Asset-Based Finance and the SME Market
A long-dated trend, accelerated during the COVID-19 pandemic, is the steady growth in credit demand from small-medium enterprise (SME) businesses across the globe. Coupled with asset-backed finance, as the lifeblood of day to day business operations, global investment firm KKR, a majority shareholder of Maia Financial, has identified lending to SMEs as one of its strategic investment imperatives. This niche market that is attaining significant scale – representing, together with consumer lending, around 30% of the total lending market in Asia/Australia – lacks support from traditional banking sources by virtue of regulatory factors that are increasingly constraining banks to narrower, commoditized lending opportunities, and underpinned by underwriting processes more suited to predictability and standardization. In this way, the widening capital supply/demand imbalance has created an opportunity for non-bank private capital to meet the borrowing needs of SMEs, and the diversity of those needs among them.
In parallel with the rise of credit demand from SMEs, the growing attractiveness of asset-based finance, as a channel for distribution of capital to market, lies in the specific features it offers to both lender and borrower: for the lender, super-senior priority in the capital structure by way of security collateral in the specific assets financed, while from the borrower’s perspective, the opportunity to derive balance sheet liquidity through financing new assets or through leveraging older assets by way of sale and leaseback. In addition, both lender and borrower may further refine the terms of the finance package by, say, lending at a lower loan to value (LTV) ratio, thus credit enhancing transactions with pricing implications that align a lender’s return requirements with an affordable cost of financing to the borrower.
Importantly, in a world where finance is increasingly adopting technology through ‘fintech’ innovation, in pursuit of new channel platforms that more quickly respond to demand for credit and in more bespoke ways through the rise of big data, the time is ripe for asset-based finance, as a ubiquitous capital solution, to rise to the challenge of our times to fuel business growth.