Chris Mellia, Managing Director and Co-Head of Global Asset-Based Finance at KKR, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the uses of asset-based finance by loan originators and corporate treasurers.
Asset-based finance grew in the 1980s with the launch of mortgage-backed securities. KKR has been active in the space for over 10 years, investing in high-grade assets for its insurance company and in opportunistic investments for its credit funds. The strategy is becoming better known as companies in the S&P 500 explore asset-based finance for their balance sheets.
Asset-based finance can offer off-balance-sheet financing and transition a company from asset-heavy to asset-light. Companies can increase their return on equity (ROE) through these financing techniques. Assets can be placed in a bankruptcy-remote vehicle rather than borrowing investment-grade debt and levering up the balance sheet. Increasing ROE often increases the company’s stock price. The traditional market for asset-based finance is lenders who originate home and auto loans or lend against receivables, then move the assets off their balance sheets.
Asset-based finance is an amortizing asset class that pays principal and interest to investors on a regular basis, typically over a three- to five-year loan term. Asset-based finance, or asset-backed securities, is backed by hundreds or thousands of loans and generates returns with relatively low correlation to other financial assets. Investors can build statistical models to predict downside return scenarios, as asset-based financial products have been in place for multiple business cycles over the last twenty years.
Mellia notes that it is beneficial for lenders and investors to have scale in the asset-based finance market to employ sector experts who understand each underlying asset type. KKR has 50 investment professionals exclusively dedicated to asset-based finance. These professionals work in four teams: residential, consumer, commercial ex-real estate, and hard assets, such as transportation, infrastructure, and renewable energy.
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