ABF Fraud Risk Concentrates in Upper-Market Deals

What's New

Recent fraud cases in asset-based finance (ABF) trace to upper-market structures, and middle-market lenders face less of that risk. Tim Kim, Partner and Head of Specialty Finance at Manulife Comvest Credit Partners, argues this in an interview on the InsuranceAUM.com Podcast. Jason Gelberd, Partner, Chief Operating Officer and Co-Head of Direct Lending, joins him. Kim cites 2 themes: double pledging and loose cash management. Large borrowers can carry 10 credit facilities. Middle-market companies typically have 1 lender. Allocators should ask who controls collateral cash and how many lenders share it.

Why It Matters

Headline coverage paints ABF as broadly risky after 3 or 4 deals. Kim argues the failures tell a story about a single segment. Upper-market borrowers first deposit cash into a commingled collection account they can reach. Middle-market lenders typically have full control over the cash their collateral generates. In upper-market deals, lenders often lack that control. Manulife Comvest focuses on senior financing of short, self-liquidating pools and prefers deals sourced directly from companies, so the argument favors its book.

By The Numbers

• Around $6 trillion: the private part of the ABF market, per Gelberd.

• 85%: the example advance rate the guests use for an auto loan pool. Junior capital makes up the rest.

• 5% or less: the typical size of purchase-price clawbacks in equity ABF strategies, per Kim.

• 12 to 24 months: the duration range the firm counts as short and typically targets.

Memorable Quotes

• "Senior secured can include both first lien and second lien, which I think is a little misleading." Kim warns that manager marketing can blur where a lender ranks.

• "The deals that didn't work out really will shed more light on the structure and monitoring capabilities of that manager than the ones that work out." Gelberd tells allocators to study a manager's failed deals.

• "I think the coverage there was completely fair game." Kim concedes the fraud cases were real failures that should have been avoided.

• "I think these dynamics are much more prevalent in the upper market as opposed to the middle market or even the lower middle market." Kim ties double pledging and weak cash controls to deal size.

The Wrap

Kim's view stays true while middle-market borrowers keep a single lender and lenders keep full control of collateral cash. It weakens if too much capital chasing the same deals strips structural protections from smaller transactions. It breaks if springing cash controls and multiple facilities spread into the middle market. The next round of ABF credit events over the coming years will settle it.