As seasoned allocators know, asset-based lending (ABL) has been a staple of credit markets for decades. So why, all of a sudden, did the asset class grow so much and top the agenda of so many investors in 2024?
The first reason is that the underlying assets in ABL structures are evolving rapidly. Traditional commercial real estate lending, trade finance and credit card receivables are today complemented by assets such as NAV lending, GP financing, data centre loans and residential solar panel receivables.1
Secondly, fintech companies are becoming an increasingly important source of loans for ABL structures, as they increasingly disrupt banks’ traditional hold on consumers with online Buy Now Pay Later or Point of Sale financing solutions.
These two trends have been facilitated, in turn, by the entry of private lenders into the environment. Finance providers seeking to fund their assets would traditionally go to banks, which have been constrained by regulation, or to the structurers of public asset-backed securities (ABS), which can be too standardised to accommodate what are often short-duration, alternative exposures. Private lenders have been able to step into this gap, offering bespoke solutions that match finance providers’ assets (for commensurately higher yields), and packaging them into specialist funds or ABL structures for investors, many of whom are eager to find assets with this type of profile.
Figure 1. The Diversity of Underlying Loans in Asset-based Lending
Source: Neuberger Berman. For illustrative purposes only.
As spreads have tightened in public investment grade credit markets, many investors, including insurance companies, have sought to move further into high grade extended and private credit. However, insurers in particular have been active investors in traditional private credit, such as direct lending, for a decade and, as a result, many now have well-deployed portfolios. The growing diversity of the underlying loan and financing assets in ABL structures, away from traditional corporate exposures and toward more consumer-oriented and other alternative exposures, has made them an increasingly viable option for insurers’ credit allocations.
Trade finance, commercial real estate lending and infrastructure debt may have played a sporadic role in asset allocations up until now, but today insurers are systematically scanning the ABL landscape with a view to selecting specific areas of the market to meet particular needs, or gaining broad access to the asset class.
Does Asset-Based Lending work for insurance companies?
We believe ABL offers insurers several benefits. Figure 2 outlines the key differences between the typical underlying ABL and private credit loan. The borrowers are more diverse, the maturities are shorter and the amortisation schedules more frequent. Longer-duration assets such as student loans, 25-year mortgages and aircraft leases are an important part of the market, but the majority is much shorter.
Figure 2. How Underlying Asset-based Lending Loans Complement Traditional Private Credit
Source: Neuberger Berman. For illustrative purposes only. Illustrative examples are not representative of actual investments. This material is based on Neuberger Berman’s market observations and analysis, such views and opinions are subject to change and there is no guarantee that any will prove to be accurate or that industry experts would agree.
This makes ABL not only a high-yielding diversifier, largely uncorrelated with traditional corporate direct lending, but also a highly cash-generative, “self-liquidating” asset class. These characteristics lower the risk of lending to higher-yielding borrowers, relative to other types of private credit, and also increase an investor’s flexibility to adjust the risk profile of a portfolio in line with the changing opportunity set. Relative to the typical quarterly repayment schedules for traditional private credit, the monthly repayments associated with most specialty finance assets give investors a real-time view into the evolution of payment rates and delinquencies, potentially enhancing their insight into that opportunity set. Moreover, these are the characteristics of the underlying assets—in addition, investors benefit from the credit enhancement embedded in the ABL structure itself, which can often be customised.
It is this profile, particularly in short-dated ABL, that makes the asset class so attractive in terms of return on Solvency Capital (figure 3).
Figure 3. Asset-based Lending’s Solvency Capital Efficiency
Estimated annualised return in EUR divided by market SCR, 2024 and 2025
Estimated annualised return in GBP divided by market SCR, 2024 and 2025
Source: Neuberger Berman, Bloomberg-Barclays, J.P. Morgan, Morningstar LSTA, FTSE Nareit, NCREIF, Burgiss, infraMetrics. 2025 analytics are as of November 30, 2024; 2024 analytics are as of December 31, 2023. Top: Non-Euro assets are hedged to EUR using three-month forwards (-1.67% USD to EUR for 2025; -1.47% USD to EUR for 2024). Bottom: Non-GBP assets are hedged to GBP using three-month forwards (1.77% EUR to GBP and 0.10% USD to GBP for 2025; 1.30% EUR to GBP and -0.17% USD to GBP for 2024).
IMPORTANT: The performance and risk projections/estimates are hypothetical in nature and reflect the Neuberger Berman’s Capital Market Assumptions. The estimates do not reflect actual investment results and are not guarantees of future results. Actual returns and volatility may vary significantly.
In short, it doesn’t surprise us that ABL, and many of its specific underlying credit exposures, such as residential transition or “bridge” loans, became such a big topic of discussion among insurers in 2024.
With its relatively high yields, its short duration and its diverse set of credit exposures—which are still proliferating as technology disrupts the finance sector—ABL can fill a clear gap in insurers’ credit portfolios while consuming only a modest amount of Solvency Capital.
Find out more about our Insurance Solutions.
1 See Peter Sterling and Sachin Patel, “Specialty Finance: High-Yielding, Short-Duration and Uncorrelated Private Credit” (May 2024), at https://www.nb.com/ en/gb/insights/whitepaper-specialty-finance-high-yielding-short-duration-and-uncorrelated-private-credit.
Asset Class Assumptions & Estimates
Neuberger Berman Capital Market Assumptions Framework
Source: Neuberger Berman. For illustrative purposes only.
1 For certain asset classes where a standard public index may not be readily available, NB will create a proxy index using a combination of similar asset classes. Default costs are estimated at the CUSIP level then aggregated to the index level; where CUSIP-level data is unavailable, NB will estimate default costs at the index level.
2 Separate estimates are made for different sources of return (income yield, valuation change, earnings growth), and these “blocks” are aggregated to establish an asset class-level estimated return.