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KKR looks to boost private credit bets in asset-based financing

[TORONTO] KKR & Co is looking to grow its asset-based private lending business to capitalise on a retreat by banks and more traditional market participants in the wake of the coronavirus pandemic that has led to mis-priced risk.

Loans in the roughly US$4.5 trillion private asset-based finance market can be secured by collateral ranging from homes and vehicles to inventory and equipment. The sector, which is expected to grow to US$6.9 trillion over the next five years, is also appealing as it offers credit exposure that's largely disconnected from more broadly held types of debt, according to KKR.

"We're trying to target what we call under-served asset classes that we think are mis-priced for the risk you are taking," KKR co-head of private credit Daniel Pietrzak said in an interview. "When you're lending against or acquiring pools of secured or unsecured loans, whether it's residential or auto or hard asset lending, it is just generally a different risk profile, it's very well downside protected."

BANK RETREAT

KKR expects global demand for credit post-Covid to be accompanied by renewed constraints on the banking system stemming from larger non-performing loan balances and increased scrutiny from regulators. Competition from other non-bank lenders is likely to diminish as well.

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"Weaker market participants will likely be forced to contract their lending activity due to inadequate capitalisation or inability to secure asset financing from risk-averse banks who will likely refocus their attention on the largest, most established operators," Mr Pietrzak and colleague Matthieu Boulanger wrote in a report published Thursday.

KKR's credit business has over US$72 billion in assets under management, with about US$23 billion dedicated to private credit. The money manager has about 20 people dedicated to asset-based finance, Mr Pietrzak said.

In July, First Eagle Alternative Credit expanded into asset-based lending in a bid to capitalise on higher yields and expectations for comparatively lower defaults. It joined other firms including JPMorgan Asset Management and Arena Investors in seeking opportunities in asset-backed debt in recent months.

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