Posted on 23 April 2020

Investors Set Their Sights on ABL: What You Need to Know

2020 AR 003 - David Traverso (ABL) Header


Asset-based lending (ABL) has become increasingly attractive to fund managers looking to make investments in new areas of interest for investors. According to a recent survey that Private Debt Investor carried out at the end of 2019, 69% of investors responded that they planned on committing to investments in asset-based lending for the year ahead.

While ABL offers up a range of important benefits for investors, many fund managers haven’t been able to commit to it as readily as they would like to because of a range of hurdles. However, these obstacles are not necessarily deal-breakers. Fund managers can enjoy the benefits of asset-based lending without having to manage the operational and liquidity challenges that accompany it.

Historically, lenders who’ve managed to tackle the administrative burdens of ABLs find them among the most durable loans in their portfolios. They are revered by credit officers for their low loss rates, even during some of the most challenging credit cycles.  By its nature, ABL provides greater protection to lenders with the borrower’s assets used as collateral.

Why are fund managers so keen on asset-based lending?

Asset-based lending has quickly grown in popularity amongst investors. This rise in appeal is due in large part to the number of vital benefits ABL provides.

  1. It generates solid, low-risk returns
    Since 2012, the ABL market has grown at an approximate 6.9% compounded annual rate. According to the Commercial Financial Association, yields for small, non-bank investors averaged 10% over a three-year period.
  2. It provides investment protection
    With loans backed by tangible collateral, ABL delivers protection. If something goes wrong with an asset-backed loan, the lender has the ability to collect whatever the collateral is, such as receivables, equipment, or inventory.
  3. ABL offers a differentiated source of yield
    A major part of its appeal is that it is a means for investors to diversify into a new yield-generating area, helping increase their portfolio security. Credit officers have long viewed ABL as an area with some of the most durable loan assets available, standing out for their low loss rate, even during turbulent market periods.
  4. Fewer financial covenant obligations
    It also requires fewer financial covenants than cash flow loan options, meaning that borrowers are not as constrained with regard to financial flexibility.

Meeting the operational and liquidity challenges

Asset-based lending presents a high barrier to entry, something that has prevented some fund managers from investing in it.

The expansive back-office commitment demands constant monitoring and contact with multiple parties on a daily basis, including servicing daily advance requests and reviews, as well as validating and processing daily collateral information. This equates to dozens, if not hundreds, of highly-specialized professionals, infrastructure, and field-specific, sophisticated software. 

Aside from the formidable operational challenge, asset-backed lending also requires a high volume of lender liquidity. Lenders must maintain minimum liquidity levels to fund loan drawings.

Other key hurdles for fund managers are size constraints and concentration risk. For funds that must adhere to concentration risk rules in relation to their investment portfolio, the risk is that a loan request may be too large for a lender to meet. The diversification brought on by asset-based loans can help fund managers to avoid potential concentration limits.

Clearing the administrative and liquidity hurdles

Many funds see the clear benefits of investing in ABL but up to now have largely overlooked it because of the need to manage the issues of hiring, daily service coverage, software needs and infrastructure.

In reality, funds can invest in asset-based lending without having to tend to these areas by partnering with the right ABL-specialist back-office provider. “By working with an ABL back-office specialist, funds can enjoy unfettered access to ABL investments and pass on a range of crucial benefits to their clients,” says Alter Domus Director David Traverso.

Through its acquisition of Cortland Capital Market Services LLC in 2018, Alter Domus offers a full-service asset-based lending operations platform. “We work with fund managers by removing the substantial administrative functions that make ABL both a desirable and seemingly unreachable option for a lot of funds,” adds David.

Alter Domus’ vast experience in providing ABL services has translated to efficient, specialist back-office management for both first-time and seasoned lenders. “If there’s a bottleneck with ABL, we’ll solve it,” says David. Among its end-to-end ABL service, Alter Domus manages collateral monitoring, loan servicing and cash management.

An unprecedented opportunity for fund managers

The opportunity to include ABL as part of a portfolio without taking on the massive operational responsibility that accompanies it is now an immediate possibility, offering investors an exceptional instrument through which to gain greater portfolio security by diversifying into a low-risk, yield-consistent area.

By partnering with a dedicated back-office operations provider that already has the requisite ABL-specialist human resources, infrastructure, and software, fund managers are able to include ABL in client portfolios and enjoy the many benefits that it provides.

ABL Whitepaper- Alter Domus and Macquerie