Panel, Conference Presentation
The Evolving Landscape of Asset-Based Finance and Securities Products | Global Conference 2025
Milken InstituteTed Seides, Matt Miller, Jack Neumark, Madelaine O'Connell, Jason Steiner, Edwin Wilches
- Investors anticipate a strategic shift toward asset-based finance to diversify away from corporate credit risk, focusing on contractual cash flows and secured structures to capture illiquidity and complexity premiums rather than directional credit risk.
- Key growth areas include the consumer space and fund financing (GPLP solutions), with specific expectations for homeowner assets, including mortgages and consumer loans, to offer superior risk-adjusted returns in the near term.
- Market participants predict that prepayment dynamics will create a "double whammy" effect of prepayments in strong pools and rapid defaults in weak pools, necessitating rigorous scenario analysis and risk management.
- Compensation structures are expected to evolve as spreads tighten and markets become more efficient, forcing investors to pursue illiquid, value-add opportunities such as turn-down programs or litigation receivables.
- As capital from insurance, pensions, and retail flows into the sector, there is a projected risk of a widened credit box, lower underwriting standards, and diminished legal protections such as re-levering safeguards.
- FICO scores are viewed as artificially inflated post-COVID (shifting from 680 to 720–730), raising concerns that delinquency rates in subprime auto and other sectors may rise to pre-pandemic levels.
- While home prices are considered rich relative to income (similar to 2006 levels), low average Loan-to-Value ratios and strong equity positions among refinanced homeowners are expected to prevent a market collapse even in a downturn.
- The panel anticipates that the distinction between private and public credit will be fully resolved within the next couple of years, with convergence creating opportunities to originate assets previously limited to public securitized spaces.
- BlackRock and PIMCO plan to expand through strategic acquisition of originator platforms and by sourcing asset purchases from banks facing asset-liability mismatches, though BlackRock currently favors resource partnerships over ownership.
- The opportunity set in asset-based finance is projected to encompass nearly 100 subsectors, requiring significant team scale and technology infrastructure to prosecute effectively.
- Excess spreads in asset-based finance and private markets are expected to compress over time, potentially ranging from 150 to 300 basis points, as more capital chases available assets.
- In stagflationary or downturn scenarios, investors are advised to move up in credit quality and prioritize returns for liquidity and complexity, while noting that subprime segments may offer better risk-adjusted returns if yields (e.g., 99% APR) sufficiently compensate for potential losses.
- Market participants warn that the uncoupling of alignment between originators and lenders, where originators demand higher payments or less yield maintenance, poses a risk alongside the potential for reduced legal document enforcement.
- For asset classes allowing increased leverage as valuations rise, such as data centers, the traditional benefit of asset depreciation is expected to be removed, creating structural investment challenges.