Direct lending is essentially a cash flow business and, while a SaaS business and a trucking company might look very different, the thing direct lenders are lending against is the quantum and quality of the cash flow generated.
Asset-based finance can’t be thought of in the same way. And that matters, because the ABF market is expected to swell to almost $10 trillion by 2029 (KKR estimates) and the firms that are hiring to surf that wave are not always doing it right.
In ABF, traditional selection processes risk overplaying some candidate experience at the expense of more deserving factors.
Which way do you need to lean to land the right talent?
One name, a multitude of strategies
ABF is ultimately a structure, using assets as collateral, and this collateral can be almost anything.
In ABF you’re lending directly against an underlying asset, not the cash flow it produces. This could be an aircraft, a railcar, a portfolio of consumer loans, or even a litigation claim. No two of them behave alike and, consequently, the defining characteristic of every ABF lender is the asset or assets it lends against, and this is every bit as true for new entrants.
The first distinction is hard assets versus financial assets, and from there the categories multiply fast.
Some firms lend against assets across several broad buckets (consumer, corporate, real estate, for example), each with its own subsets. Others focus on a single bucket, or restrict themselves to hard assets. Litigation finance counts as ABF too, because the lawsuit is the asset.
Why the asset is the job
To understand how directly the asset can control the risk and the return, let’s take aviation as an example:
With order backlogs at the big manufacturers now above 18,000 aircraft and delivery queues running past a decade, a five-year-old plane can be worth more today than when it was delivered. This means that it is possible to write a loan, see the borrower default, and make more money through picking up the keys than would ever have been the case with full and timely repayment.
On the other side of the coin, if you don’t understand the regulatory complexity of the aviation market, you have no business lending against aviation assets. A regulator’s change of direction can have a huge impact on valuations.
None of this would show up in the borrower’s financials.
Put frankly, there’s a big difference between underwriting a pool of consumer loans and underwriting corporate debt, and you can’t learn that difference sitting in a generalist corporate credit strategy.
This has significant implications for the way you identify the best candidates.
Pick the sub-strategy before you pick the person
Going into ABF generically is very hard, because it’s so complex. The most important thing is to start granularly. One of our clients decided on a hard-asset mandate very early. By the time they started hiring, they knew enough to rule out most of the candidates who would have shown up in a generic credit search and many more with ABF experience from a completely different sector. This saved a huge amount of time. Another built around one sub-sector so deeply that other firms now have to club into their deals to get access. Both of them knew what they wanted the asset to be and used this to direct the candidate search. This is the right way around.
Another model that can work, if you’re building an ambitious strategy from scratch, is to attract a global head with broad experience and then hire in asset specialists to lead specific sector teams: aviation, infrastructure, consumer, for example. But even then, the decision around the assets should be set before signing that global head.
Match the track record to the assets, not the label
Where hiring for credit secondaries (another hot area) might mean needing to fish in adjacent credit pools, hiring from similar strategies and cross training, ABF requires a different approach.
Once the asset is set, you’ll get better results by hiring from the relevant sector and training on the structure and the nuances around the ABF fundamentals, than you will by hiring a credit generalist and trying to upskill them on how to price an airplane or litigation. A sector expert will win out over a generalist every time.
The one place this doesn’t apply is fundraising. Raising an ABF fund is not materially different from raising an opportunistic credit fund: same allocators, same qualities in the person doing the raising. The differentiation is in the investment team.
One final thing to keep in mind: In ABF I would typically weight origination more heavily than in most other credit flavors. Sourcing is different in every sub-sector, and pattern recognition is sub-sector specific. If you don’t have a deep understanding of the specialty, you don’t have pattern recognition, and without it good deals are harder to find (and harder to price accurately).
Which ABF?
Everyone is expanding into ABF, and I do understand why. The question is not whether to follow suit; it’s which type of ABF you want to do and where you can hire the asset specialists you need. Answer those questions honestly and the right hiring decisions will follow.