Last year, the Future Fund grew its ABF risk exposures after carefully assessing the landscape. Karen May Lam explains the reasoning behind this decision and discusses how ABF can lower risk in the overall private credit portfolio.
After careful research into the asset-based finance (ABF) market, the Future Fund has decided to take a multi-strategy approach to the sector, allowing its managers to invest in relative-value opportunities across assets and make use of the broad set of instruments available to them.
“At the Future Fund, I would say we’re early movers to private credit. So, we’ve been investing in direct lending, distressed and special situations since 2008. And we’ve opportunistically invested in ABF deals with existing partnerships over time,” Karen May Lam, Investment Manager, Credit at the Future Fund, said at the [i3] Credit Forum 2025 in Sydney in early June.
“The beauty of ABF is that it is a very fragmented asset class with many niche markets to generate a broad range of risk/return profiles. Returns can range from high single digits to mid-teen returns, depending on where you invest across the capital stack and across the ratings spectrum.”
Last year, Lam conducted a research project on ABF for the fund to understand the evolution of the market, the global manager universe and the product types available.
“After understanding the universe and engaging with my portfolio strategy colleagues, we recommended to our investment committee to initially grow our ABF exposure via a multi-strategy approach,” she said.
“We believe that alpha can be generated by investment managers applying a relative-value lens to pivot across opportunity sets as risk premiums evolve over time.”
We believe that alpha can be generated by investment managers applying a relative value lens to pivot across opportunity sets as risk premiums evolve over time
The Future Fund doesn’t have a set strategic asset allocation and doesn’t follow a core-satellite approach in its credit portfolio. This means the fund has more or less a blank sheet of paper to decide what role private credit as an asset class will play in the portfolio.
In 2010, the fund identified direct lending as a good opportunity, but it needed to decide whether to allocate to United States or European direct lending.
“We decided to grow our direct lending book with European direct lending because we saw it was less competed, the opportunity set was quite attractive and, over time, we added US direct lending opportunistically,” Lam says.
“We saw the same phenomenon appear in Australian direct lending in 2015 and appropriately sized the opportunity within the portfolio. ABF was invested in opportunistically because the market wasn’t necessarily big enough in private credit markets until the last few years,” she said.
The Future Fund hasn’t published its overall allocation to ABF, but it has been reported that, as of 31 March 2025, the fund had a 9.3 per cent allocation to credit, which included private credit as its largest exposure.
ABF Helps Mitigating Risk in Private Credit Portfolio
The ABF market globally has grown rapidly in recent years, but the concept behind it has been around for some time.
Modern forms of securitisation found their genesis in the US mortgage industry, where in 1970 the Government National Mortgage Association introduced government-insured securities, in which the principal and interest payments were passed from borrowers to investors who purchased bonds on 30-year single-family mortgages.
It wasn’t until the mid-1980s that these securitisation techniques were applied to non-mortgage assets that involved predictable cash flows, including auto loans and equipment leases. Not long after, banks developed structures to normalise the cash flows of credit card receivables and the first credit card asset-backed securities were born.
The asset-backed securities market increased dramatically from 1996, when the value of outstanding securities was US$404.8 billion, to 2008, when the value of outstanding securities reached US$2.7 trillion, according to figures from the Federal Reserve Bank of Chicago.
The global financial crisis and subsequent introduction of tighter regulations for banks under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the requirements under Basel III and IV meant securitisation was no longer attractive for banks and much of the securitisation activity moved to the private credit sector.
More recently, the US regional banking crisis of 2023 further added to the move away from traditional bank lending as these regional banks were shedding assets and pulled back from new loans in the wake of the turmoil.
The Future Fund segments the current ABF universe into four sub-markets. The biggest sub-market is residential and commercial mortgages, followed by consumer and commercial financing, which can include asset types such as auto loans, credit card receivables and student loans.
The third sub-market consists of hard assets and this can include transportation assets, such as rail and aviation, or even digital infrastructure assets, including data centres.
Relative to other private credit strategies, ABF is an asset class where you could earn a premium without necessarily taking additional risk. For the same credit rating versus a single entity corporate credit deal, you can earn a complexity premium in an ABF deal
Finally, there is the contractual cash-flow market, which includes collateralised loan obligations and significant risk transfer instruments, as well as more niche assets, such as film distribution rights.
ABF transactions are attractive to the fund because they help lower risk in the private credit portfolio. Not only do they diversify away from corporate risk, but often these structures allow investors to earn an additional premium, Lam says.
“Relative to other private credit strategies, ABF is an asset class where you could earn a premium without necessarily taking additional risk. For the same credit rating versus a single entity corporate credit deal, you can earn a complexity premium in an ABF deal,” she said.
ABF transactions also tend to lower risk by paying back not only interest coupons from the start, but also repayments on the principal amount that was borrowed.
“ABF deals generally feature front-loaded amortising cash-flow profiles. By that I mean ABF deals start collecting coupon interest payments and varying principal repayments from day one. This is in contrast to a direct lending deal, where you’re getting interest payments throughout and the full principal payment at maturity,” Lam said.
ABF can be a mixture of fixed and floating-rate profiles, whereby the hard asset the deal is secured against tends to rise in value with inflation.
“So in a sense, you are getting additional protection against inflation from ABF. Whereas for direct lending, you’re only getting that inflation protection from the floating base rate,” Lam said.
Although the Future Fund currently invests in multi-strategy ABF only, Lam kept the door open to future single-strategy allocations.
“I’m not saying that we won’t graduate a single ABF market. We have and will be doing more work to understand whether there are certain ABF markets worth graduating in the future,” she said.
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