recovery of funds.

Partnering with a company that has a robust governance framework and an experienced Product & Risk Committee (such as the one at Kingsbury & Partners) can help mitigate these risks.

What to Look for in an Asset-Based Lending Opportunity

Investors should consider the following factors before engaging in ABL opportunities:

1. Experienced Management: Work with lenders who have a proven track record in asset valuation, loan structuring, and risk mitigation.
2. Asset Quality: Ensure the underlying assets are high-quality and appropriately valued.
3. Loan Terms: Evaluate interest rates, repayment schedules, and covenants for fairness and feasibility.
4. Due Diligence: Verify the borrower’s creditworthiness and the lender’s risk management practices.

Courtesy of Ben Rockell, Caravel Partners Group Sales Director and Managing Partner of Kingsbury & Partners https://kingsburyandpartners.ae