The US$20 trillion-plus asset-based finance market has gained prominence as investors seek diversified income beyond traditional corporate lending.

Asset-based finance (ABF) is taking a larger role in private portfolios as rising capital requirements across digital infrastructure, energy and consumer finance create opportunities beyond traditional corporate direct lending, according to PIMCO.

Speaking at PIMCO’s inaugural Asset-Based Finance Symposium in Sydney, president Christian Stracke said opportunities were emerging across residential mortgages, consumer credit, aviation, energy and digital infrastructure as investors sought exposure to collateral-backed cash flows.

“Asset-based finance represents one of the largest and most dynamic opportunities in private markets today,” Stracke said. “As capital needs accelerate across sectors ranging from digital infrastructure to consumer finance, investors are increasingly seeking strategies that can provide predictable income, diversification and strong downside protection through collateral-backed cash flows.”

The shift has extended ABF beyond its traditional roots in securitised credit, with private capital increasingly being used to finance larger and more complex requirements across the real economy.

Stracke described the market as entering “ABF 3.0”, following an earlier expansion of private capital into areas where banks had reduced their exposure.

“We are now entering ABF 3.0, where flexible capital is helping to finance major investment needs across digital infrastructure, energy and other parts of the real economy. This is significantly broadening the role ABF can play in investor portfolios.”

The expansion comes as parts of the corporate direct lending market mature, with ABF offering exposure to identifiable financial or hard assets and contractual cash flows that can be less directly tied to corporate earnings.

PIMCO cautioned, however, that market growth did not reduce the importance of disciplined underwriting, structural protections and active management.

PIMCO head of Australia and New Zealand, Sam Watkins, said bank balance-sheet optimisation, growth among specialist non-bank originators and rising financing requirements were increasing the role of private capital.

Those structural changes are occurring alongside a significant capital expenditure cycle, with an estimated US$7 trillion required over the next five years across compute capacity, data centres and energy infrastructure, driven in part by AI.

“We are seeing significant demand for capital across both established and emerging areas of the economy,” Watkins said.

“Investors often categorise financing as public or private, asset-based finance, infrastructure or real estate, but borrowers are largely agnostic to those labels. What matters to them is access to flexible capital, specialist expertise, and certainty and speed of execution.”

Financing for expanding data-centre footprints could span public bonds, private placements, investment-grade ABF and bespoke private structures, with PIMCO pointing to its involvement in recent Meta and Oracle data-centre financings as examples of asset managers meeting large-scale capital requirements.

Despite the scale of prospective investment, speakers at the symposium stressed the need to scrutinise operators and tenants, lease terms, leverage, construction and refinancing risks and structural protections.

Australia is also emerging as a broad market for ABF across residential mortgages, consumer lending, equipment finance, infrastructure, specialty finance and small and medium-sized enterprises.

PIMCO head of Australia portfolio management, Adam Bowe, said established securitisation markets and expanding private financing channels were supporting opportunities across the domestic market.

“As the boundaries between public and private credit continue to blur, investors with flexible capital and strong local underwriting capabilities can assess opportunities across the financing spectrum and identify where risk-adjusted value is most attractive.”

Recent transactions have included PIMCO-managed funds’ participation in Westpac’s approximately $15.4 billion RAMS mortgage portfolio transaction.

Australian investors can access the market through public securitisations, warehouse financing, whole-loan portfolios and forward-flow partnerships, the firm stated. “Asset-based finance is private fixed income at its core,” Stracke said. “It requires the same credit discipline, data-driven analysis and active approach that investors apply across fixed income markets, together with specialist expertise in the assets and structures underlying each transaction.”