From niche to core

Read this article to understand:

• Why institutional investors are turning their attention to asset-based finance (ABF)
• How ABF can meet a variety of institutional investment objectives
• The asset class’s diversification potential

As private debt markets mature, allocators are increasingly asking: what’s next?  With many portfolios already heavily allocated to corporate risk, and yields adjusting to a higher-for-longer interest rate environment, institutional investors are turning their attention to ABF. It combines structural security with income resilience, and flexibility with real economy impact.

ABF is not entirely new, but its relevance is increasingly evident. It offers investors access to private loans backed by identifiable assets; whether tangible hard assets, like aircraft and equipment, or financial, such as consumer receivables, student loans, or more esoteric assets such as royalties. These assets generate contractual cashflows that can be structured into investable debt and equity instruments across a broad risk-return spectrum.

What makes ABF compelling in the current environment is its ability to meet a variety of institutional objectives, from capital preservation and income stability to surplus generation and diversification. Whether for insurers, pension schemes, endowments, sovereign investors, or family offices, ABF offers an adaptable toolkit for today’s more complex market challenges.

A shift in market dynamics

Private debt has expanded significantly over the past decade, led by corporate direct lending. As this segment matures, with tighter spreads, slower origination, and commoditised structures, investors are reassessing how to maintain returns and resilience.

Meanwhile, macro conditions have evolved. Higher-for-longer base rates, inflation risks, and stricter capital regulations are reshaping the landscape. In this context, ABF offers an attractive alternative: short-dated structures with floating rates, amortising cashflows and collateral-backed exposures that typically offer stronger recovery rates than unsecured loans.

Corporate direct lending and ABF are not always completely distinct asset classes. They are often used by borrowers and sponsors as an optimisation tool for their financing structures. For instance, lending directly to a corporate borrower may offer a reasonable yield (e.g. Euribor +350bps), but the exposure might be at a holding company level, structurally subordinated and tied to remote excess cashflows after paying for financial costs at the operating company level.

In contrast, lending against trade receivables via an asset-backed loan for example will tend to be secured and sit at the operating company level and provide a stronger structural position, direct access to cashflows, and enhanced protection through ring-fenced collections, while paradoxically offering higher yields (e.g. Euribor +450bps). This improves downside protection and leverages the historically low default rates of receivables, making it a compelling option for investors seeking higher risk-adjusted returns. 

Some question whether ABF resembles the asset-backed securities (ABS) seen in the build-up to the Global Financial Crisis (GFC). While both involve lending against asset pools, their structures differ. Pre-GFC, ABS featured opaque, leveraged securitisations with misaligned incentives and systemic risks.

Private ABF, by contrast, are transparent and bespoke. Deals are typically bilateral or within small investor groups, allowing direct asset access and active collateral monitoring. Strong covenants, clear recovery paths, and a hold-to-maturity approach reduce complexity and contagion risk. This aligns incentives and enhances resilience in volatile markets

A diverse landscape built on contractual cashflows

The scale of the opportunity is already significant. McKinsey estimates the scope for ABF to exceed $30 trillion globally, driven largely by consumer lending and securitisation markets that are steadily migrating away from traditional bank channels.¹

What truly differentiates ABF is the breadth and diversity of its underlying assets. From aviation finance and trade receivables to structured consumer portfolios, the borrower base and risk drivers are often entirely uncorrelated with those in conventional corporate credit (see Figure 1).

This diversity is not just a feature, it’s a strategic advantage. A well-diversified, multi-sector approach enables investors to capture the distinct pricing dynamics and relative value opportunities across sectors. Different asset classes respond differently to macroeconomic conditions, regulatory shifts, and liquidity cycles. By allocating across multiple sectors, investors can smooth volatility, enhance resilience, and optimise risk-adjusted returns.

Asset-based strategies therefore serve as a true portfolio diversifier. They reduce reliance on the corporate credit cycle while providing access to real-economy exposures often overlooked in mainstream portfolios.

Figure 1: ABF: A multi-sector opportunity set

Source: Aviva Investors, October 2025.

Many ABF opportunities remain private, bespoke, and importantly, under-penetrated by institutional capital. This creates the potential to capture complexity premia and tailor structures on a deal-by-deal basis. In an era of capital discipline, that level of control and customisation matters.

A flexible solution for evolving defined benefit (DB) scheme needs

As DB pension schemes mature, ABF is proving to be a nimble and compelling solution across a range of strategic outcomes – whether a scheme is in run-off, targeting self-sufficiency, or planning to run on.

In run-off, ABF’s amortising structures and recurring cashflows help meet pension obligations while preserving capital. For self-sufficient schemes, its diversified income and inflation resilience enhance portfolio stability and reduce dependence on traditional fixed income. And for schemes choosing to run on, longer-dated ABF strategies support surplus growth and strategic optionality, aligning with broader goals such as ESG and productive finance.

With yields often exceeding those of conventional bonds and the ability to tailor duration and structure to match liabilities, ABF offers a scalable toolkit for navigating changing market conditions and long-term funding needs. Some institutional investors have already implemented short-duration, investment-grade ABF strategies delivering net yields of around six per cent – sufficient to meet near-term cashflow needs while retaining flexibility.

Beyond yield, ABF’s appeal lies in its structural versatility and broad exposure across sub-asset classes. It enables schemes to manage liabilities efficiently without compromising long-term objectives. Importantly, it also supports government ambitions to channel capital into productive sectors like housing, infrastructure, and SME lending – delivering strong outcomes for both investors and society.

Some institutional investors have successfully implemented short-duration, investment-grade ABF strategies delivering net yields of around six per cent. These are sufficient to meet three-to-five-year cash flow needs while maintaining flexibility for future portfolio decisions.

Structuring for insurance capital efficiency

For insurers, the investment challenge is uniquely complex. Balancing regulatory capital requirements under Solvency II or other risk-based capital frameworks, navigating accounting constraints like IFRS 9, and delivering steady income - all within a volatile macroeconomic environment - requires more than conventional fixed-income solutions. ABF is increasingly proving its worth as a versatile and capital-efficient alternative.

When thoughtfully structured, ABF can deliver income streams that sit comfortably within insurers’ core fixed-income allocations yet offer materially higher returns. Amortising profiles, high levels of collateralisation, and the potential for investment-grade ratings mean that ABF exposures can be both capital-efficient and accounting-friendly.

For insurers allocating to mortgages, auto loans or insured receivables, this has translated into attractive yields, while reducing Solvency II capital charges by over a third; an outcome that is hard to ignore.

ABF also offers a solution to the liquidity and duration management puzzle. Many strategies are short-duration and self-liquidating, with scheduled amortisation that reduces refinancing risk and provides strong visibility over cashflows. This makes them particularly well-suited to insurers managing liquidity buffers or duration-matched liability portfolios.

The granular nature of ABF exposures, whether in receivables, leases, or loans, enables insurers to exercise tighter control over credit quality, sectoral concentration, and duration. These attributes can be tailored to align with internal risk appetite frameworks, offering a level of precision that traditional fixed income often lacks.

With regulatory pressures mounting and income predictability more critical than ever, ABF stands out not just as a tactical allocation, but as a strategic building block for insurance portfolios.

Anchoring long-term capital

As volatility persists and traditional alternatives become increasingly crowded, long-term asset owners such as endowments, foundations, and Sovereign Wealth Funds (SWF) are turning to differentiated strategies that combine consistent performance with portfolio resilience. ABF’s appeal lies in its ability to generate uncorrelated alpha, offering a steady stream of cashflows with lower volatility than private equity or listed equities.

This consistency is particularly valuable for institutions that rely on stable distributions to fund long-term commitments. For example, residential transition finance and franchise receivables have delivered net returns in the eight to ten per cent range, with amortising structures that support predictable income and reduce exposure to market swings.

Beyond performance, ABF opens the door to niche opportunities that are often overlooked in broader markets. Strategies such as royalty-backed lending or residential transition loans offer inflation protection and favourable risk-adjusted returns, especially when accessed through private, negotiated transactions. These sectors tend to be less competitive, allowing sophisticated investors to deploy capital with greater precision and control.

Flexibility is another hallmark of ABF. Many strategies are self-liquidating, reducing reliance on secondary markets and enhancing liquidity management. This makes ABF particularly well-suited to institutions that value the ability to scale positions up or down across cycles and asset types.

Preservation and stability

For family offices and other private wealth investors, ABF offers access to real economy investments without the complexity or illiquidity of traditional private equity. It is also highly customisable.

Investors can design mandates around specific themes or exposures. That could be SME lending, real estate leases, or niche sectors like aviation leases by working with a curated set of originators. Many of these strategies currently offer attractive entry points, as traditional lenders retrench and the cost of capital recalibrates.

Families focused on wealth preservation and long-term stability may consider ABF thanks to its reliable income, strong collateral coverage, and the ability to align investments with generational objectives.

A thoughtful approach to origination

A key strategic consideration for ABF managers is how to generate deal flow: self-build franchise based captive origination or partner with independent specialist originators. While both are viable, we believe strategic partnerships offer clear advantages. Captive platforms require licences, technology, and operations, tying up capital and increasing costs for investors. Partnerships keep the balance sheet light, direct capital to assets, and offer flexibility across asset classes and geographies.

They also reduce concentration and operational risk, spreading counterparty exposure and enhancing underwriting through competitive tension. Well-structured partnerships align incentives, allowing originators to earn on flow while asset managers retain control over deployment and risk.

Partnerships let managers focus on core strengths like structuring and portfolio construction, while outsourcing servicing. Though captive models may offer tighter control and full margin capture, they come with complexity, reduced agility and reduced investment choices which are all key for relative value-based investment decision making.

Flexibility to tailor risk-return profiles

One of the most compelling features of ABF is its flexibility to tailor risk-return profiles to meet diverse investor preferences and regulatory requirements (see Figure 2).

At the conservative end of the spectrum, regulated institutional investors, such as insurers, may find greater value in investment-grade structures, which benefit from more favourable capital treatment under insurance regulations.

DB and defined contribution pension schemes, depending on risk appetite, may see attractive relative value and enhanced absolute returns in mezzanine risk profiles. Meanwhile, less constrained investors seeking equity-like returns can benefit from the strong diversification offered by leveraged ABF instruments, which may present an attractive alternative to traditional private-equity strategies.

Figure 2: Mapping the risk-reward spectrum

For illustrative purposes only and not intended as an investment recommendation. Forecasts are not a reliable indicator of future performance.

Source: Aviva Investors. Data as of August 31, 2025.

From niche to core?

ABF is evolving from a niche strategy into a core component of the private debt landscape. Its appeal lies in the ability to combine collateral-backed security, structural flexibility, and sectoral diversity with scalable deployment.

Amid tighter credit spreads, a higher-for-longer rate environment, and increasing focus on capital efficiency, ABF offers diversified asset exposure, resilient income, and targeted opportunities aligned with long-term objectives.

For insurers, pension schemes, sovereign wealth funds, and family offices, ABF is emerging as a versatile complement to traditional private debt strategies. Its capacity to deliver differentiated returns while supporting portfolio resilience, makes it a compelling option for investors seeking to navigate complexity with precision.