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The impact of technology on asset based lending



What is Asset Based Lending?

Asset based lending (ABL) provides the borrower with a revolving credit facility secured against its balance sheet assets. These assets range from working capital assets, to inventory and tangible fixed assets such as plant and machinery and property.

ABL is used in a wide range of situations such as financing for asset rich companies where a transaction or event requires leverage in the business or to finance growth companies that need a significant investment in working capital and equipment to expand.


Brief Historic Overview

About 25 years ago, the majority of ABL lenders focused on lending on a portion of accounts receivable, inventory and perhaps some equipment and real estate. As a consequence, companies that traditionally had large amounts of accounts receivables and inventory, could meet their financing needs regardless of the operational environment.

Although lending against a collateral of assets has been around for a long time, hedge funds entered the space only about 20 years ago, as institutional players started to screen for new opportunities that provided an attractive level of return. After the dot.com crash in the early 2000s, consistent yields in the range of 8-12% appeared to be very attractive.

The aftermath of the Financial Crisis led to an initial pause in the evolution of the ABL market. However, along with the recovery of global economic conditions, the ABL market started to experience a newfound growth and has been on a strong foothold ever since.


Technology Challenges in the ABL Market

The impact of technology on the ABL market is poised to further increase in the upcoming years. To see this, one has to keep in mind that financing inventory is one of the key traits of asset based lending. In the past years, companies’ focus towards lean manufacturing, smart distribution and the shared economy has started to revolutionize fast moving inventory. On top of that, the uprise of sophisticated tools powered by artificial intelligence has given companies the means to optimize their operations and their working capital needs.

In the past 20 years, the typical equipment of a factory has increasingly shifted from tangible materials, such as steel and metals, towards software and robots. The latter may now account for a staggering 50% of the total capital expenditures. This raises several questions about IP related matters to consider for ABL related matters.

On top of this, smart distribution will also impact the asset-based lending industry in the years ahead. In particular autonomous vehicles, such as autonomous trucks are expected to displace two million truck drivers in the next decade. Subsequently, the balance sheets of trucking companies may be strengthened, while staffing companies currently financed by asset based lenders may see a negative impact.


In conclusion, we expect significant impacts from technology on the ABL market in the years ahead. We believe that careful selection in niche segments with high barriers to entry will be of crucial importance for investors looking to invest in the space. Examples of segments we like include container ships, trucks and agricultural machinery.



Sources:

www.privatedebtinvestor.com, Specialty Finance Niche to Know

Financial Times, The asset-based lending industry after the disaster

The Secured Lender, State of the ABL Market

ABFJournal, Opportunities and Challenges: Asset Based Lending in 2018

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