Over the past decade, regulatory capital treatment has seen Authorised Deposit-taking Institutions or major Banks (ADIs) pull back from originating specialised asset-based loans, instead gaining exposure via asset-backed facilities secured by asset-based loans originated by non-bank lenders. Due to ADIs’ preference to invest only in large, mature facilities with a AAA rating, there is an inherent funding gap. This week we explore how specialised investment managers, such as the Aura Private Credit team, provide curated access for investors to this asset class via securitisation or asset-backed facilities.
The need for asset-based lending
Traditionally, Australian Small and Medium Sized Enterprises (SMEs’) access to debt capital was limited to banks. Due to the smaller loan sizes of SME credit and regulatory capital treatment introduced in 2010, SMEs were pushed towards homogenous term loans, secured by properties or in some cases, equipment. These debt arrangements were not appropriate for many SME borrowers, leading to a $213.5 billion funding gap, according to Judo Bank 1. What many may not realise, is that they are also not ideal for banks. See our article “A $9bn Opportunity for Non-bank SME Lenders” which outlines ADIs inability to fund SME loans secured by assets other than residential property, instead, predominantly lending to larger entities.
Frustratingly for Australian SMEs, many borrowers are not able or willing to post residential property (more often than not being the family home) as collateral. Instead, most SMEs have assets, or a category of assets available and which they are willing to post as collateral, which are marketable and ascertainable to retain collateral value over the course of loan terms, that are not recognised by the banks. This has led to the emergence of non-bank lenders who specialise in specific alternate security types filling the funding gap and enhancing Australian SMEs’ access to debt capital markets.
Types of asset based lending
Over the past decade, many alternate forms of assets have been made eligible for collateral by non-bank lenders. Some examples that the Aura Private Credit strategies hold exposure to include:
Asset backed lending: A wholesale investors curated access to asset based lending
While ADIs are unable to fund these loan types for reasons such as regulatory capital treatment and heavy fixed overhead costs, they still view the sector positively and instead choose to gain exposure to loans originated by non-bank lenders via asset backed or securitisation warehouses, effectively providing the funding to non-bank lenders to write these loan exposures. See our article “What happens if ADls invest in a tech-driven SME credit application process?” which outlines how ADIs invest alongside Private Credit Funds, such as those managed by the Aura Private Credit Investment Team, in these asset backed facilities.
Given the size and fixed costs of ADIs, banks tend not to invest in these facilities until a non-bank lender’s portfolio of SME loans reaches sufficient size, typically $50 million – $100 million and require a third-party investor to participate, in addition to equity contributions by the non-bank lender. This leaves a large funding gap for Private Credit Funds such as the Aura Private Credit Funds.
To gain a deeper understanding of the archetypal funding roadmap of asset-based non-bank lenders and where the Aura Private Credit Funds participate, see our article “Fintech & Non-bank Lenders: How to Finance a Loan Book”.
This funding gap has allowed an opportunity for investors to gain access to asset backed facilities, through Private Credit Funds, traditionally the domain of institutional investors. Investors benefit from specialised management teams, bankruptcy remote investment structures, third-party trustees and equity subordination provided by the non-bank lenders, absorbing initial losses in loan portfolios.