Exploring asset-based lending and specialty finance with Stephen Hull, Zerobridge Partners

7-8 May we're launching SuperReturn Private Credit Asia in Hong Kong as part of the SuperReturn Private Credit series, that aims to bring together private credit professionals at the private credit hotspots across the world. Ahead of the event we spoke to Stephen Hull, Partner, Chief Operating Officer, Zerobridge, about one of the hottest topics in private credit: Asset-backed lending. Read our conversation below to learn more about the next big area of lending.

Asset-backed lending is being described as the next frontier in private markets: What do you think has contributed to this growth?

Asset-Based Lending (ABL) is gaining significant traction among private debt investors. According to Preqin[1], ABL is identified as one of the top emerging private debt fund opportunities for the next 12 months, with 57.5% of surveyed investors expressing interest in it. In fact, in North America, 77% of established private credit managers engage in ABL and five funds launched in 2024 alone.[2] We believe this growth in popularity is likely due to its increased utility for both borrowers and investors.

For borrowers, ABL monetises assets for liquidity that can be crucial for operational needs, growth opportunities, or project completion, focusing on the value of the collateral rather than cash flow lending. For instance, our ABL strategy focuses on independent film production companies that require debt financing to complete the capital stack for their movie projects. The collateral here is primarily comprised of distribution contracts, production incentives, rebates, and tax credits, which get paid out at completion and delivery of the project. For other ABL strategies[3], the collateral may be balance sheet items such as receivables, IP assets, other inventory or equipment. It’s a very flexible form of finance compared to what banks or traditional cash-flow-based direct lending can offer.

Scalability is another attractive factor for borrowers. As a business grows and its asset base expands, the borrowing capacity under an ABL arrangement can increase proportionally. This scalability supports ongoing growth and operational needs, enabling repeat borrowing and benefiting both parties in the long term. Again, using our Film and Media ABL strategy as an example, we often begin working with a producer when their requirements are below the typical US$5 million bank threshold. The initial loan, which can be either an asset-backed loan or a bridge loan, is typically the first step on the journey to a multi-year, multi-transactional customer relationship with different collateral types.

Finally, while ABL can be more expensive than conventional loans due to origination and collateral assessment fees, it often offers lower interest rates compared to unsecured loans, making it a cost-effective option for many businesses.

For investors, ABL strategies can offer a compelling combination of security and yield[4]. By leveraging tangible assets, these strategies provide robust downside protection while targeting high-teen IRRs. In the case of a strategy like ours, the loan tenors are relatively short, ranging from 90 days to around 18 months, so there is reasonable internal liquidity. This profile can offer both return enhancement and diversification as a complement to more conventional private credit strategies such as US direct lending, which tend to be longer tenor, based more on cash flow metrics and show risks of being overly concentrated on certain industries. According to JP Morgan and KBRA, more than one third of loans are issued to software and healthcare companies.[5]

Given the current volatile conditions in capital markets, ABL financing is gaining popularity as investors seek more defensive and stable returns[6]. The ability to leverage tangible assets as collateral provides a layer of protection that is highly attractive in today's economic environment. Asset values, while they may fluctuate over time, are generally less volatile than corporate cash flows. Additionally, many ABL strategies focus on sectors that historically present low correlation with the broader economic cycle. Using content production finance as an example, the movie industry has demonstrated cyclical resilience for almost a century.

What are the key trends shaping the asset-based lending market in Asia in particular?

I want to note that, as a firm, we view ABL and specialty finance from a global perspective. Our vision is to build out a series of funds on our platform that capture compelling specialty lending opportunities across a range of countries, sectors and themes. The first fund out of the blocks is a Film & Media ABL strategy, partnering with Los Angeles’ leading institutional-quality media specialty lender, Sherborne Media[7]. The borrowers are predominately in the US and other developed Anglophone markets, with a maximum of 20% allowed to be allocated to emerging film production markets, predominately the Middle East. There is no Asian angle at all, except that Zerobridge is based in Hong Kong, although there is no reason why we would not invest in Asia-Pacific productions in the future.

Moreover, we see numerous other opportunities for ABL in the Asia-Pacific region, driven by structural themes such as the energy transition, FinTech, supply chain resilience, and changing demographics. Many South and Southeast Asian countries are blessed with young populations, and some may benefit from an increased focus on “friendshoring” and “China plus one” changes to supply chain management globally and regionally. By contrast, populations in North Asian economies are ageing rapidly, which drives a regional focus on healthcare innovation. To the south of the region lies Australia, a significant player in many of these themes, particularly in energy transition and life sciences.

How do the opportunities vary across different regions in both Asia and the EU? How and where can LPs find the hidden gems?

As mentioned, Zerobridge see ABL as a global opportunity set, and compelling strategies can be identified across all regions. It’s a case of knowing where to look and who to partner with.

Our advice to LPs is to reconsider their global allocation strategy. Instead of constructing credit portfolios along the lines of regional buckets, they should approach the ABL opportunity from the perspective of compelling sectors, themes and strategies.

There is also an opportunity to examine emerging managers more closely. This is an area that has been neglected in the post-COVID direct lending space. Direct lending has entered an era of increasing scale and consolidation, as ever larger flows are accruing to fewer managers in the US, Europe, and, increasingly, in the Asia-Pacific region[8]. The good news for LPs is that this trend forces fees down; the most prominent players' rate cards for US direct lending are fast approaching levels more commonly associated with active fixed-income mandates. However, larger deals, standardisation and an increasing focus on asset gathering can also mean that alpha gets left on the table.

Emerging managers offering ABL and other specialty finance strategies have an opportunity to stand out[9]. Many such strategies are capital-constrained, and as a result, their target fund sizes are much smaller. In turn, ABL and other specialty finance strategies can achieve more resilient and sustainable levels of return, which are lowly correlated with the corporate cash flows that support direct lending. Smaller, niche strategies are difficult for LPs to access, and there is currently a lack of institutionally sized managers. If LPs want to access these strategies, they should look for emerging managers, even first-time funds.

Given the role of leverage in asset-backed lending, how are LPs and GPs thinking about underwriting standards to balance the risk/return profile?

At a basic level, underwriting standards for ABL are not significantly different from those for other forms of private credit investing and in many cases the valuation methodology and lending value given to types of collateral allow for more granular risk profiling.

The accurate and conservative valuation of collateral is crucial. LPs and GPs should ensure that the assets backing the loans are appropriately appraised and that their value is regularly monitored. The value of collateral can fluctuate in response to market conditions, which in turn affects the borrower’s credit capacity.

Maintaining appropriate leverage ratios is crucial for mitigating risk. This involves setting limits on the amount of debt relative to the value of the collateral, ensuring a sufficient buffer to cover delays or potential losses. As in other forms of private credit, strong loan covenants are essential, with a focus on maintaining stable levels of liquidity, loan-to-value ratio, and the collateral turnover rate.

In the case of our film and media lending strategy, in addition to collateral analysis, our due diligence and underwriting will focus on the project’s overall budget and finance plan, human capital risk evaluation, completion bond issuance and a detailed legal and contract review of the chain of title, talent deals, sales contracts, producer contracts, fee deferral arrangements and the many insurance policies that will be written against the production. Bridge loans, which are event-driven, will involve similar evaluations, along with a close examination of the permanent project finance being put in place via bank loans and equity investment.

This is a highly specialised industry, and few LPs will have the resources or prior experience to access these deals independently. Other ABL strategies are similarly specialised. It may make sense for many limited partners (LPs) to adopt a delegated portfolio approach to ABL investing, whereby they mandate a fund of funds or private markets solutions manager to research and construct a diversified portfolio of ABL strategies. This portfolio can then be added to their overall private credit investment program[10].

What are you most excited about for the upcoming SuperReturn Private Credit Asia?

As a long-term resident of Hong Kong, I’m delighted to welcome SuperReturn back to our city. Hong Kong retains the largest pool of private credit firms and talent in the region, and I'm excited to meet peers from across Asia and the globe, as well as numerous limited partners who are hopefully interested in what we are doing at Zerobridge.

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