Värde’s Head of Asset-Based Finance, European Lending, Barbara Richter, shared her views on the growth drivers, macro backdrop and barriers to entry in asset-based finance at SuperReturn Private Credit Europe.
[0:05] In a difficult macroeconomic environment, where can investors find the most attractive returns in specialty finance? What is driving growth?
“We at Värde view this sector as investing and lending against granular pools of assets, usually financial receivables from consumers or small businesses. Now this market is in the trillions, particularly if you consider all the assets sitting on bank balance sheets today, so I think what’s really driving the growth is both the absolute growth of the receivables space but also the transition of those assets out of the banks into private credit hands.”
“There are a few key drivers. There’s certainly the external driver of regulation and accounting, but perhaps more importantly, there are the inherent operating inefficiencies in banks that make these particular small-balance loans better served in the non-bank sector – and I think this transition is really turbocharging the growth we’re seeing in the market.”
“In terms of returns, I think you’re right to reference a difficult macro backdrop. […] We do like to understand the fundamental attractiveness of the underlying assets, and we use statistical techniques to understand base case unit economics loss rates. So we assume some loss even in the base case, but we really try to think about how bad those losses can get, which in turn will drive what we push for in terms of attachment points and covenants.”
[2:10] What are the barriers to entry as a manager in this space?
“I think it’s one of the last remaining truly private markets in the investing space broadly. We tend to source a lot of our transactions directly, and they are often the result of longstanding relationships between the deal team and the originating platform.”
[3:30] How can investors strike a balance between traditional cash flow lending private credit and asset-based strategies?
“One word of caution: We do see a lot of asset-based lending – or nominally asset-based lending – that really is very close to corporate lending. So it’s worth checking that what you’re getting actually attaches to the asset, has control of the asset, and really does capture that downside protection.”
[4:50] How can asset-based strategies help to increase diversification in portfolios? What are the advantages of these strategies?
“Diversification obviously is a key advantage. We think you can generate some very attractive risk-adjusted returns in this space. One additional point to differentiate between the two asset classes is that our assets tend to be cash-flowing and self-liquidating. So, we’re not relying on some sort of exit multiple to refinance us; in fact, we’re cash flowing over time.”
Watch the video for Barbara’s full remarks.