The borrower can request as little or as much capital, depending on what their needs are at any given time. Asset-based loans are agreements that secure the loan via collateral, like equipment or property owned by the borrower. SouthStar Capital. In many ways, ABFs credit solutions are everywhere, often operating behind the scenes to make the mundane transaction we often take for granted possible. The opportunity fits within our investment theme focused on demographic trends, including the aging U.S. population. Asset-based lending, also known as asset-backed finance, ABL lending or an asset-based loan, provides your small or medium-sized business with fast, flexible financing to optimize cash flow, avoid draining savings accounts and effectively manage critical transitions. Given the businesss capital intensive nature, KKR was able to support the company through additional capital investments in different forms (e.g., term loans, secondary equity raise, private REITs) at each stage of its growth over multiple years. Investment Approach: To harness the opportunity set in a meaningful way, KKR recognized the need for a captive aircraft servicing platform. Control your cost of capital by only using our ABL services when needed, More access to capital than a traditional line of credit. Two examples of KKR investments in this segment include financing used vehicles in the United Kingdom and making residential mortgage bridge loans predominantly in the U.S. Market Opportunity: Capture the outsized returns available in the U.K.s used vehicle-lending market relative to those available in other developed markets by improving the delivery of loans to the end purchasers/borrowers, generating average interest in the mid-teens vs. high single-digits charged elsewhere (e.g. Portfolio Acquisitions: Portfolio acquisitions involve the direct acquisition of or investment in a portfolio of income-generating assets. The views expressed reflect the current views of the Private Credit Team as of the date hereof and neither the Private Credit Team nor KKR undertakes to advise you of any changes in the views expressed herein. By clicking Accept All Cookies, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. However, banks retreat over the past decade has had an equally profound impact on non-corporate activity, a segment that comprises a far larger portion of the global capital markets and real economy. Accords asset-based lending is ideal for a wide variety of industries across the United States and Canada. Investments backed by cash flow producing assets such as intellectual property, royalty streams and customized financial contracts fall within this eclectic segment. Up to 90% of eligible Accounts Receivable, Credit reviews for new and existing account debtors, Receivables support allows you to focus on your core business. In contrast to unsecured loans, such as a personal loan, secured loans, such as ABL financing or home equity financing, provide borrowers access to larger capital flows. The information in this presentation may contain projections or other forward-looking statements (which can be identified by the use of forward-looking terminology such as, but not limited to, "may," "will," "should," "seek," "expect," "target," "intend," "estimate," "believe," or other variations thereon or comparable terminology) regarding future events, targets or expectations regarding the Funds or the strategies described herein, and is only current as of the date indicated. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. After the orders are filled, the company would invoice its customer for the balance due. KKR and its affiliates may have positions or engage in securities transactions that are not consistent with the information and views expressed in this material. 2022 Crestmark , a division of MetaBank, N.A. Market Opportunity: European and Asian banks are still estimated to have approximately $65010 billion and $64011 billion, respectively, of NPLs languishing on their balance sheets, even 12 years after the Financial Crisis. This allows your company to turn its assets into working capital and access flexible funding quickly. An example of asset-based finance would be purchase order financing; this may be attractive to a company that has stretched its credit limits with vendors and has reached its lending capacity at the bank. 2 Sources: Global Direct Lending Preqin. Timothy Li is a consultant, accountant, and finance manager with an MBA from USC and over 15 years of corporate finance experience. SouthStar Capital will establish a revolving line of credit (revolver) to maximize the availability of working capital from the companys asset base. Private Credit today is most commonly associated with directly originated and negotiated senior and subordinated corporate lending, i.e., Direct Lending and Corporate Mezzanine Debt. Learn about Live Oaks asset-based lending solutions and how they work for your business. Unlike certain types of structured financial products, with an asset-based lending relationship, you do not have to give up equity in your company. If your business is growing rapidly, youve hit a bump in the road or you just need cash to bridge a longer production or collection cycle, asset-based lending could be ideal for your business. It can increase or decrease based on your current business size and needs, and youll have daily and weekly access to your line of credit when you request it. Europe The continent appears poised to see the greatest growth rate with the ABF footprint expected to more than double in coming years as banks become subject to new regulations (e.g., Basel IV, IFRS 9) and required treatment of NPLs by the European Central Bank (ECB) which will add further capital pressure. Certain information contained herein (including forward-looking statements, economic and market information and issuer or portfolio investment data) has been obtained from published sources prepared by other parties (or in some cases obtained from companies that KKR Credit Advisors or their affiliates have advised or invested in) and in certain cases has not been updated through the date hereof. As a result, this ABF segment is a natural opportunity set for non-bank lenders. The views expressed in this material are the personal views of the Private Credit Team of Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, "KKR") and do not necessarily reflect the views of KKR itself. The financing is used to fund the growth of a pool of assets or servicing of a static pool of assets. A value is given to each asset, and a percentage of the value of the asset is made available to the borrower as a line of credit. Asset-based loans leverage your valuable assets to help fuel your growth or sustain your business during difficult times. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Unlike corporate credit, which is typically dependent on the performance and enterprise value of a single borrower, cash flow performance of large, diversified pools of underlying hard and financial assets drive ABF returns. We identified this trend early on and sought to tap the huge lending market supporting this industry. You know the value of your companys assets. Which Creditors Are Paid First in a Liquidation? Market Opportunity: Regulatory Capital trades (or Capital Relief trades) are typically defined as synthetic securitizations through which banks transfer the risk of a reference pool of credit exposures to non-bank investors. During due diligence, asset-based lenders will work with you to study your needs and your business plan, and, in particular, take a deeper look at the specific assets that you want to leverage in order to access additional working capital. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida. They are the backbone of your business, ensuring your ability to consistently produce and deliver. Typically, asset-based lending rates are based on the type of asset available as collateral, the level of risk and the financial performance of your business. The ABF market grew to an estimated $3.1 trillion in this period. Sources include IHS Markit, data for NACE Rev.2 Division 77 Rental and leasing activities.. When it comes to providing an asset-based loan, lenders prefer companies with not only strong assets but also well-balanced accounts. Often, companies that implement ABL have cash flow problems, many of which stem from rapid growth. Thanks for listening to me and understanding my individual needs!, Ron, President and CEO of an Engineering Firm. Daniel Houde, Director of Finance, Creative Mines, LLC, Crestmark, the Commercial Finance Division of MetaBank, Provides More Than $49.5 Million in Commercial Financing to 94 Businesses in May, Crestmark, the Commercial Finance Division of MetaBank, Provides More Than $26.8 Million in Commercial Financing to 43 Businesses in the Second Half of April, Crestmark, the Commercial Finance Division of MetaBank, Provides More Than $101.7 Million in Commercial Financing to 142 Businesses in Late March and Early April, Crestmark, the Commercial Finance division of MetaBank, Welcomes Richard Flamang and Ralph Aurelia to the Commercial Lending Development Team, MetaBank Announces Name Change to Pathward. Live Oak Bank can support your business with asset-based lending, allowing you to successfully operate during rapid growth or unpredictable times. 9 Source: Attom Data Solutions, 2019 year end report and KKR Estimates. We have ownership in debt servicing platforms across Europe and Asia we leverage to source and then service these investments post-acquisition. Of the total fleet, 41%, or $360 billion, were on operating leases in 2018. Timothy has helped provide CEOs and CFOs with deep-dive analytics, providing beautiful stories behind the numbers, graphs, and financial models. Slow Receivables Turnover and Bad Debt Loss, Up to 90% of approved accounts receivable, Up to 90% of the net realizable value of inventory, equipment and real estate, Up to 75% of the cost of inventory that is pre-sold to approved customers. Information regarding the Drawbridge Fund accessed through the KKR Investor Portal is confidential and intended for Drawbridge Fund investors only. It also includes financing secured against financial contracts typically in the insurance and asset servicing sectors, where KKR Credit has made an investment. This allows a company to immediately access the working capital available in their assets, such as Accounts Receivable, Equipment and Inventory. Physical assets, like machinery, property, or even inventory, may be less desirable for lenders. No person should rely upon the past performance or reputation of KKR or its investment products when considering any security offered by the Drawbridge Fund or Drawbridge. It is essentially any loan to a company that is secured by one of the company's assets. However, it is within the secured SME lending segment, with security over specific assets such as inventory, equipment, receivables or real estate, where we find most value. Inventory financing is a revolving line of credit or a short-term loan used primarily by small to medium-sized retail businesses to buy stock. Live Oak Banks asset-based lending solutions offer increased borrowing availability against your working capital assets. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. We Can Help. These consumers are from all age groups (but concentrated in Millennials and Generation X) who seek to rent or share major assets (e.g., cars and homes) rather than own them, preferring to spend their income on experiences v.s. The line of credit is then paid down overtime by collecting on inventory and outstanding receivables. The spread of COVID-19 and government-imposed restrictions have created unprecedented near-term uncertainty in the aviation market. Private Credit has and will continue to be a natural buyer for these assets, likely in the form of straight asset acquisitions or more bespoke structured solutions agreed on a bilateral basis. The KKR vehicles primary strategy is purchasing policies with a hold-to-maturity objective and opportunistically purchasing and trading policies in the tertiary market. Market Opportunity: Aviation leasing is a quintessential example of a segment where there is a scalable deployment opportunity but high barriers to entry. The disadvantage of this type of financing, however, is the interest typically charged, which can be as high as prime plus 10%. Our experienced team will work with your business to optimize availability and affordability with the right ABL product. Regions where housing market fundamentals are positive and yet pockets of demand-supply imbalance exist are interesting investment opportunities. 15 Source: PwC transaction due diligence report, February 2019. The inability to finance raw materials to fill all orders would leave a company operating under capacity and could put the company at risk for closure. 8 Past performance is not an indication of future results. Over the next two to three years, these banks will face increasing pressure to find new homes for these assets driven in part by increased regulatory focus (European Central Bank in particular) on the health of the wider banking system and the impact of new regulations, such as Basel IV, on bank capital models12. 8 Unusual Ways Businesses Can Borrow Money, How Second-Lien Debt Affects Borrowers and Lenders, The Inner Workings of Asset-Based Lending. To identify and assess ABF investment themes and their related opportunity sets, KKR leverages the intelligence and data gathered from around the Firm, including more than one hundred private equity portfolio companies and one thousand traded credit holdings, in areas such as global macro-economics, demographic and industrial trends, and new technology. Asset-based funding is often used to pay for expenses when there are temporary gaps in a company's cash flows or the usual time lag in the cash collection cycle between buying raw materials until receiving cash for goods or services from customers, but it can also be used for startup company financing, refinancing existing loans, financing growth, mergers and acquisitions, and for management buy-outs (MBOs) and buy-ins (MBIs). Using our line of credit option, we provide a loan using your accounts receivable and/or inventory as collateral. Alternatively, we considered starting our own platform and gain portfolio control but face steep origination frictions. By continuing to browse this site, you agree that we may use cookies as discussed in our Privacy Policy. In addition, insurance carriers offer surprisingly low values to surrender policies. Source: Integer Advisors and KKR research estimates based on shadow banking data from the Financial Stability Board. Our highly experienced team works hard to understand your business and grow with youproviding support at each level of success. In Australia, non-banks, which have taken share from banks in recent years, should benefit from adoption of proposed Banking Royal Commission recommendations that would further clamp down on bank lending governance. Investment Approach: We have developed strong relationships with banks and advisors across Europe alongside a growing presence in Asia. Specialized strategy pursuing new and mispriced lending opportunities and opportunity to negotiate towards potential origination premiums, excess spreads, and equity upside of ownership in lending platforms. Result: Today, we have successfully executed our business plan to convert a disparate mix of loans into a homogenous, bank-financeable strategy by incentivizing our originator partners to adhere to our specific underwriting guidelines, loan documents, and best-in-class operational procedures. Pre-pandemic, the company originated approximately 60 million in loans each month up from around 35 million just 12 months ago and is about to implement additional tech-enabled distribution channels which should contribute to even greater growth in origination volume. As an investment strategy, Asset-Based Finance invests in directly originated assets that derive returns from recurring, often contractual, cash flows. We believe ABF is worth examining now as a strategy that can stand on its own merits, on absolute and relative bases, and has a long runway to deliver on a number of attractive characteristics, including: Fueled by a persistent and possibly widening global supply/demand imbalance for non-corporate credit and new technology-enabled innovations streamlining access to credit solutions. Asset Based Lending refers to a business loan secured by using a companys assets as collateral. Its crucial that you understand your financing options so you can land on the product that best suits your business and its capital needs. While such rights can create the predictable, long term cash flow streams attractive to banks, borrowers often struggle to obtain bank financing due to the non-standard nature of the assets (e.g. The creation of a platform is typically done in partnership with a deeply experienced management team with subject matter expertise in an industry. The data and information presented are for informational purposes only. Leveraging the team and tech-focused platform, the goal is to start disintermediating existing broker channels and providing a direct-to-consumer offering that substantially reduces cost of customer acquisition and delivers highly attractive product economics. Second-lien debt, also called junior debt, is subordinate to senior debt in the event of a bankruptcy or credit event. Whether your business is looking to maximize growth opportunities or manage a successful turnaround, asset-backed financial products provide maximum flexibility, especially in the following circumstances: Asset-based lending works just like a revolving loan, which means its available when you need it, and you can pay it down whenever you choose. Each has pros and cons. Market Opportunity: Following the U.S. housing crisis, the aging U.S. home stock induced many to purchase homes, perform refurbishments financed by a loan, and sell the improved stock for a profit. None of KKR Credit Advisors, the Funds, the general partner of the Funds or any of their respective affiliates or employees have updated any such information through the date hereof or undertaken any independent review of such information, nor have they made any representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of any of the information contained herein (including, but not limited to, information obtained from third- party sources) and they expressly disclaim any responsibility or liability therefore. Member FDIC. Prior to Live Oak, he worked as a senior field examiner at LCG Advisors. Still, the pace of growth will vary by region given different regulatory frameworks, GDP growth trajectories, and credit cultures. The information in this presentation is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. Intellectual property and royalty financing is particularly relevant in industries like Media and Healthcare. Jackson joined Live Oak Bank in 2018. Examples of our themes include the Digital Economy, Bank Capital Inefficiency, and the Aging Population6. Access to the benefits of (i) privately negotiated transactions where lenders often maintain an upper hand due to a less competitive market, (ii) investments backed by large diversified pools of hard and financial assets, (iii) short duration of many of the underlying loans. Through our research, we learned that more than ~$100 billion worth of insurance policies lapse each year with no financial benefit to policyholders.
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