The asset-backed finance (ABF) universe underpins much of the real economy, spanning everything from consumer lending – such as car loans, credit cards, and mortgages – to business financing, aircraft leases and digital infrastructure. Public securitized credit has taken portions of asset-based lending out of banks’ balance sheets, and now private credit is stepping in to capture opportunities where banks continue to pull back. The scale of the market is enormous: U.S. consumer credit alone stands at around $5 trillion, while the total ABF market is manyfold larger. For asset managers like PGIM, this creates an opportunity to connect real-economy lending with institutional capital, unlocking diversified cash flows and attractive risk-adjusted returns.
“Asset-based lending is really as old as time,” says Edwin Wilches, Co-Head of PGIM’s Securitized Products team, noting that banks and public securitization markets have both long been engaged in this type of financing. Public securitization takes pools of loans, bundles them into tradeable securities, and sells them to investors. Increasingly, however, investors are accessing these strategies not through public markets but by gaining direct exposure to originators through the private credit space.
“Asset-based lending is really as old as time.”
Edwin Wilches, Co-Head of PGIM’s Securitized Products team.
Yield, Diversification, and Natural Liquidity
Investor interest in the asset class, especially in the Nordics, has been increasing significantly for a number of reasons, according to Victoria Dorreboom, Client Advisor for the Nordic region. ABF offers a diversified stream of yield compared to corporate credit, shorter duration, and a natural source of liquidity stemming from the underlying loans’ amortizing structures. According to Wilches, ABF differs from corporate credit in that “you have different risks, but also true diversification benefits. These assets are generally self-amortizing and shorter in duration, typically two to four years, compared to six or seven years for a typical corporate bond. You’re receiving principal and interest every month or quarter, so there’s this natural liquidity coming back to you.”
“From an investor’s perspective, these assets are seen as both diversifying and yield-enhancing.”
Victoria Dorreboom, Client Advisor for the Nordic region at PGIM.
For investors, the appeal lies in both diversification and enhanced yield. “On the investment-grade side, you can pick up anywhere between 150 and 200 basis points over comparable corporate bonds,” says Wilches. On the below-investment-grade side, somewhere between 200 and 300 basis points. “Depending on where you invest, you’re picking up anywhere from 150 to 300 basis points in additional yield.” This combination of shorter duration, amortizing structures, and incremental yield makes ABF particularly compelling. “From an investor’s perspective,” adds Victoria Dorreboom, “these assets are seen as both diversifying and yield-enhancing.” In addition, she adds that ABF offers interesting investment opportunities from an ESG perspective too. Because you invest in the real economy, as the real economy transitions to greener energy, there are an increasing number of funding opportunities to invest in the energy transition. Given that ABF deals are done privately, you also get access to more information than in public transactions.
Public versus Private ABF
While asset-based lending has traditionally been the domain of banks and the public securitized markets – often referred to as public ABF – regulatory changes and balance sheet constraints are steadily reshaping this ecosystem. In the years following the global financial crisis, loans backed by high-quality assets continued to receive favorable capital treatment, enabling banks to stay active in many areas of secured lending. Yet as capital requirements have tightened and balance sheets have become more constrained, banks have increasingly stepped back from certain transactions. Although public securitized markets have absorbed part of this activity, this has also opened the gap for private credit managers to develop dedicated private ABF strategies.
“If we’re talking about a consumer loan, for instance, whether that loan sits in a public securitization or a private ABF deal is often a matter of circumstance rather than intention,” notes Wilches. In the public securitized market, asset-based finance transactions are typically dealer-led: a bank or arranger aggregates a pool of loans, works with a rating agency to obtain credit ratings, structures the deal, and sets the covenants before offering a standardized product to investors. In contrast, private asset-based finance involves no intermediary dealer. Transactions are usually bilateral, with investors working directly with the originator or borrower to negotiate terms, structure, and covenants. This approach allows for greater customization and control but comes with lower liquidity and the absence of public ratings, typically offering higher returns to compensate for the additional complexity.
“Combining public and private credit gives investors meaningful synergies in terms of asset origination, quality, and risk assessment – resulting in better risk-adjusted returns for all investors.”
Edwin Wilches, Co-Head of PGIM’s Securitized Products team.
“Private ABF is definitely a growing asset class for the market, for investors, and for us,” says Wilches. “At PGIM, we’re active in both public securitization markets and private asset-based lending. It’s all one integrated team. Combining public and private credit gives investors meaningful synergies in terms of asset origination, quality, and risk assessment – resulting in better risk-adjusted returns for all investors.”
Drivers of Private ABF Growth
Wilches points to several catalysts behind the increasing participation of private credit managers in asset-based lending. One key driver has been the evolving regulatory environment and its influence on bank balance sheets. “Banks that have traditionally focused on lending into the real economy have changed the focus of their balance sheets,” he explains. “Regulators are encouraging banks to provide loans secured by assets that others own, instead of owning the assets themselves.” In practice, this means that assets once financed directly by banks are now being financed through private credit vehicles or securitizations. Banks, in turn, are often content to provide leverage or funding capacity to these private lenders rather than hold the loans on their own books. “In essence, we’re moving toward an environment where banks lend on loans, rather than originate and hold them,” says Wilches. “That’s a meaningful shift, and it’s become a growing theme globally.”
The underlying drivers, however, differ across regions. In the United States, the push toward private capital in asset-based lending was accelerated by the fallout from the Silicon Valley Bank collapse, which forced regional banks to hold more capital and retrench from parts of the market. “This took a lot of financing out of the market,” says Wilches, “but the economy continues to grow, and credit formation is still needed.” In Europe, the dynamic is distinct. Economies remain far more dependent on bank financing, and the rise of private ABF is being driven by the need to unlock growth through new sources of funding. “In Europe, the need is really for renewed growth,” says Wilches. “Mario Draghi has been very vocal about the importance of capital markets, specifically securitization to help fund defense spending, infrastructure, energy transition and other much-needed GDP growth initiatives.”
“The difference isn’t necessarily about risk, it’s about removing the middlemen. You’re not paying Wall Street for structuring or balance-sheet services, and that alone can easily add 100 to 200 basis points in return.”
Edwin Wilches, Co-Head of PGIM’s Securitized Products team.
If Europe wants higher GDP growth, Wilches argues, it needs to be funded by both equity and debt. “Debt can’t continue to come just from banks,” he notes. “They already make up a very large portion of the system, and making them even bigger could risk greater financial fragility. The increase in ABF we’re seeing here in Europe is really coming from areas where banks are not as actively lending or are near their risk limits. Private markets are filling that gap.”
As economic activity expands, the opportunity for private capital to finance real-economy assets grows. Asset managers are increasingly going straight to the source, bypassing intermediaries and acquiring assets directly from originators. Wilches acknowledges that “if you’re doing something bilaterally, the level of liquidity is going to be different than in a public security, but you’re getting paid for that liquidity.” However, “the difference isn’t necessarily about risk, it’s about removing the middlemen. You’re not paying Wall Street for structuring or balance-sheet services, and that alone can easily add 100 to 200 basis points in return.”
The Importance of Sourcing and Origination
For private credit managers, sourcing and origination are paramount. “How you originate is how you differentiate,” emphasizes Wilches. Partnerships between banks and private credit managers have become a defining feature of the ABF landscape. Banks can de-risk and free up balance sheet capacity, while managers gain access to high-quality deal flow. “We’re looking to partner with banks when they reach their risk limits and need a partner,” he says.
The challenge, according to Wilches, is not the availability of origination itself, but the diversity and quality of sources. “Origination is a critical part of the value proposition,” he concludes. “We want to see as much as we can, so we can be as selective as possible and find the best opportunities. Over time, the managers with the broadest, most diversified origination networks will be the ones who win.”
