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From Collateral to Catalyst: The New Age of Asset-Backed Finance - Aronima Biswas

Asset-backed finance has grown from a niche area of private credit into a key conduit for

institutional investors to deploy capital. In 2025, global asset managers of all sizes raised

significant funds committed to providing finance against identifiable cash-flow streams, from

real estate leases and infrastructure revenues through to music royalties and corporate

receivables. The implications are profound; the nature of credit supply is changing, as are the sites of financial risk and revenue generation.


What asset-backed finance involves


Asset-backed finance is a lending or investment arrangement where the obligation is secured

by a defined asset or recurring revenue stream. Traditional securitisation of mortgages and

auto loans is still a part of this market, but its expansion now includes financing linked to

subscription revenues, logistics receivables, renewable-energy capacity payments, and

intellectual property income (e.g. Bowie bonds). The structures turn projected cash flows into

tradable securities or privately negotiated loans, while for institutional investors, they offer

yields that generally exceed public market credit instruments of comparable credit quality.


Why is the model expanding now


Several structural factors have driven the new growth in asset-backed finance. First, tighter

financial regulation has forced banks to hold more capital in reserve and has curbed the

amount that they can lend. Thus, leading to an increasing proportion of credit demand is

being met through asset-backed finance, where loans are secured against identifiable assets or income streams. Second, demand for stable yield continues from pension funds, insurers, and sovereign wealth funds looking for income-generating assets with low correlation to volatility in public markets. Third, better data and valuation frameworks like cash-flow performance histories, servicing technology, and legal standardisation have reduced the operational friction that once limited the market's scale. These developments have collectively allowed private credit managers to intermediate financing that would previously have sat on the balance sheets of banks.


Economic rationale and benefits


These asset-backed structures can provide borrowers with long-term funding matched against

asset lives, sometimes at a lower cost than unsecured borrowing. Investors, in turn, receive

predictable cash-flow profiles. And the risk of corporate default decreases because

repayments depend on the performance of the assets. There is also the positive of

diversification benefits due to low correlation with traditional equity and bond markets.

As a result, this has made asset-backed financing a key funding mechanism for sectors such

as renewable infrastructure and transport leasing, rather than just a supplement to bank

lending.


Risks and vulnerabilities


Despite the benefits that come with the use of such systems, some risks to highlight include:


● Securitised instruments usually trade in private markets thus, secondary liquidity stays

limited.


● Determining how sustainable a certain revenue stream is, such as digital royalties or

subscription-based online revenue streams, normally requires an analysis of

operations in great detail.


● Lastly, if several funds were holding similar assets financed with short-term

borrowing, market stress could amplify losses.


The Bank for International Settlements has noted that rapid growth in nonbank credit

intermediation creates channels through which shocks can be transmitted even without direct

banking-sector exposure.


Potential system-wide consequences


The systemic implications of asset-backed finance are primarily a function of its financing

structure. Financed mainly by long-term equity capital, losses would be confined to investors.

But any leveraging-up through short-maturity borrowing or repos creates the risk that

liquidity stress could spill over into the wider credit markets, as in past securitisation cycles.

Maturities of funding, therefore, not just the credit characteristics of collateral, will be

important to monitor in prudent oversight.


Regulatory and market responses


Regulators have not sought to limit the growth of asset-backed finance, but they are

emphasizing aspects like improved transparency in the reporting of sub-surface cash-flow

performance. Stronger servicing and governance standards. Market participants are also

taking steps to adapt through the adoption of enhanced collateral triggers and increased

reserve accounts to ensure liquidity coverage and subsequent recovery in scenarios of

underperformance.


Outlook


Asset-backed finance has continued to grow, and it will probably expand further as

institutional investors move out of public markets and banks maintain tight credit conditions.

Its resilience will depend primarily on underwriting discipline and restraint on leverage. A

sector that can keep transparency and structural safeguards up to the growth pace might

remain a source of stable, diversified long-term capital. If not, the sector is positioned to be a

source of market fragility in stressed conditions.


Bibliography


Adrian, T. (2025). Growth of Nonbanks Is Revealing New Financial Stability Risks. [online]

nonbanks-is-revealing-new-financial-stability-risks.


BIS. (2025). Annual Economic Report 2025. [online] Available at:

Ferreira, M., Hensby, K. and Fletcher, R. (2025). The growth of asset-based finance in

private credit markets. [online] Macfarlanes. Available at:

private-credit-markets.


Kraus, K., Dienemann, F., McCarthy, K. and Ramirez, G. (2025). Asset-Based Finance:

Quantifying Diversification Benefits and Return Potential. [online] Pacific Investment

Management Company LLC. Available at: https://www.pimco.com/gb/en/insights/asset-

based-finance-quantifying-diversification-benefits-and-return-potential.


Platt, E. and Nicolaou, A. (2025). ‘Bowie Bonds’ Go Mainstream as Wall Street Chases

Returns. [online] FinancialTimes. Available at: https://www.ft.com/content/297c4455-ee04-

4eb5-9628-899077e494ec.


Reuters Staff (2025). KKR Raises $6.5 Billion for asset-backed Financing. Reuters. [online]

backed-financing-2025-07-30/.


Sterling, K. (2024). The Tailwinds behind Asset-Based Finance. [online] Goldman Sachs

Asset Management. Available at: https://am.gs.com/en-

kw/institutions/insights/article/2024/asset-based-finance-tailwinds.

 
 
 

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