Before the financial crisis crested in early 2009, hedge funds employing the conservative strategy of asset-based lending enjoyed a boom. As debt markets and bank credit dried up, asset-based loans (ABLs) backed by all manner of collateral, from receivables to real estate liens to inventory, became a sought-after source of capital.
Inevitably, the credit crunch caught up with ABLs too. Borrowers’ inability to refinance when loans came due, compounded by a collapse in asset-to-loan ratios and unprecedented investor withdrawals, forced most ABL managers to restrict withdrawals or suspend their funds.
The overall impact was severe. Peter Laurelli, a vice president at data provider HedgeFund.net, reports that there were 92 funds in HFN’s ABL index at the end of 2008, but only 51 at the end of 2009. (HFN’s database, though not comprehensive, reflects the broader trend.) “More than 150 asset-based-lending funds that had three-year or more track records, with at least $100 million, are winding down or reorganizing into new funds,” observes Jonathan Kanterman, a managing director at New York–based Stillwater Capital Partners, which manages ABL hedge funds and an ABL fund of funds.
Although current opportunities for asset-based lending have never been better, according to Kanterman, the financial crisis and subsequent fall in asset values have prompted a distinct shift in strategy from lending against assets toward owning them outright. Stillwater’s $450 million in ABL hedge funds is invested roughly 50 percent in loans and 50 percent in underlying assets; before the crisis loans made up about 90 percent of the funds. ....