While the traditional markets of asset-based finance, such as mortgages and automobile loans, are mature, the non-traditional ones, such as point-of-sale transactions and home improvement loans, are offering investment opportunities, says John Withrow, principal at AB CarVal, part of AllianceBernstein’s private alternatives business.
Speaking during a session at the Canadian Investment Review’s 2025 Global Investment Conference, Withrow contrasted the high yield market, leveraged loan market and corporate direct lending market — at about $1 trillion each — against the asset-based finance market, which is about $6.5 trillion.
“In addition to being a much bigger market, we’re adding the equivalent of a U.S. high yield market almost every year. Over the next few years, we think this $6.5 trillion market grows to about a $10 trillion market.”
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One of the reasons for this growth is that banks are over-leveraged, moving away from long-term lending and facing regulations that differ across global jurisdictions, said Withrow. For example, a bank that’s accumulating mortgage or automobile loans is piling up millions or billions on their balance sheets — if the capital regime changes so the bank has to hold more regulatory capital against those loans, it’s no longer a good return.
“If it isn’t efficient for a bank to continue to hold those assets on their balance sheet for more capital required against them, it’s probably not efficient for them to issue new loans that look just like that.”
Whether a bank or other financial institution is considering underwriting a loan that falls into certain criteria, AB CarVal will buy it on a go-forward basis, he said. “Instead of buying $500 million of loans at one time that they’ve already seasoned on their books, we may buy $25 to $50 million a month every month for the next 12 to 18 months. We call that a forward-flow deal. And sometimes we’ll do both — buy a back book and do a forward flow.”
The growth of asset-based finance can also be attributed to the consumer behaviour following the coronavirus pandemic, said Withrow. At first, central banks flooded the world with liquidity and rates stayed low, so people were able to make payments and spend money. But then, central banks started to pull liquidity out of the market as rates and inflation picked up.
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“What happened to the consumer? They started defaulting on payments. . . . We went from a period of historical lows on defaults to historical highs in a matter of a few years, especially on those loan portfolios that were underwritten in those later years of the global pandemic. We expect that’s going to happen on a go-forward basis as well.”
Asset-based financing is a strong and growing market, he said, highlighting the importance of deep relationships and long-termism. “Because these things are cash-flowing so much — every single month, people are making their payments — these deals are amortizing down, so our risk is going down over time.”
In addition, these deals have a low correlation to public markets, said Withrow. “As volatility has picked up in the last couple of months, our cashflows haven’t changed.”
Read more coverage of the 2025 Global Investment Conference.