The global structured finance and asset-backed securities (ABS) market is changing rapidly, driven by new financial regulation, technological innovation, and evolving investor risk appetite. These changes have generated fresh opportunities for capital flow, and keeping abreast of them is critical for structured finance market participants.
What is structured finance and ABS?
Structured finance is the practice of pooling diverse assets and transforming them into tradable securities. Asset-backed securities (ABS) are a subset of securities collateralised by an underlying pool of income-generating assets, such as loans or credit card receivables. ABS exposes investors to diversified portfolios while freeing up more capital for lenders, providing a viable alternative to other debt instruments.
In this article, we’ll dive into three key trends shaping the future of global structured finance and ABS. We’ll also explore how structured finance market participants can capitalise on the long-term impact of these trends into the future.
#1: ESG investing and sustainable finance in ABS
While securitisation is traditionally linked to assets such as mortgages and credit card debt, companies are increasingly exploring structured finance to generate positive social and environmental impact. Green ABS attracts investors not only because of its environmental, social and governance (ESG)-related virtues but also because of its flexibility, which allows for easy adaptation to impact-driven projects.
While sustainable finance and ABS are naturally compatible, many asset-backed issuers are small, privately held companies that aren’t yet familiar with the robust reporting requirements for ESG investing. This is starting to change, as sustainability-related disclosures help attract a larger investor base and lower the cost of capital.
#2: Digital transformation and innovation
Fintech companies also drive digital transformation and innovation in global structured finance through AI, machine learning, and automated systems. These digital tools can analyse vast pools of data, enabling better credit risk management and improved decision-making.
Innovations in fintech are optimising loan servicing, making it possible to deliver more efficient service and enhancing portfolio performance. With faster reactions to structured finance market conditions and workflows that can execute transactions automatically based on predefined rules, asset allocation can stay optimised in real time.
Blockchain in finance is also having an impact through the tokenisation of assets. Tokenisation is the process of issuing a blockchain security token that digitally represents a real-world asset, such as a company share or participation in an investment fund. These tokens are actively traded on secondary markets, exposing more investors to structured finance and unlocking potential trillions in market liquidity.
#3: The rise of private credit
The rise of private credit is another key trend in the ABS market. As banks have scaled back lending in the face of stricter capital requirements from regulators, private credit has stepped in to fill the gap. Unregulated special-purpose vehicles such as collateralised loan obligations (CLOs)—often used by private equity firms for leveraged buyouts or private credit firms for management of sizeable pools of loans —are the primary debt structure used for this asset class.
This growth trajectory is expected to continue, offering investors access to a broader range of asset classes and the potential for outsized returns. As large financing gaps continue to emerge, investors can fill the void as providers of debt capital or as buyers of loan portfolio assets.
The long-term impact of current trends in structured finance
Trends currently shaping ABS market forecasts—which will continue to have downstream impacts well into the future—include:
- Regulatory compliance: Regulatory scrutiny will increase as the industry grows, requiring structured finance teams to stay on top of evolving post-crisis regulations. Risk management in general—and risk retention thresholds in particular—will remain a regulatory focal point
- New asset classes: Renewable energy, digital assets, and infrastructure will continue to drive new investment strategies and financial innovation throughout the ABS space
- Evolving tech: Structured finance will see streamlined processes, enhanced efficiency, and lower costs as tech-driven automation improves. The shift toward increasingly sophisticated digital tools will require improved data security and governance to ensure high data accuracy and adequate protection
- Portfolio servicing: High-quality loan portfolio servicing is vital for maximising returns and mitigating risk, including seamless onboarding, communication and investor reporting
As these market trends continue to shape the industry, they are continually carving out new opportunities for market players on all sides. Staying ahead of these and other developments as they unfold is critical for capitalising on the ample opportunities in the sector.
