📝 The AGM Op-Ed: The Rise of Asset-Based Finance: The Next Growth Engine in Private Credit
Views from the field with Arcesium's Private Markets Head Cesar Estrada
Private markets are at an inflection point. Growing appetite for private investments is compelling firms to pursue innovative strategies, launch competitive products, enter new markets, and differentiate their business model. Yet as firms expand, many are colliding with an explosion of data, fragmented systems, error-prone processes, and cost growth.
Arcesium is a global financial technology company delivering pre- and post-investment operations and enterprise data management solutions designed to systematize the most complex workflows.
Arcesium was built from a platform developed and tested by investment and technology development firm, the D. E. Shaw group, and launched as a joint venture with Blackstone Alternative Asset Management. J.P. Morgan, another large client, later made a strategic investment in the company, helping Arcesium further its mission: to power the entire investment lifecycle.
Arcesium recently partnered with Neuberger Berman Specialty Finance (NBSF) to scale the investment management firm’s asset-based financing strategy.
This week’s AGM Op-Ed is brought to you by Arcesium.
If you want to learn how Arcesium is delivering the technological infrastructure required to manage the complexities of asset-based financing, you can download their white paper below and read thoughts on the asset-based finance space from Arcesium’s Private Markets Head and industry veteran Cesar Estrada.
The Rise of Asset-Based Finance: The Next Growth Engine in Private Credit
By Cesar Estrada, Private Markets Head, Arcesium
Going private has never been more appealing to business borrowers, consumers, and institutional investors. From what was once a niche within private equity, private credit blossomed after the global financial crisis fueled by more stringent regulations and higher capital requirements that squeezed traditional bank lending.
As private credit continues to hatch new specialized lending structures, funds are flocking to asset-based finance (ABF), in which the lender’s source of repayment is derived from the contractual cashflows of a pool of financial or hard assets. PIMCO estimates that the total value of the ABF market stands at over $20 trillion.
Lenders are executing investment strategies on assets like consumer and commercial loans of all kinds (e.g., personal loans, credit cards, auto), to residential real estate, accounts receivable, equipment leasing, intellectual property, royalties, and more. Klarna and DoorDash recently announced a partnership to put food delivery on payment installments. As punny headlines abound, the deal highlights the growth of high-volume activity in the ABF space.
What once was niche is now necessity.
ABF’s explosive growth
The use of assets to secure loans is expected to accelerate as borrowers demand more flexible and speedier alternatives to traditional lending. Lenders will continue to find new opportunities to monetize goods and services, resulting in the growth of new ABF asset classes in the years ahead.
Origination platforms are attracted by the flexibility, pace of execution, certainty of closing, and the personal attention that banks cannot provide. And the opportunity to get more juice from the private debt apple and drive attractive risk-adjusted returns in uncertain times is bringing more lenders to the table. In September 2024, Blue Owl Capital completed its acquisition of Atalaya Capital Management, further cementing the alternative asset manager’s leading market position in direct lending. A month later, UK-based Elliott Advisors took an approximate $39 billion stake in Klarna’s loan portfolio. And earlier this year, Neuberger Berman announced it raised over $1.6 billion for a fund focused on asset-based investments.
Innovation at the nexus of growth
As the ABF market grows and attracts new investors, originators and lenders each bring distinct, sometimes overlapping requirements. The intersection of market participants’ needs accentuates the demand for efficient, scalable solutions to navigate ABF’s operational intricacies — and presents an opportunity for innovation.
ABF macro trends are providing strong tailwinds for growth. Insurance asset owners and pension funds like ABF for its long-dated nature and predictable returns, which align well with strategies that emphasize matching long-term liabilities with long-duration assets. Private wealth investors enjoy the diversified portfolio of assets and the reduced risk associated with individual loans. And private market managers are always hungry for new investment opportunities.
As private credit lenders scale their operations, they encounter heightened complexity in data management and reporting. Firms offering ABF strategies must also adapt to a higher volume of transactions, especially in consumer lending strategies, where they may be funding millions of loans. This shift requires seamless integration with originators, lending platforms, and servicers. Lenders may also be tasked with managing fundamental operational hurdles such as daily NAV calculations and lifecycle event processing.
Private wealth investors bring a distinct set of challenges — new sources, daily NAV requirements, demand for new distribution channels, transparent reporting, and more. Lenders must also be prepared to support liquidity events as retail investors seek greater exposure to private credit and ABF.
For insurers, the challenge lies less in managing transaction volumes and adapting existing systems to accommodate the nuances of credit investing across the public to private spectrum. While insurance firms are accustomed to managing vast portfolios, they often lack the infrastructure and expertise required for daily NAV calculations and valuations. Stringent regulatory and reporting requirements make ABF a particularly complex endeavor for insurers. Data and reporting demands only accelerate as private credit and insurers deepen collaborations through mergers, joint ventures, and other strategic partnerships.
How opportunity can fuel innovation
Innovative technology solutions can help bridge the gaps in expertise, compliance, and operational efficiency. Harmonized consolidated data is a prerequisite to maximizing workflow efficiency. But cleansing and validating disparate investment reference and transaction data is no simple task. Firms expend considerable energy “loan tape cracking” at scale, ingesting and validating vast amounts of unstructured and inconsistent loan data across different lending sectors and from multiple originators and servicers.
Private market funds need a systematic way to orchestrate and organize workflows to get the most from their ABF strategies:
Real-time positioning and reporting.
Data mastering and ETL (extract, transform, load) tools.
Loan setup and enrichment.
Transaction lifecycle management.
Trade capture.
Reconciliation and accounting.
The current process is often resource intensive and not scalable as it depends on legacy systems, python scripts, and spreadsheets. A straightforward way to model instruments and events can provide more transparency into positions and a better way to track performance, risk metrics, and debt repayments.
Modernize operations to thrive in complexity
Automated workflows reduce manual errors and increase speed to ... everything from processing loan trades and lifecycle events to daily position reconciliation. A fund running ABF strategies can automate investment criteria and risk models through portfolio-level policies and criteria-based processing, including categorization of defaulted loans, to track FICO scores, borrower states, and product types, and generate granular analyses for risk and portfolio monitoring. Accurate, immediately accessible data is the prerequisite for gleaning real-time insights: a real-time view of portfolio performance, positions, investor updates, and fund valuations.
Role of advanced technology in scaling private credit
The most advanced investment lifecycle technology will allow for integration, connectivity, and scalability. A comprehensive platform and modern data architecture will not buckle under expanding trade volumes, large loan portfolios, new entity structures, and new strategies. It will enable funds to seamlessly adapt to different asset classes and unique client needs.
Most importantly, portfolio managers gain a higher level of confidence in their data analytics, which translates to newfound confidence in their higher value decision-making. It’s not an easy macroeconomic or geopolitical environment in which to do business. Margins are tight, risks are asymmetric, and inefficiencies cost millions. The capacity to leverage data analytics transforms portfolio management, risk assessment, and investment decisions. Firms that thrive in the complexity of ABF and other private market strategies will rise above the fray.
Cesar is responsible for Arcesium’s data management and investment operations technology and services offered to private markets fund managers and investors. Previously, he served as Senior Managing Director and Alternatives Business Head for North America at State Street — a role in which he drove the growth agenda for a business with approximately $1 trillion in Assets Under Administration by leading new product launches, expansion into new client segments, strategic partnerships, and acquisitions. He served on the board of State Street Fund Services Inc. Prior to that, as a Managing Director at J.P. Morgan, Cesar led the Private Equity & Real Estate Funds Services business from launch to $350Bn AUA. While at J.P. Morgan, he also held investment banking roles in New York, London, and Hong Kong. Cesar has a BS in Chemical Engineering from ITESM and an MBA from the Kellogg School of Management at Northwestern University.
Alt Goes Mainstream’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Alt Goes Mainstream’s work may feature entities in which Broadhaven Ventures or the author has invested in.