ABF plays a vital role in financing everyday transactions for consumers and businesses. For example, if a consumer buys a t-shirt at a clothing store, ABF can finance (i) the credit card transaction, (ii) the small business loan to the clothing store, (iii) the equipment that produced the shirt, and (iv) even the trucks that transport the t-shirts to the store.
Figure 1
Illustrative example: A trip down Main Street
For illustrative purposes only. The information shown is summary in nature and not complete.
Taking a step back, the two broadest categories we can use are: hard assets and financial assets. In the previous example, the credit card and small business loan are financial assets – contractual streams of payments, while the equipment and trucks are hard, tangible assets. Investors in ABF can either lend against these assets or purchase them outright. In both cases, investments are supported by predictable contractual cash flows and asset values.
Figure 2
Key segments of the asset-based finance universe
For illustrative purposes only. There can be no assurance that Blue Owl Alternative Credit will be able to implement its investment strategy and achieve its investment objectives. All investments are subject to risk, including the loss of the principal amount invested.
Given that ABF finances millions of transactions daily, the market is large and growing. Today, we estimate it to be an $11 trillion market with only 4% penetration by private markets.3
Figure 3
Growth of private ABF3
We have been investing in ABF for nearly two decades and have repeat partnerships with many premier origination platforms. We aim to grow with platforms that have a consistent track record and pride ourselves on being a flexible capital provider. This approach has led to extensive relationships with select platforms, and 75% of our investments are with these repeat partners. Building relationship equity takes time and we have an 18-year head start on new entrants.
Beyond repeat business, these platforms also provide a vast amount of historical and real-time data. Today, we have over 50 active relationships, supplying us with daily data feeds from millions of consumers and small businesses. In 2016, we began building our data science effort because the analytics and asset management required can’t be done in Excel. This is now an integral part of our investment process and one we are accelerating even more at Blue Owl.
Overall, we’ve invested over $21 billion across more than 900 investments in all types of asset-based credit, making us an experienced player in the space.
We’ve long believed that consumer credit is generally misunderstood by investors and the Global Financial Crisis (GFC) amplified this. At a basic level, we understand why an investor choosing between one corporate loan and one consumer loan might perceive the corporate loan to have less risk. However, we invest in large, diversified pools of consumer loans that we price aiming to provide stable income and downside protection. The law of large numbers supports this process and helps us estimate how loan pools with certain characteristics will perform under various market conditions.
Even with the help of data science, we recognize that underwriting and tracking the performance of thousands of loans is not the most glamorous work. However, we see this as a feature, not a bug. Credit cards, for example, have been around for more than 75 years and provide a long history of performance, illustrating how this data-rich asset class can be used to our advantage.
Figure 4
Leveraging data science
The information provided above is for illustrative purposes only. The insights derived from our data science capabilities are intended to enhance the quality of asset-based finance investments and facilitate the proactive management of existing positions within our portfolio. However, there is no guarantee that leveraging data science will lead to improved results. Any views and opinions expressed are those of Blue Owl, based on available information, and are subject to change. Blue Owl’s strategies and targets depend on various factors, including the prevailing market environment, investment availability, and opportunity. There can be no assurance that the conditions upon which such strategies and targets are based will materialize. Nothing contained herein constitutes investment, legal, tax, or other advice, nor should it be relied upon in making an investment or other decision. Historical or current market trends are not reliable indicators of actual future market behavior. Past performance is not necessarily indicative of future performance. Actual results may vary.
Our affinity for consumer assets makes sense when you consider that the consumer represents approximately 70% of U.S. GDP.4 Our second largest allocation, small business finance, also plays a crucial role in the economy, with 33 million small businesses in the U.S.5 Many of the attributes that make the consumer space attractive apply to small business finance, which also entails large pools of smaller balance and highly diversified loans, but consumer finance retains a primary focus due to its sheer size.
The asset-based finance opportunity has been growing since the GFC, driven by a steady push to remove risk from the banking system. We believe this bank retrenchment has occurred in two phases.
In our view, Phase 1 took place after the GFC, as regulators in the U.S. and Europe sought to remove risk from the banking system. This resulted in banks backing away from corporate credit, leading to the direct lending boom. We believe Phase 2 accelerated after the regional banking crisis of 2023 when their cost of capital – the rate required on deposits – increased rapidly. This encouraged banks to back away from “everything else”, specifically assets we like in the ABF space.
Given ABF’s market size and the lack of dedicated players, we believe we are at a growth stage similar to the direct lending market a decade ago.
Figure 5
Secular decline of banks
As credit investors, durable income is at the core of everything we do. We have invested through a variety of market cycles and interest rate regimes, and regardless of where base rates have been, we have always sought to deliver a compelling yield premium.
As mentioned, this is a data-rich asset class with extensive performance history, which allows us to analyze asset performance in extreme scenarios such as the GFC or COVID. This helps us iterate and structure new investments defensively, with the goal of delivering consistent results even in stressed conditions.
This is one of our favorite questions to answer. Although we target a similar yield profile to direct lending, we believe ABF investments offer many differentiating attributes, making the two asset classes complementary.
For one, the underlying collateral and underwriting exercise is different than direct lending. Asset-based investments are secured by hard or financial assets that have contractual cash flows and residual value. When we lend against a pool of financial assets originated by a platform, we are focused on the asset risk, not the corporate risk.
Figure 6
Why asset-based investments?
In Blue Owl's view, the asset-based opportunity set is a sizeable and largely underpenetrated market with the potential to provide diversification within traditional private credit portfolios, attractive current income, and downside protection.
This information is being provided for illustrative/informational purposes only. Past performance is not a guarantee of future results. There can be no assurance that historical trends will continue. The views expressed are Blue Owl’s and subject to change. References to downside protection or similar language are not guarantees against loss of investment capital or value.
Another differentiator for asset-based investments is that the underlying collateral is often very short in duration. Consumer and small business credit assets typically have short weighted average lives of <2 years. Finally, asset-based investments feature amortizing cash flows, meaning principal is paid back along with interest, similar to a mortgage. This approach helps reduce risk throughout the term of the investment without relying on capital markets for exit liquidity.
Figure 7
Asset features
For illustrative purposes only. The depictions of corporate loan and ABF investments shown above are general and illustrative for discussion purposes only and are not indicative of the characteristics of all investments in these asset classes, which may vary substantially. There can be no guarantee or assurance that investments with self-amortizing features will be less risky or perform as underwritten. There can be no guarantee or assurance that investments with self-amortizing features will be profitable or avoid losses (which may be substantial).
These fundamental differences can make ABF a complement—a diversifier—to direct lending, and we believe this is reflected in correlation analyses which show that ABF provides a unique return stream. We are seeing investors incorporate ABF in their private credit portfolios alongside direct lending, and in some cases, they are substituting ABF for underperforming traditional fixed income strategies. Of course, these decisions depend on each investor’s risk tolerance and investment situation.
We believe these investments not only offer a diversifier but also have the potential for attractive returns because of the barriers to both source and understand these assets.
