Credit Markets in Transition: Asset-Based Finance

What It Covers

Edwin Wilchins explains asset-based finance as lending secured by cash-generating assets, spanning consumer loans to infrastructure. PGIM's approach emphasizes independent research, scale advantages, and avoiding captive originators to deliver investment-grade returns 150-200 basis points above corporates.

Key Questions Answered

• •Market Scale Opportunity: ABF represents 5-50 trillion dollars in addressable market versus 1.5 trillion for corporate private credit, offering 10x larger opportunity set with persistent attractive spreads despite new entrant competition and strong institutional demand from pensions and insurers seeking diversification.
• •Return Enhancement Strategy: Investment-grade ABF delivers 150-200 basis points above comparable corporate bonds through combining 75-100 basis points from public securitization plus another 75-100 from illiquidity premium, while maintaining superior covenant protection and monthly principal repayment providing natural liquidity despite private market structure.
• •Independent Research Model: Segregate origination from underwriting by having research teams report independently from portfolio managers, preventing conflicts where pressure to deploy capital compromises credit assessment. Research teams assign internal ratings and ESG scores before pricing decisions, ensuring disciplined risk evaluation across bilateral investments.
• •Captive Originator Avoidance: Deliberately avoid owning origination platforms to eliminate conflicts between equity ownership in originators and debt purchases for clients. In trillion-dollar markets with supply exceeding demand, sourcing through relationships and scale delivers better relative value than captive arrangements that create pricing conflicts.