At the same time, asset-based finance assets offer an appreciable yield premium due to their limited liquidity and, in some cases, complex lending arrangements. Specialty loan pricing for auto loans and credit cards in the US and UK, for instance, is often above 20%. Yields on US direct lending, as measured by the Cliffwater Direct Lending Index, stood at about 12% at the start of the year, while public credit assets such as US and European high-yield debt hover between 6% and 7.5%.
Spanning the Atlantic
The way we see it, North America and Europe are the two largest and most accessible markets in the global opportunity set today. But understanding the nuances and specifics of each asset class in each jurisdiction is the key to success.
North America is the more mature market—it’s bigger, deeper and more homogeneous. Data on underlying loan collateral are widely available, lending and legal frameworks are standardized, and specialty lenders are well established across the main asset classes, including autos, credit cards and private student loans.
The market in Europe, on the other hand, is more varied—and smaller. Data quality varies. Legal regimes differ by country. We think this helps to explain why many private credit managers active in specialty finance focus on opportunities in the US and Canada.
We think inefficiencies create opportunities for managers with the experience, capabilities and relationships needed to navigate individual European markets. Sizable exposure to markets on both continents, in our view, can increase diversification and make it easier to uncover attractive relative value opportunities across a wider opportunity set.
Asset-based finance, in our view, stands today where corporate direct lending did a decade ago. We expect rapid and sustained growth to follow. With restrictive regulatory capital legislation putting banks on the back foot, specialist lenders should continue to grow and seek more scalable private credit financing solutions. For investors, we think it adds up to an increase in potential return and downside mitigation and an opportunity to diversify their overall credit allocations.