Consistent Yield with Minimum Volatility: How Asset-Based Finance Thrives in Turbulent Markets

Introduction: An All-Weather Strategy in a Stormy Climate

The macroeconomic climate of 2024–2025 — characterised by high interest rates, inflation, and trade tensions — has roiled global markets. Amid this volatility, Asset-Based Finance (ABF) has demonstrated resilience , offering asset-secured cash flows when traditional credit strategies faltered.

While public markets oscillate on shifting sentiment, ABF anchors returns to real-world assets and contractual cashflows, offering investors a degree of insulation from volatility amid macro storms. Its combination of tangible collateral, short loan durations, and technological agility offers potential in today’s uncertain environment.

Source: Bloomberg (April, 2025)

In an era marked by economic uncertainty and shifting market dynamics, private credit has the potential to be an engine of growth and diversification for institutional investors. As traditional fixed-income markets grapple with interest rate volatility and compressed yields, private credit has expanded its reach, offering tailored financing solutions to businesses underserved by conventional banks. From direct lending to specialty finance, this $2 trillion asset class has redefined risk-adjusted returns by leveraging flexibility, illiquidity premiums, and structural protections (Mckinsey, September 2024).

Source: KKR, December 2024

Growth of Asset-Based Finance (ABF): Key Drivers

Yet not all private credit strategies are created equal. Many, including direct lending and opportunistic credit, remain tethered to corporate risks—the same vulnerabilities that plague high-yield bonds and syndicated loans. These risks encompass the broad challenges of corporate creditworthiness: competitive pressures, input cost volatility, working capital mismanagement, and regulatory or tax uncertainties. Even strategies touting “senior secured” positions often depend on a borrower’s ability to generate cash flow, leaving investors exposed to cyclical downturns or operational missteps.

This is where Asset-Based Finance (ABF) stands apart. Unlike corporate credit, ABF strategies bypass reliance on a borrower’s overall financial health. Instead, investors hold liens on specific hard assets (e.g., aircraft, machinery, or real estate), with repayment tied to the value and cash flows of those assets themselves. ABF’s structural focus on collateralised, income-generating assets inherently limits exposure to corporate risks resulting in a strategy insulated from the vagaries of earnings cycles and management decisions—a defining advantage in volatile markets:

Source: Manulife John Hancock, April 2025

The private ABF market has expanded rapidly, growing ~67% since 2006, with 15% growth from 2020–2022 alone. By 2022, it represented nearly half of the total asset-backed market, and projections suggest it will grow to over $7trillion by 2027 (Financier Worldwide, February 2024). This momentum is fuelled by several structural shifts:

• Tightened bank regulations post-2008 have reduced traditional lending capacity, creating a $1 trillion+ funding gap.
• ABF’s collateralised structures may provide optimised risk-return profiles , shielding investors from corporate earnings volatility while delivering consistent cash flows.
• ABF aligns with the surge in sustainable investing, financing green assets like renewable energy infrastructure and energy-efficient buildings.
• Advanced data analytics and digital platforms have streamlined underwriting and asset monitoring, enabling non-bank lenders scale efficiently and penetrate underserved markets.

Source: TCW, February 2025

Observers have noted that even during periods of earnings downgrades and market turbulence, ABF strategies have remained resilient “all-weather” performers. Portfolios anchored by real assets and diversified loan pools experienced far smaller drawdowns than conventional corporate credit when the economy turned. The combination of conservative deal structures and broad diversification helped many ABF portfolios maintain stability even as economic conditions shifted dramatically.

Source: Alliance Bernstein, 2024 While past performance has shown relative stability during periods of market stress, outcomes depend on a range of market and structural factors, and capital is at risk.

Below, we examine eight key pillars of ABF’s resilience – and how these features contribute to ABF’s stability in a world of macro uncertainty.

Value: Loans anchored to the appraisal value of tangible assets

At its core, ABF is about lending against assets with tangible intrinsic value. Rather than depending on a borrower’s enterprise value or rosy projections of future earnings, ABF investments are backed by things like invoices, leases, receivables, hard equipment, or royalties that have stand-alone economic worth. In practice, this means an ABF lender is financing completed sales or deployed assets – for example, funding a batch of delivered invoices or an aircraft lease – where the underlying asset or cash flow already exists. By focusing on real, cash-generating assets, ABF significantly reduces reliance on corporate performance and market sentiment. Even if a borrowing company’s stock plunges or its EBITDA takes a hit, an invoice from that company’s customer still holds its value and must be paid, and a leased piece of equipment can be repossessed or sold if needed.

This structural focus on asset value directly benefits investors in volatile markets. When recessions or macro shocks hit, traditional unsecured loans or cash-flow loans often see recovery values collapse – but asset-based loans can fall back on collateral. The International Monetary Fund recently observed that roughly 70% of private credit deals are tied to private-equity-backed corporate borrowers, underscoring how much of the broader private credit market is exposed to leveraged corporate fortunes:

Source: IMF, April 2024

ABF breaks this link by targeting diversified pools of assets that have value independent of any single corporate parent. Even if a borrower’s own finances deteriorate, a delivered invoice or an operating asset it has financed may continue to produce cash. This independence from corporate health helps insulate ABF loan performance from swings in equity valuations or corporate earnings. In other words, the value of the collateral underpins the loan, providing a fundamental cushion when markets turn down.

Collateral: Tangible Asset Backing as Downside Protection

In asset-based lending, credit decisions hinge on the liquidation value of specific assets, not just the borrower’s credit rating. Loans are underwritten with hard collateral – whether that’s accounts receivable, inventory, real estate, equipment, or other tangible assets – which can cover the debt if the borrower defaults. This contrasts sharply with unsecured corporate loans that rely solely on a company’s cash flow and promise to repay. By tying each loan to assets with resale or recovery value, ABF builds in a natural downside buffer for investors. If a borrower hits distress, there are actual assets to claim or sell, and often the loan-to-value is set conservatively enough that those assets can fully repay the principal. In volatile markets when default risks rise, this kind of asset anchoring may become invaluable.

Historical recovery data bears this out: secured lending simply results in smaller losses when things go wrong. One analysis by StepStone found that senior secured loans achieved roughly 72% recovery rates in default scenarios – far higher than the ~47% recovery typically seen on unsecured corporate bonds (StepStone Group, March 2024).

This asset-backing transforms risk into manageable scenarios. During COVID-19, ABF lenders reclaimed and resold collateral (e.g., machinery) while unsecured creditors faced empty promises. Collateral creates a reliable recovery mechanism in crises—turning abstract risk into salvageable value and deterring borrower recklessness.

Duration: Short-Term Loans Minimising Refinancing Risk and Interest Rate Sensitivity

Most asset-based loans are naturally short-term and self-liquidating, often with durations measured in months rather than years. For example, a batch of trade invoices or a pool of merchant cash advances might mature in 30–90 days; a consumer instalment loan or equipment lease in an ABF portfolio might have a term of 6–18 months. This ultra-short exposure profile stands in stark contrast to the 5–7+ year lock-ups common in traditional private credit or corporate direct lending. Being short-term can be a significant advantage when interest rates and market conditions are changing rapidly. A portfolio of short loans can quickly adjust to rising rates (reinvesting maturing capital at higher yields) and can rapidly reduce risk if signs of distress emerge:

Hypothetical Amortisation Profile, Asset-Based Lending vs. Direct Lending

Source: Castlelake, May 2024

Short duration also mitigates credit and liquidity risk in volatile times. Because loans roll off quickly, an ABF fund has a steady stream of cash coming back to either reinvest or distribute. This greatly reduces reliance on external refinancing – there are no looming maturity cliffs where an entire loan principal comes due at once and must be rolled over. The self-amortising nature of most ABF assets means portfolios naturally de-lever and raise cash over time, allowing managers to handle withdrawals or pivot strategy without fire-sales.

Repayment: “Always-On” Self-Amortisation Reducing Refinancing Risk

ABF is often described as “self-amortising” finance, meaning the loan assets pay back their principal on their own over time through operating cash flow. In an ABF portfolio, principal is constantly being returned via scheduled loan instalments or the payoff of short-term receivables. For example, each month a consumer loan in the pool repays a portion of principal along with interest; every time an invoice that was financed gets paid by the buyer, the ABF lender’s capital is returned and can be recycled. This creates an “always-on” repayment cycle that significantly reduces dependence on outside refinancing and lowers the risk of being caught in a frozen credit market. In a volatile period, that can be the difference between a controlled wind-down of exposures versus a distressed scramble for liquidity.

Continuous repayment also bolsters liquidity. In stressed times, having cash flow continually coming back can be crucial – it enables an ABF manager to meet obligations (such as investor withdrawal requests in an open-ended fund) without having to sell assets at a discount, simply by using the normal course of principal collections. It also means the manager can proactively de-risk the portfolio by choosing not to reinvest some of the returned principal if the economic outlook is deteriorating. Effectively, the portfolio can naturally shrink (raising cash) or shift into safer assets as needed, in a relatively orderly way. This inherent flexibility contrasts with many traditional private credit loans that require waiting until maturity (or a default) to get principal back.

Cashflow: Dependable Contractual Income Streams

One of ABF’s most attractive features is that it relies on contractual cash flows from real economic activity, rather than discretionary payments or market-dependent outcomes. In an ABF portfolio, interest and principal payments are typically tied to the performance of underlying assets or receivables that have already been delivered or are in use. For instance, a trade receivable financing is backed by goods that have been shipped and accepted – the buyer legally owes that payment regardless of market conditions. Similarly, a music royalty stream or a pool of auto loans generates cash based on contracts or usage that are often quite sticky even in downturns. This means the income flowing into an ABF fund is largely driven by actual consumer/business cash flows (people paying their car loans, businesses paying their suppliers, etc.), not by the whims of the capital markets.

The advantage of this in volatile times cannot be overstated. These contractual cash flows tend to keep flowing through recessions and market shocks, barring truly catastrophic collapse scenarios. Even in the sharp 2020 COVID downturn, most trade finance and consumer loan ABS (asset-backed securities) continued to receive payments close to schedule, aided by stimulus but also by the high priority people place on certain obligations. Empirical data underscores the reliability: the International Chamber of Commerce’s trade finance registry has consistently found very low default rates for short-term trade finance – on the order of 0.2% to 0.9% historically. Even during the worst of 2020, default rates on import-export loans remained well below 1% (International Chamber of Commerce, October 2022). This is because buyers still needed to pay for shipped goods (or risk losing access to supplier credit) despite the recession. In contrast, during the same period, corporate bond default rates spiked much higher. ABF’s cash flows are simply less correlated to economic cycles than corporate profits are. A company might suspend dividends or even miss bond payments in a pinch, but it will strive to pay for critical supplies and leases needed to keep the lights on – which are exactly the cash flows ABF often finances.

Protection: Built-in Structural Protections Absorb Shocks

ABF deals commonly feature layered structural protections that act as shock absorbers for volatility. These can include first-loss equity tranches, excess spread, reserve accounts, insurance wraps, and other credit enhancements that further shield investors from losses. In practice, this means that even if some underlying loans default or cash flows come in below expectations, the top-tier investors (often the senior tranche or the fund investors) may still receive full and timely payments because the structure absorbs the hit.

ABF deals also often have covenants and triggers that provide early warning and allow intervention (such as diverting excess cash to a reserve if defaults tick up). This proactive stance means issues can be contained before they spiral. It’s a stark contrast to unsecured lending where the only real protection is a covenant (which, if tripped, often means the loan is already in deep trouble).

Source: TCW, February 2024

ABF portfolios are engineered for resilience. They are not merely a random collection of loans; they are carefully structured financings with multiple lines of defense. Collateral is the first line, but then credit enhancements act as a second line, akin to airbags deploying in a crash. This gives investors a smoother ride. It’s telling that even extremely conservative investors like insurance companies have been comfortable pouring capital into ABF strategies via senior tranches bloomberg.com – a strong external validation of the safety that these structural protections provide.

Quality: Pivoting to Higher-Quality Assets when the Cycle Turns

Not all credit is created equal, and ABF managers have the ability to dynamically shift the quality of collateral depending on the macro environment. This “counter-cyclical collateral shift” means that during riskier periods or when credit spreads widen, ABF portfolios can move “up in quality” – focusing on more resilient asset classes or more creditworthy borrowers – to weather the storm. For instance, if the economy is slowing and consumers are under stress, an ABF lender can pivot away from subprime consumer loans and toward prime auto loans or government-backed receivables. If certain industries are looking shaky, the manager can allocate more to assets in defensive sectors (like healthcare receivables or essential equipment leases). Because ABF spans a wide spectrum of asset types and geographies, there is a lot of flexibility to tilt the portfolio toward safety when needed.

When credit spreads widen (indicating investors expect higher defaults), ABF can respond by upping credit quality without sacrificing yield, since wider spreads mean even high-quality borrowers/payors are paying more. ABF are able to lean into more senior tranches of deals or assets with stronger guarantees at only a modest drop in yield, thus improving expected loss profiles.

Source: Pimco, April 2025

In practice, this might mean an ABF fund that normally finances mid-tier consumer loans pivoting to prime loans and asset-backed facilities when the economy softens, or a trade finance fund focusing more on insured trade receivables during a period of geopolitical risk. These shifts can be subtle or significant, but they all serve to shore up the portfolio’s resilience. It’s a proactive defense: bolster credit quality before defaults materialise.

Diversification & Agility: Millions of Small Positions and Real-Time Pivoting

Finally, one of ABF’s greatest strengths is the combination of diversification with agility. An ABF portfolio is typically composed of hundreds, if not thousands, of underlying loans or leases spanning different borrowers, sectors, and regions. This granularity means idiosyncratic risk is spread across a vast pool of exposures . The breadth is both quantitative and qualitative: an ABF fund might simultaneously finance European trade receivables, Asian auto loans, and North American equipment leases. A recession in one region or a default by one obligor hardly registers when the exposure is diluted by hundreds of others. Such wide diversification is the first line of defence for ABF, lowering volatility at the portfolio level by averaging out localised losses with many uncorrelated positions. It should, however, be noted that capital is still at risk and such a strategy is not immune to other potentials risks which may negatively affect outcomes.

Source: Macfarlanes, January 2025

Diversification alone, however, is only part of the story – ABF also offers agility in allocation. Because ABF managers source deals from many originators and asset platforms, they can continuously adjust the mix of exposures in real time as conditions change. Unlike a static loan fund that might be fully committed to a set of loans for several years, an ABF strategy is constantly redeploying maturing capital into new assets. This provides the opportunity to proactively steer new investments toward sectors or asset types with tailwinds, and away from those facing headwinds, almost on a rolling basis.

Conclusion

Recent years of market turmoil have tested many investment strategies and ABF has proven its mettle as a collateral-based credit strategy, combining intrinsic asset value, collateral rigor, and structural safeguards to deliver relatively stable repayment characteristics amid market chaos. ABF continues delivering the contractual repayment streams that investors crave even when public markets are whipsawing. The combination of structural features that together make ABF uniquely equipped to withstand – and even prosper in – volatile conditions. Its resilience during volatile macroeconomic conditions is no coincidence, but rather the result of intentional design and evolution in the private credit market

From a portfolio construction standpoint, the implications are powerful. In an era defined by uncertainty – be it inflation surprises, geopolitical rifts, or macro volatility – ABF offers potential to earn consistent income without riding the market’s rollercoaster. For institutional investors re-evaluating their strategies after recent upheavals, ABF shines as a structural element within diversified credit allocations and modern portfolio stabiliser – a way to put capital to work that is at once innovative and comfortingly intuitive. It channels capital to where it’s needed in the economy (often providing financing to underserved areas) while shielding investors from the storms that periodically roll through markets.

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Risk Consideration: As with any private credit strategy, asset-based finance involves risks including borrower default, illiquidity, and capital loss. While structures may include mitigants like collateral and short duration, they are not immune to broader macroeconomic shocks or operational risk.

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