The US consumer sector and residential housing are areas where asset backed lenders are finding a sweet spot, Brad Bauer, partner and deputy chief investment officer with Varde Partners has told Investment Magazine’s Fixed Income & Credit forum.

Particularly in the US housing market where there is a lot of under supply with home builders adopting a “balance sheet light” operating model and with the development market stalled, alternative lenders are using direct relationships with home builders in local markets to finance development, Bauer said.

“In consumer and housing in particular, you really need to be part of the fabric of those markets. In consumer it is direct sourcing with the underlying platforms, with housing, it’s knowing those builders and doing bilateral deals,” he said.

In the consumer segment Bauer points to student loans, and other discretionary purchases such as cars and jet skis that have increased in demand since the COVID lockdowns.

It’s through these kinds of specialty finance arrangements Varde is able to originate loans in the prime or near prime categories, a credit quality he’s happy to play in.

But even within these prime and near prime categories, the impact of COVID and the shutdown of economies is still not clear.

“It’s been hard to say what the effect of COVID is with the level of intervention, payment to end consumers and you’ve seen a spike in savings rates, spending has been low,” Bauer says. “Overlay that with loan moratorium and you don’t really know how that’s going to flow through.”

Asset backed or sometimes known as asset market lending has begun to find its place in superannuation fund portfolios, according to Bauer, who has noticed LPs now allocating directly to the asset class segment, “not just off the corner of a credit strategy.”

“Two years ago no one talked about asset based or asset backed lending, now you’re parts of direct lending and opportunistic credit being carved off for this,” Bauer said. He pointed out the strong connection asset backed lending has with Fixed Income portfolios based on the deep appreciation of the underlying asset.

Outside of consumer and home lending, Bauer points to Asia where there is a lack of capital markets and lack of industry players with scale as a place private credit markets get bigger and demand a place in portfolios.

Further, Bauer highlighted commercial real estate as an industry segment likely to provide opportunities for asset backed lenders as a result of the dislocation occurring within disrupted areas such as commercial real estate and mortgage REITs.

Smith is head of content and managing editor of Professional Planner and Investment Magazine.
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