Private assets
The growth of asset backed lending in Europe: A journey set to continue
4 min read 2 Jul 24
The sustained rise of asset backed lending (ABL) in Europe has been driven by well understood factors. These include a continued bank retrenchment in Europe, regulatory pressures, technological developments and banks seeking balance sheet optimisation. Together these factors have propelled the ABL market forward.
Supported by mega-trends
However, these drivers are now being supported by several ‘mega-trends’ which are now re-shaping the opportunity set within European ABL. The first of these trends involves bank deleveraging, comprising two main types. Bank regulation throughout Europe has increased the capital requirements of European banks. In addition, a growing acceptance that the size of the European banking sector is oversized, particularly in relative terms to overall European GDP.
The consequence of this first trend is that banks in Europe are looking to either divest or reduce their lending exposure to certain types of lending. Furthermore, banks are seeking to transfer risk – often utilising the Significant Risk Transfer (SRT) market. The attraction of the latter is that it allows banks to regain capital from certain parts of their balance sheet. For both, these dynamics offer interesting opportunities for asset backed investors.
The second ‘mega-trend’ has been led by technological change. Part of the technology-led evolution of the ABL market in Europe has been the emergence of the non-bank lending sector, in addition to new banks entering the market. These developments have both improved and made more efficient the underwriting process. In addition, technology has also improved the types of products these new banks are able to offer both to consumers and corporate customers.
For asset based lenders such as M&G, these banks will require finance, which M&G can provide.
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The evolution of a market
The European ABL market is not stagnant – it is constantly evolving. This process of change presents opportunity. The most noticeable has been led by bank leveraging. Banks have been rationing capital in order to meet more onerous capital requirements, and also a desire to either exit or hedge their exposure to capital intensive businesses. We believe this is a prime opportunity for investors to access core parts of banks’ lending books.
Further, Europe’s private capital markets are noticeably less mature than those in the US. In Europe retail banks still dominate the provision of much retail and consumer lending. With bank retrenchment, this again will open up opportunities to finance these non-bank platforms in order for them to originate product. Finally, less mature European markets means less competition when seeking to source investment opportunities.
Where are the opportunities?
There are 4 main areas M&G believe present opportunities for ABL investors:
- Consumer finance – areas such as residential mortgages, credit cards, car loans
- Collateralised Loan Obligations (CLOs) – financing of loans to private companies
- Consumer and corporate specialty finance – financing private assets within the consumer and corporate space
- SRT – providing a new capital source to banks in return for providing risk protection on certain parts of their balance sheets.
Why allocate to asset backed lending?
ABL opportunities offer strong diversification potential for many investors. Also, ABL can potentially access assets not typically found in many investors portfolios. In our view, returns are also potentially higher. Lastly, the supply outlook is very positive with the European ABL market offering attractive opportunities for investors.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.