As fixed income markets continue to evolve, advisers are facing a common and growing challenge: how to deliver consistent income, manage downside risk, and diversify exposures, all while navigating an uncertain interest rate environment.
For many, traditional corporate credit has been the go-to solution.
But increasingly, advisers are looking beyond this to explore new ways to strengthen portfolio construction.
One area that is heavily utilised among institutional investors and is now becoming more accessible to sophisticated wealth clients is asset backed finance.
For advisers, it presents a compelling opportunity to broaden credit exposure, reduce correlation to traditional credit markets, introduce additional risk premiums, and access stable, real-economy-linked income streams.
So what exactly is asset backed finance, and how can advisers position it with clients?
What is asset backed finance?
At its core, asset backed finance is a form of private lending secured by pools of tangible or financial assets.
These might include residential mortgages, auto loans, aircraft leases, equipment financing, infrastructure receivables, or even recurring contractual cash flows.
Unlike corporate lending, which relies on a company’s ability to repay based on its earnings and balance sheet, asset backed finance is concerned only with the performance of the underlying assets. That means the loan isn’t backed by the solvency of a business, but by a predictable stream of repayments coming from real-world assets.
Put simply, you’re lending against the cash flows of the assets themselves, not the creditworthiness of a company. That shift changes everything, from how risk is assessed, to how returns are generated, and how portfolios behave through different market cycles.
Investors are also protected by structural features including credit enhancement, diversity of collateral, and subordination, designed to absorb losses before investor capital is impacted. This adds a layer of capital protection not always present in corporate loans, where recoveries depend on restructuring outcomes.
Asset backed finance typically involves senior secured lending, where each loan is backed by tangible or
contractual assets. Collateral types can include consumer finance, residential mortgage loans, commercial real estate, hard assets and financial assets.
Why is asset backed finance worth considering now?
We’re at an inflection point in the credit cycle. As central banks slowly pivot from tightening to easing, advisers are increasingly grappling with reinvestment risk. Term deposits are rolling over at lower rates.
Floating rate credit is offering less yield than it did 12 months ago. Meanwhile, credit spreads are tight, and
the “easy money” in credit may be behind us. Against this backdrop, clients are looking for solutions that still deliver income but also offer capital resilience and flexibility.
This is where asset backed finance can play a meaningful role. It often delivers attractive income, but it does so with a very different risk and return profile to corporate credit. It’s less dependent on corporate solvency, and more reliant on broad-based cash flows tied to the real economy.
Further, many asset backed finance strategies are designed with the ability to include both fixed and floating rate exposures, providing more diversity and flexibility to manage the full interest rate cycle, while still preserving yield.
How does it fit into private credit portfolios?
In the Australian market, most private credit exposure is heavily skewed towards corporate lending, particularly to small and mid-market or property-linked borrowers. These exposures tend to cluster around a narrow set of economic risks including business defaults, balance sheet deterioration, and market-specific downturns.
Asset backed finance complements this by offering something fundamentally different.
First, it introduces diversified sources of income. Rather than relying on one borrower’s solvency, a diversified asset backed finance portfolio may be made up of thousands of individual loans or receivables, each contributing a small piece to the overall return. That diversification helps to reduce the impact of any single default.
Second, asset backed finance is typically senior secured. That means loans are backed by real collateral, be it property, vehicles, equipment, or contracts, and often benefit from structural protections such as credit enhancement, subordination (which provides a hierarchy of protection), or over-collateralisation (which provides an additional buffer). These mechanisms are designed to absorb losses before investor capital is impacted. Put simply, these structural protections provide a built-in layer of protection that helps improve the credit quality of an investment.
Third, it gives clients exposure to parts of the economy not easily accessed through public or corporate debt markets. Think of sectors like housing, transport, consumer finance, or trade infrastructure. These cash flows tend to be more stable and less cyclical than corporate earnings, particularly in times of market stress.
Relative to private corporate debt, asset backed finance portfolios can offer superior credit quality (much of the market is investment grade) with similar returns and enhanced liquidity (deep public and secondary markets for asset backed finance securities exist). The incremental yield that asset backed finance can achieve is largely attributable to the complexity involved in the securitisation process and evaluating these structures. For investors that are able to access this complexity premium, it can bring attractive diversification and return enhancement to portfolios.
A word on risk and structure
Understandably, some clients may hear the term “asset backed” and think back to the GFC. But it’s important to stress that the asset backed finance market of today is a world apart from the pre-2008 era.
Since the GFC, regulation and oversight have fundamentally reshaped this part of the market. Underwriting standards are more conservative. Transparency has improved. Complex, opaque structures have been replaced with simpler, investor-friendly designs. Importantly, most institutional asset backed finance exposures today sit in senior (investment grade or equivalent), well-collateralised positions, rather than the high-risk equity tranches that caused problems in the past.
And the investor base has changed. Institutions such as pension funds and insurance companies now dominate asset backed finance markets, making very long-term investments in the sector and bringing with them a greater focus on credit quality, risk management, and capital preservation.
So how should advisers approach the conversation?
For clients seeking yield, stability, and diversification, especially those already allocated to high yield corporate credit, asset backed finance is worth introducing as a complementary strategy. It allows advisers to shift the conversation beyond company default risk and towards structural protections, income resilience, and exposure to real assets.
The key is to keep the explanation simple and relatable. For example: “Rather than lending to companies, this approach lends to pools of assets like mortgages or leases, where returns are driven by stable contractual cash flows, and your investment is secured by real assets, not a company balance sheet.”
It’s also important to frame asset backed finance as a long-term, income-oriented investment. While it is generally illiquid, the trade-off for this is greater control, security, and yield potential, especially when managed by experienced institutional platforms.
Challenging the old playbook
Asset backed finance is not a replacement for corporate credit, but an addition to help diversify client portfolios. It can bring a different set of risk drivers, more granular diversification, and meaningful protections in a market that continues to challenge traditional income strategies.
For advisers, it’s an opportunity to introduce clients to a more evolved way of thinking about private credit,
one that aligns with today’s environment and helps prepare for whatever comes next.
As the credit landscape evolves, reassessing long-held assumptions about fixed income can help ensure
portfolios remain well-positioned for the road ahead. Asset backed finance represents one way to add depth
and diversification to this process.
Luke Mandekic is co-head of distribution at Channel Capital.
