Asset-Based Lending in the Modern Private Credit Allocation Framework

We have the pleasure to welcome Matthias Dux, Co-Founder at Avellinia Capital to discuss how asset-backed lending fits within the broader private credit ecosystem. In this interview, we explore how ABL structures work in practice, how lenders underwrite and secure collateralized portfolios, and why this segment has seen strong growth across Europe.

We also discuss the advantages of asset-backed lending from both the borrower and investor perspective, the role of diversification for family offices and institutional allocators.

Find Matthias Dux on Linkedin: https://www.linkedin.com/in/matthias-dux/
Avellinia Website: https://avellinia.com/

Timestamps: 
00:00 – Introduction & Matthias Dux background
03:15 – What asset-backed lending is & how it fits private credit
07:35 – How ABL structures work in practice (SPVs, collateral, underwriting)
15:30 – Managing risk, depreciation & protecting lender capital
24:25 – Why companies choose asset-backed lending over equity or banks
31:10 – Why investors and family offices allocate to ABL
38:10 – European market opportunities & manager selection
44:35 – Dry powder, scalability & deployment in private credit
48:55 – Final thoughts & conclusion

Transcript

0:00

Welcome back for a new interview at Level Capital Club, Private Markets Intelligence for Family Offices. Today we have the pleasure to be welcomed by Mathias Ducks, founder and managing partner at Avelina Capital, an asset-based lender focused on the UK and European markets. We're going to be discussing how asset-backed lending actually fits within the private credit ecosystem, how the mechanics work in practice in terms of underwriting, collaterals, also discussing the benefits from a borrower and lender perspective, and how asset backed lending actually fits within the portfolio construction of a family office and an institutional investors. Mathias, it's great to have you. Thank you for welcoming us into your beautiful office. How are you today? I'm fine. Thanks very much for coming. It's a pleasure to be on your on your podcast, and I'm looking forward to our discussion. Before we diving into our discussion and all the great topics we've planned for today, what we like is for you to give a brief presentation to our audience of your professional background, how you came to work in the private credit ecosystem, and how you came to fund Avilena Capital today. Yeah, thanks. Thanks for the intro, and uh it'll be it'll be a pleasure. So my background's been in investing over 25 years, uh, across different asset classes. So I spent the first uh give or take uh decade of my career in investment banking, um, and uh then moved over to the asset management side uh almost 10 years ago now. Uh co-founded Avalinia Capital um together with my co-founder Julian Schickel. Uh he spent his whole career in structured credit. So why as I'm I'm more of a you know investment journalist across asset classes, uh, he really has the deep background on the on the structuring side, on the credit side. Of course, that's also something that I've now uh you know done over the over the past 10 years. So the combination between a credit specialist and an uh an investment uh partner uh on your side. Exactly, exactly. So that's how we how we fit together. And of course, uh you know, as you as you build a business, there's there's lots of different angles that you have to cover and lots of different things you have to you have to do. But uh it's it's also good if uh you have you have some complementary uh strength. The the private credit ecosystem has been growing a lot and actually emerge uh post-financial crisis as banks uh became less and less willing to lend, at least uh the restrictions became uh became tougher, and actually the industry accelerated when we saw the rate hikes a couple of years ago, uh, both from a borrower's perspective, which were at a stage of actually seeing ways they could better optimize their capital structure, uh, but on the lender-investor side, it actually became an asset class where a lot of investors saw it compelling from a risk-adjusted basis. But it's a big industry, and asset backed lending is actually one part of that industry. So, how does asset backed lending really fit into the whole picture and how does it differentiate within the broader private credit ecosystem? Um, good question. And you know, there's sort of uh questions within the question. So let me let me start with the you know the first point you you raised, sort of the broader, the broader macro or mega mega trends, and one really being as you as you mentioned, banks retrenching pro post uh uh financial crisis, and that opened up the the playing field, if you will, for for private uh uh private credit to to fill that gap. At the same time, there's been another mega trend, uh what we call rent instead of own um models where let's say, for example, an iPhone. When your first iPhones came out, you could, you know, you could more or less afford to buy one. You maybe you still can, but they've uh become more and more expensive. So, you know, right now you're talking about a new iPhone being closer to uh you know a thousand pounds, dollars, euros. If your family with uh several children, everybody wants the newest one. Do you really want to buy them or would you rather rent them? Same with you know cars. People used to buy cars, then came leasing. Leasing is uh, you know, somewhat uh traditional leasing, a bit of a you know paper-based, prolonged process, etc. There's there's new models where you subscribe to a car and you do it all online and you you choose the car and fill out all your information. There's background check running automatically uh on your on your credit worthiness, etc. etc. So the whole technology setup and the whole proposition of renting something instead of owning it has opened up the field to more assets needing needing financing. And uh that's sort of where where where we come in and where the asset class as such comes in. And of course, asset-based lending has traditionally been, you know, it's been around for for thousands of years, you know. The first uh, well not the first farmers, but farmers in Mesopotamia, they forward sell or you know get credit secured against uh against an upcoming harvest. Um, you've had credit card portfolios, um, aircraft leasing, uh student loans, very specific underlying assets have been financed in bulk as portfolios for for decades. So all we're doing really is we're taking the technology in terms of how you structure things, how you value them, how you look at them, how you think about them, and apply them to newer and and different underlying assets. So I sometimes you know I joke that uh KKR they might finance uh airplanes, we might finance eBay, for example, but the the underlying the underlying idea is the same. And so where where we really came from was we saw a uh a growing number of these originators of new assets, and you know, this could be this could be online receivables, this could be uh micro loans uh originated via via the internet, via mobile phone, etc. Um, so also again lending models that traditional banks wouldn't do. We you know, in the past we financed a consumer lender that was giving uh loans of you know 150, 250, 500 pounds a pop. Why? Because they automated the whole underwriting process in a way that it's cost efficient to do this. A bank could have never done that. So there was there were all these assets and these pools of assets originated by quote unquote unquote new new age lenders that needed financing. And in the beginning, if you think back 10, 15, uh, 20 years, the first ones emerged as peer-to-peer lending platforms, right? So the idea was you have retail investors who invest via a platform into loans to SMEs, to uh to consumers. Now, what turned out is that the the retail funding side wasn't scalable, right? And that's where that's where we and others came in and said, okay, you know, the the lending models themselves, they're very they're very good and they're very you know scalable, but what's not scalable is the is the retail funding. So let's put together institutional funding, let's uh make all these, you know, all these structures more more robust and more in line with what we've seen from other other structured credit uh let's say models or setups in the past. Basically institutionalize a market that was once fragmented in a way. Exactly, exactly. So and and and and also um on top of that, banks, even if they were to lend in this market, banks are very very conservative in their in their thinking and very slow moving. So there was truly a gap of institutional capital willing to look at, you know, how do you think about e-bikes? How do you think about mobile phones as underlying assets? How do you think about uh you know automated online underwriting of you know large pools of very small assets, etc. And that's that's kind of where we where we came in. And and by by the nature of it, and these originators, when they start with the new lending model, they're very small. So what you want to do is you want to have a structure, a setup, ring-fenced uh pools of assets. So the assets are not owned by the company as such, but they're in a in a segregated ring-fenced SPV. So you can also enforce against them. So what you do is you lend against a pool of definable liquid assets that you, you know, that you can enforce against if the originator and original servicer of those loans or assets is no more. Because sometimes that happens. You know, these companies are mostly uh venture capital funded. Uh, we've gone through through different cycles on the VC funding side where all of a sudden uh certain business model falls out of favor, they don't get their next equity funding round, they're not profitable yet, um, and they go out of business, and you're left with a you know a portfolio of underlying loans that you know that come back or that you can you can enforce against. So that's that's kind of the security that you get, although it's earlier stage companies that you lend to indirectly your lending against their assets, and that helps you uh uh uh in your you know in in in securing against losses. So, in terms of practicality, in terms of the mechanics, how does it work in practice from a borrower point of view and from a lender point of view as well? Where does the credit risk sit and how it works? Yeah, so maybe I take a step back to answer that question and uh talk a bit about the differences between sort of traditional uh uh lending as as banks do it, uh and as you know, as you as you also see on the private credit side in in direct lending, where you as a you know, as a lender, you would lend to one company and based on their on their business model, on their revenues, on their expected uh eBIT das, on free cash flow, on on the basically the ability to come of the company to repay or to pay the interest and repay the debt based on the cash flows they are generating from whatever it is they're selling, right? So you're giving a large loan or relatively large loan, a concentrated loan to one borrower. Whereas when you look at asset-based lending, there's still a company, but there is also another, you know, another structure, another company, a special purpose vehicle, uh, SPV, uh basically a ring-fenced uh entity that holds these assets. And these these assets they're they are distinct, they're identifiable, you can uh liquidate them, they have a known value, they have a secondary market value or repayment value or whatever it is that you're that you're lending against. So there's these may be maybe hard assets, they may be you know cars, they may be we've lent against camper vans, we've lent against mobile phones, they may be invoices, they may be short-term working capital loans, they may be uh consumer loans. So there's there's all these types of assets that are that sit in a pool and you lend against that pool. And you also there's several structural mechanisms that make uh you know you've you you you're pretty sure to you know to have the to have the value to to get your money back in a worst case situation. Because if you look at the other the other example where you know you lend to a company, if that company goes out of business, if it doesn't create any revenues anymore, what are they going to repay your loan from, right? And here, if this company goes out of business, we have the assets and we can, you know, we can sell them, we can if they're loans, they might just come back. We have a backup service that makes sure that borrowers, underlying borrowers, pay their pay their debt. But there's there's something concrete there that you can recover from. And and you are modeling, uh, you're looking at the portfolio on a more statistical basis. So whereas again, if you lend to a company, you will look at their you know, their balance sheet and their cash flow statement and their their business plan and and all these things you might look at in the bigger construct in what we're doing as well, but you're very specifically looking at these assets. So if they're consumer loans, you will look at okay, what's the credit score of the individual borrowers? What are statistically um, you know, what's the likelihood that they will default? And if they default, what's my so-called loss given default? So what's my uh expected recovery? So if I lend this person a hundred, they already repaid 50. So the outstanding loan is 50. Now they're defaulting. That doesn't mean I'm losing the 50. There might still be something to get there if I go after you know after the borrower. So but I might not get the 50 back, I might get 30 back. So out of the 100, we've covered, you know, recovered 80. So and that's that's kind of things that you look at on a on a statistical basis uh to also inform your, for example, your pricing for the loan, but also how much you want to lend against it. Because if you buy a house, if your house is worth a million, the bank will typically not give you a million, they will give you what's called an LTV, a loan-to-value ratio, or what we may call an advance rate, they're all sort of different terms for essentially the same thing. How much are you willing to lend against a hundred worth of asset value? Right. And so that the answer might be 80. So in the case of the house, the borrower defaults, the bank sells the house. In a you know, sort of give them example, they they they may recover the hundred and uh you know they get their 80, and then there may be some costs, and then you know you get you get the rest, or they may just say, Okay, well, you know, we're selling the house for 80 and that's it, and we get our money back. Same same idea really for the asset portfolios that we're financing. So the portfolio as a whole, there might be a hundred loans of one dollar in there. So it's a hundred dollars. We won't give them a hundred, we'll give them eighty, right? And we say, okay, well, if you have defaults, if out of your hundred borrowers, two or three or five don't repay, you have to replace that money, right? So you have you have a what's called a borrowing base mechanism where you have monthly tests of the the word borrowing base refers to what is my performing part of the loan portfolio. So if you have, you know, you have 100 borrowers, three are not paying, you have 97 that are performing, you had three that are non-performing, you take those three out and you have to put three cash in there for them, and then you can lend money out again. And again, you have a hundred worth of uh underlying assets in your portfolio, you've lent 80 against them, your 80 are safe. Your 80 are safe as long as not more than 20 in one goal default, right? And that's that's really something that that gives a lot of uh you know a lot of confidence to the to the lender uh that they will that they will receive their money. You you've mentioned the the real estate example. I think real estate, when you look at the long-term aspect, it's an asset that gain in appreciation. And so if you were to make a 50% LTV, hopefully in a couple of years, that LTV will be more conservative. But it's not the case for every asset. You look at car oftentimes, but maybe collectionable cars, but cars in general depreciate in value over years. So, how do you assess that risk when kind of um underwriting potential um loans? Yeah. Um, no, very good. And I mean, of course, the the past you know, sort of 10-15 years, uh real estate values have only gone one way, and you know, that might be different as well. So if we look at a financial crisis, when when of course, when you get access, and you know, in the financial crisis, the one of the big problems was that banks weren't lending 80 against 100, they were lending 110 against 100 because they were already discounting the future increases, and they said, Oh, why don't you you know you take the 110, uh, we make a bigger loan, you buy yourself a new kitchen, and everything will be fine because you know, in a year's time the thing will be worth 113. Once that didn't happen anymore, there was a there was a problem. So I think you always, whatever you do, you should better stick to your 50 that you're saying, or your 80. So you need that security buffer. And if people get too uh uh you know too overly optimistic about future valuation uh appreciation, then then you have a problem. But more fundamentally, how do we value the underlying assets and how do we make sure we get the money back? That depends on the underlying asset, of course. But um, one thing that we of course look at in that context is are these self-liquidating assets? So a consumer loan might be um, you know, you might lend somebody money and they have to pay it back over, let's say, six months in monthly instalments. So that's a typical example. You just have to sit there and collect the money. It's it's it's coming back. The loan, the portfolio is rolling off. And so if they're all six months long, some will be older, some will be a bit newer. So on average, they'll let's say be let's say three months old. So after three months, you've got the bulk of your money back, and there'll be some long tail, the the very fresh loans, the six-month loans you'll get back after six months. There might be some that default, but you've got your 20% buffer, and uh, you know, hopefully you'll you'll refine. There's other assets that aren't self-liquidating that you may have to sell, all right. So you might also uh sell sell a whole loan portfolio, but that's that's just one option. But another one would be you have, for example, hard assets underlying, you have the cars that we that we talked about, you have you have iPhones, you have uh things that have a liquid secondary market and a known used item price. And the but the example of cars is a is a classic one where there's very, very good uh secondary market value information. So you can pretty much for for any make and model for a given you know given vintage, a given year, you plug that into you know into a database or you query it from a database like a Schwacker list in Germany or you know, Blue Book, Black Book in the US, uh they will tell you this card is make this model is is worth that much. So on an ongoing basis, you have uh you know you have good pricing information how to value your portfolio and to always make sure if you have a drop in you know in secondary market value, as we had. So if you remember during COVID, there was a supply chain crisis, uh uh used car prices went up, and then after COVID, it came back, it came back down. There was a point in time where actually you could buy a new car, run it, use it for a year or even a couple of years, and sell it at a profit. Now that's that's not a normal, a normal case, right? And as coming back to the example of the houses, some people, you know, they bought they bought the car and they basically weren't expecting a drop in value because at the moment you could forward sell them for you know for a higher price. But the you know, the root awakening came when prices came back down to earth and things normalized, and so you have to not only be sure that um you know that you that you know the secondary market values, but they also can actually sell at that value. So, how do you do that? You you either you you know you you enter into forward sale agreements that locks in the price. Now you also have to be sure that the forward buyer is still there, or you know, they're they're they're they're honoring that contract. And I mean we've seen it in the past where then all of a sudden the used car dealer says, sorry, you know, I can't buy this because then I'd have to sell it at a profit, uh at a loss, and not making, you know, not making any money on this. And then you you say, okay, well, do I, you know, do I go to court or do I, you know, do I take the loss or what do I do? So what do you do? You credit insure against things like that, or you make sure that you're forward selling only to investment grade buyers, for example, OEMs, the the original uh manufacturers of the cars, they oftentimes have buyback programs where they you know they will they will buy back their their own cars and then you know uh reset resell them again. So these are things that you have to think about. Is there a liquid underlying market? Uh do I have transparent pricing? And that then informs also how much of a buffer you have. If everything, you know, if the uh underlying market is very liquid, if you're very confident about the uh actually receiving uh those those those prices in a in a in a sale, and also where you don't only have to sell you know your occasional car, but you have to sell a whole lot because you know you need to get rid of the whole portfolio. The the more confident you are, the the higher this advance rate, this this 80 can be. So it can be 90, it can in some cases can even be 100 if you you know if you're very very confident that there's excess you know excess value in it. Um in your example of the uh of the houses, for example. But uh in in most cases, and especially in things that mentioning that are a bit novel, that are a bit new, that are a bit that don't have so much historical data going through cycles, uh, etc. You have to be more conservative, so your advance rate will be lower, and your you know your covenant triggers may be tighter, and and so that's the that's the beauty of these, you know, of these structured products that you can adjust them based on the underlying risk and and kind of de-risk them by by having additional covenants, so we might have minimum cash balances on the originator on the on the operator side. I mentioned if you know on the loan portfolio there's defaults, they they need to replenish this. Well, this only works if they have the cash to do that. So you need to keep an eye on that with a covenant where they report, okay, this is our cash balance. And if that drops underneath a certain level, then you have a covenant breach, and then you know you can you can enforce and these these sort of things. And when underwriting loans, to what extent uh do you take into consideration the the actually the actual companies outside of the assets, kind of calculating the debt to coverage ratios and all the kind of financial metrics that, for example, cash for lenders will patch much of an importance on? It's of course it's very important, but it's of secondary importance to the assets that we're lending against. Because essentially our philosophy is that the asset portfolio that we lend against on a standalone basis and on a sort of orphaned basis, if if the originator goes out of business, if they're bankrupt, we still want to recover our full principal and full interest owed, you know, in adverse scenarios. Of course, you know, that's not the ideal scenario, and you want to avoid that. So that's why you look at uh, you know, why why you look at the going concern of the of the originator. And also quite frankly, we come in when the asset portfolios are still quite small, and we do a lot of structuring, a lot of legal work, a lot of analytics goes into this, setting this up. And essentially at the beginning, it's subscale. So you also need it to scale to get to a point where it's worth the money for everyone and the time and effort, etc. So if you're setting up the structures that we're setting up, the legal documentation, the uh, you know, setting up the companies that hold the assets, etc., it's the same if you're doing it for 5 million or for 50 or for 500 million, right? And so it's it's it's very obvious that um, you know, your your your legal costs, your your service provider costs for you know corporate services, etc., you'd rather have them on the 500 million portfolio than on a five million portfolio. So it's important that it scales to make that initial investment worth it. So that's also another reason for us to look at, you know, how confident are we that the company itself is able to scale, is able to grow. So we look at uh have they done it before, the the the the the management team, the founding team, what's their ability to raise equity? Uh, what's the what's the investor base? Are these well-known, reputable uh VC funds or at later stages private equity funds that will write that check that's needed for the next round? We will look at things, we'll have covenants against runway to make sure that uh they'll they'll be around for long enough to either service the portfolio or in the worst case, at least hand over to a backup servicer that takes over from them. So we won't get into a situation where the company all of a sudden runs out of money and shuts down from one day to the next because we'll have these early warning signals where we say, okay, well, on average you you burn, I don't know, 100,000 per month, and you know, so you got a million in the bank account, that means you can cover 10 months, right? But if you, you know, if we let it come to a point where the bank account is empty, uh that doesn't, you know, it doesn't help us hand it over. So you'll have a, you know, I don't maybe a covenant at six-month runway, where if you drop below that, either you need re need to raise new equity to replenish it, or you need to hand over to a backup service and we wind down the portfolio and we get our money back. So that's the kind of the interplay between the assets that we finance, the portfolio of assets, uh, with again with the with with the additional buffer of having capital underneath us and also looking at the originator, at the service at the company itself, if you will, uh, whose assets we we we we finance to make sure they're they're a going concern. Well, when assessing the the different lending and actually capital raising ways to go about it, why would kind of like a borrower decide to go through um you know an asset-based lender instead of maybe a cash flow lender or just you know, pref equity or what's what are the main really true benefits of of asset-based lending? Uh in a nutshell, it's non-dilutive, right? Or at least a lot less dilutive than uh imagine so you know the the the car subscription company that uh that I that I talked about. Uh when we first got in their car portfolio, their asset portfolio was about 300-350 million. It's grown to well over a billion now. Now imagine funding that with equity, right? I mean, any any equity, you know, be it VC or PE, would say you're you know you're crazy. We can't you know fund your your cars that you're that you're renting out with with equity. So you need to, you know, you need to fund the assets that you can segregate and that you can uh liquidate with debt because simply you know it's not economical uh and it's not possible uh to you know to do this at scale with equity. Having said that, in the very early stages, when you first found the company, you will necessarily do this out of equity because nobody will give you the money, right? I mean, we won't give you the money if you say, Well, I'm setting up a car subscription company and I'm gonna start with three cars, and uh, you know, I'd like you to lend me, I don't know, a car costs, I don't know, let's say 30,000, uh 30,000 uh euros, and uh, you know, I'd like you to lend me 100,000 euros so I can buy three cars and lease them out. We'll say, no, sorry, that doesn't work, right? So you have to set up your systems, you have to make sure that you know you can actually rent out the three cars, you can have to make sure that you can deliver them, etc., etc. You have to make sure that you, you know, that the the OEMs, the car manufacturers will sell you. So there's a lot of work that needs to get done before any lender will get comfortable uh uh financing that. And then that work needs to get done out of equity. But once that proof of concept, that initial portfolio is there, that in the case of more traditional lending, you've done a couple of turns of you know, you so you've lent out the money, it's come back. Maybe not all has come back because you know two borrowers defaulted. So you can show, okay, well, you know, we had 20 borrowers, two defaulted, this is how much uh, you know, uh how much we lost, this is how much we recovered, etc. So you've got something for a lender to you know analytically get their teeth in and say, okay, well, you know, this is kind of what we'd expect, because in this kind of uh credit uh uh credit bucket, you expect out of 20, you expect two to default, right? You you have you have some data to to to to work with, and that's that's really what you what you need to be comfortable as a lender to lend against this, and as a borrower, you need to be able to show this and and and have some you know have some experience and have some uh track record to uh uh to show to the lender. We've talked a lot about kind of venture companies growing a lot, but we're seeing you know it's no secret that private equity firms, bank mature companies are becoming increasingly more sophisticated in terms of their capital structure. Um, LTVs are lower than they used to be from traditional bank financing. Uh so how do you see kind of private equity firms actually implementing uh that asset-based lending to their capital structure? Well, I think you know it's it's it's essential that um, as I said earlier, that you are able to finance the assets, the pools of assets with debt rather than equity. And the proportion might change over time. So, you know, the very extreme example in the very beginning: 100% equity, 0% debt. Over time, you know, we might come in, let's say you've got an initial 5 million portfolio, we see some track record, etc. We give you 80 to your 5 million. So it's you know, we give you 4 million, there's there's 1 million out of equity. You might grow that to let's say 30, 40, 50 million, we might increase the advance rate to to 90. We you grow it a bit more, we might go, you know, bring in a mezzanine lender to 95. There might there will be a point in time where you might be able to get 100, right? In the case of the in the case of the cars, there's some you know some some over-collateralization, there's minimum cash balances on the on the opco side. There's some, you know, maybe there may be some VAT receivables or something like that that is available as additional uh additional collateral, or you may have some cash trapping mechanisms where you have access spread, so money that you earn in the with the assets in the asset portfolio that doesn't get uh uh channeled to the to the operating company, but that stays in the structure as a you know as a cash buffer. So that's how as a lender you might get comfortable with you know with a higher higher LTV. And that means that there comes a point in time, and that's the point every every lender, every you know, every leasing company, every uh rental company aspires to where you don't need any equity anymore to grow your asset portfolio. And that's that's a question of maturity. And then the the larger you are, the more track record you are, the more vanilla and well understood your underlying assets are, the cheaper your financing gets, and the easier it is to open different pockets of capital. So, you know, that that asset portfolio at some point, you know, there's banks coming in lending the the senior tranche at you know at a floating rate plus you know a couple of hundred basis points, which is very different when we first come in. And the the type of capital that we provide has mid-teen returns, right? Low to mid-teen running returns. We might get some warrants, so we have some equity upside because we are creating equity, we're helping create equity value. Um, at a later stage, a bank might lend, as I said, at you know, at a 200 or 300 basis points margin over floating rate. And then at there might be a point where you can do a public securitization. You know, you have chunks of let's say 250 million that you then sell out as as as tranches, as senior tranches of this of this ABS portfolio, where you then again lay off the funding to you know to large institutions like insurance companies like buying these things. They, you know, they have uh they they then they're they're rated, so they have credit ratings, they might have a you know investment grade or even like a triple A credit rating. And then again, you're opening different pockets of capital, and that's kind of how you grow this asset financing. And switching gears a little bit, we've talked a lot from a borrower perspective point of view, but from a lender and an investor, I mean private credit, like I said at the start of the interview, uh, it's an asset class that's been growing, that's been attracting a lot of momentum. Um, it's really compelling uh from a risk-adjusted basis. Uh so how do you see kind of asset-based lending fitting within the portfolio construction of an institutional or a family office that wishes to be allocated to private credit? Yeah. I think in in one word, it's diversification. Um, so you know, depending on what you've invested in before, if you're if you're already invested in private credit, you're likely you started with direct lending because that's kind of the the core, you know, the core where where private credit started. We said it in the beginning, banks were retrenching from traditional lending. Somebody had to lend to the companies. In addition, private equity was you know was very much on the upswing and they needed leverage uh to, you know, because that's an essential part of their business model is to get debt financing. So that's that's where private debt started really out and started to grow. So if you've been an investor in private credit for for a while, it's likely that you're allocated to that. So if you want to stay in the private credit universe, but you want to diversify within that, uh uh asset-based lending is a is a natural addition to that. Now, if you look at in you know in in in terms of diversification, it's also very nice because here you have very lumpy risk, you have uh single name, larger single name exposures to single companies. If you invest in asset-based lending, you're investing in diversified portfolios and in certain tranches of them with certain structural security and benefits that that I discussed. So it gives you a nice, nice diversification. And also in terms of more broadly underlying uh risk and correlation, if you invest in direct lending, you're directly exposed to certain industries, to certain, you know, to certain verticals, to certain uh uh geographies, and you can very nicely diversify with asset-based lending. So within what we're doing, there might be uh underlying might be uh UK consumer, it might be German SMEs, it might be uh worldwide camper vans, it might be uh uh the the cars that we that we discussed. So there's a very wide variety of underlying assets giving you diversification benefits, and then you know, of course, the sort of the other way to look at diversification is low correlation, right? And and and so if you if you invest in our fund, you'll get the benefit of diversification across these different you know, consumer SME equipment geographies. If you've got a specific investment mandate, and you know, one one example uh I I I could mention is we have one co-investor, and you know, I can talk about this publicly because it's it's it's publicly known as the British Business Bank, and uh they uh uh you know they have a political mandate to support UK SMEs. So they wouldn't invest in a trade that lends to German consumers, but they will invest in a trade that lends to UK SMEs. And we have one of those in the portfolio, so it might be in you know in our fund portfolio, but then we have an extra pocket where an investor like that invests in one particular underlying sub-asset class. And your mandate might want to concentrate on on consumers, so you can only can concentrate only on that, or it might be UK only or Europe only or whatever it may be, and we can accommodate that through you know separate managed accounts. If this if the size is you know, of course, large enough, we can't do a sort of uh you know a menu by menu for each small investor, but uh in in general, this is how we this is how we grow and this is how our trades grow. We we have them in the fund, we anchor them in the fund, we do the first 10-15 million out of the fund, and then we grow it with investors who like that specific trade, and that's you know, and or or that group of trades, and that's that's how we you know how we uh uh uh build our our investor base, and that's from the investor perspective, how they can allocate to certain things that might fit their their investment mandate better better than others. You briefly touch on correlation. I mean, as any investor, what we try to do is find correlation, dislocation, I think it's the big words. So, what kind of correlation do you see with, for example, maybe public equities or the bond market? Um, and and you know, that could actually make it compelling from a diversifying perspective, I guess. Um that changes that changes over time, and also from a macro perspective, our portfolio composition has has changed over time in line with certain macro views that we had. So earlier on we had a lot of consumer exposure, and uh, you know, when we when we saw the affordability, the cost of living crisis come, and then were a bit more doubtful about the ability of consumers to uh to to service uh uh personal personal debt, we uh pulled back from that. Our facilities that we provide, the loans that we that we give are on average only two years long. So we you know when we see a trend, it's it's relatively easy for us to to shift to a different you know different focus. Um so in that case, then we you know shifted more to an SME lending focus, right? And then um I think one thing that's that's important to note is that uh most of the facilities we provide are floating rate, so you have an inherent kind of uh inflation hedge in the sense that uh you know if if you see inflation uh rates tend to go up, so the coupon that you receive increases. So, you know, that's a that's a nice sort of uh side effect of that. But you know, other than that, I can't I can't say of course that there's there's no correlation to you know to certain public equity markets, but um it's a very different kind of segment. So if you're if you're looking at European SMEs, if you look at public equity markets, if you look at the S ⁇ P 500, it says 500, but it's a really only the magnificent seven, or you know, it's a very limited number of companies and it's a very limited investment thesis. So if you if you believe in AI and if you believe it's got room to run, it's all great, right? But it you're very concentrated within even what seems like a diversified index. And so, you know, having you know, having not all of your eggs in one basket, but diversifying with different underlyings, different geographies is definitely, you know, it's definitely uh worth worth having a look. And what we've seen is also uh more interest of, for example, American allocators, US allocators to look at European trades, because they also realize they're you know they're very uh very concentrated in in their US exposure, and that's worked out very well over you know, over a certain point of you know, certain certain period of time. But uh then you get curveballs like you know, like trade tariffs, you get you get other things where you say, okay, well, you know, it might or might not work in my favor, and you know, sometimes sometimes it's good, sometimes it's bad. These disruptions, if you look at the Middle East crisis, now oil prices are going up, they're winners and losers to everything. But you know, I think you have to consciously think about it and and and and and not put all your eggs in one basket. If there's one, you know, there's one thing I you know I learned in my in my studies that were you know long, long ago is that uh diversification is the only free lunch in finance. So you know you might as well diversify. And so if you had a mandate to kind of invest in in asset-based lenders, um, how would you go about it? I mean, how would you kind of diversify? Do you would you diversify from a geography perspective, from an industry perspective, selecting kind of fund managers in the space? I mean, what would be your approach? Um, look, very good question. And of course, it depends on you know what you're what you're what you're after. If you if you want to go sort of for the you know the very plain vanilla uh stuff, uh what we're doing is relatively new in Europe, it's more mature in the US. So, in terms of uh, you know, the there's there's there's more funds doing this, there's larger funds doing this, but also inherently there's there's there's more competition. Um, you know, yields are lower, uh returns, returns are lower. In Europe, we're in a more nascent space there. We as Everlinear Capital concentrate even within that space, as I explained, on the sort of more earlier stage growth phases, which gives us you know higher higher yields at what we believe is the same type of structural protection on the asset side. So our risk might be more that originator falls over, we have to unwind the portfolio, it hasn't grown, right? But we're not we we we try and you know, we want to not lose money on the on the assets. So the risk is that we put all this work in, it repays, um, but it it hasn't grown. So it was a lot of work for you know not much not much size, but in terms of credit quality or in terms of uh you know recovering recovering your principal in the interest, do it's it's it's working. So it's a you know uh uh I think if you you know if you go with a big brand name, sometimes there's a there there's there's a danger that they have too much deployment pressure. I mean what we've what we've seen uh you know without wanting to point fingers, uh things can happen to everyone, but these recent cases that have been in the press were brand name both banks and funds that rushed into a trade without doing proper D D. We are very close to you know, our by by the nature of the trades being smaller, the teams being smaller, we're very close to the you know, the the founders, the people running the business. Whereas in these in these other cases, large uh large allocators sometimes they didn't even get proper access to to the to the team, to the data. You know, I heard of cases where uh people said, okay, we have you know this is our DD list, and they got the the reply, well, if that's all you know, if you want to know all these things, then get to the back of the line because we've got other people who you know who are willing to give us money without doing the proper DD. And that's you know, that's of course that's a that's a problem, and you want to avoid that. But um, I think uh uh you have to you have to know for yourself. Do you want to allocate to a you know to a smaller specialist? Do you want to allocate to you know a brand name that that may or may not uh you know have the have have the benefit of more stability? I think something worth mentioning, and we've actually discussed that pre-interview is the fact that the European market in itself is very fragmented, and it's really important to work with people that have an understanding of a the local regulation to the second culture. Um and that's a bit, I guess, what what you're doing as well uh within the European Union. Yeah, yeah, yeah, yeah, totally. And from a you know, from a bird's eye view, uh people talking about the single market and the EU, and okay, the UK is a case apart now, but uh, you know, even even within the so-called single market, uh it's it's it's not it's not single in the sense there's different regulatory regimes. Um you might uh you know you might need a banking license in one country where it's totally unregulated in another country. Um, and uh of course there's you know there's there's there's language as well, and there's different uh uh security regimes. So in terms of security perfection, i.e., you know, how can I have uh you know those those assets that I believe are mine, uh, you know, is there a way for somebody else to kind of claim against those assets and to make sure that you the security is perfected and that it's really only you who have the security over this asset? There's some legal understanding that that you need. And you know, in some in some jurisdictions you need to register your you know, your your your deed, your uh uh basically your lien to to an asset with you know a tax authority or public register or whatever, and in some cases, or in some countries, you have to notarize it and you have to know all these things, right? Because uh if you if if you don't, you might think, oh, I have you know I have security over this asset, and then you know, there's three other people who say, Well, you know, I've got a sort of a general pledge on everything, and so you know I've got my fingers on this as well. And so there's there's there's lots of uh things that you that you have to know, and that not necessarily if you you know if you're a large US fund and you have a you know you have a small small European origination team that looks for deals here. You might not necessarily be aware of all those all those intricacies. And of course, it's also an origination, you know, a network that we've developed over the years. So for certain types of trades, we're one of a handful of people that get the call, because debt advisors or banks or whoever may be the kind of intermediary, they they know if you want, you know, if you want this type of uh this type of money, this type of capital for your debt structure, you have to call Avelinia and maybe a couple of other names, but there's there's not there's not a you know a long a long list, whereas if you you know if you want to if you want to fund the the last, I don't know, 200 million in a two billion trade, there might be a much longer list. Before we wrap up this interview, I think there's a there's a big current topic is the amount of dry powder that's in both in private equity but also even more in private credit. Um I think one of the biggest drivers is the fact that banks are becoming increasingly more competitive as rates go down, um, especially in Europe. Um so based on what you're currently seeing and based on your pipeline, I mean, how's your capacity of actually um deploying the capital that that you raise in an efficient manner, making sure it's not uh just dry powder that's sitting there with uh not a meaningful kind of rate of return, I guess. Yeah, I mean we're in we're in a lucky situation and we get this question asked a lot and for good reason. Um pipeline and and you know investment opportunities have never been our bottleneck. One reason is, as I just mentioned, within our you know, the kind of universe that we invest in, there are there's not a lot of uh uh of other of other funds because for for most of the big guys, if you've got you know your your latest race is a couple of billion, then you can't start with you know a five to ten million uh uh ticket, even if it grows to 50 million over time. You need kind of you know 50 million or 100 million deployment day one, and that you know that rules that that competition out for those trades. Now, having said that, for you know, for a manager of our size, it's still large enough to have an opportunity that starts at five to ten million, but that quickly over the course of a couple of years grows to 50, 100 million. And we've done that, we've done that many times. Um, you know, just uh have one trade where that that that car trade that we we started a few years ago with uh with 10 million, grew it over time to you know 40, 45 million, just bringing in a large uh a large US fund as a as an you know additional additional investor here. Um and they're you know they're putting in another 50 million plus another 50 soft commitments. So the next hundred million taking the part of the capital structure that we're financing to 150 million, you know, that shows how scalable this is. And we've got you know, we've got another another trade where we just got refinanced after we deployed 40 million, because again, they wanted to very quickly uh you know reach the next 50 million or so. Um so there's there's possible there's there's there's good potential to grow our trades to to sizes that make the portfolio worthwhile. And you see the fact since I mean you you work with companies from a very early stage that you can have a competitive advantage in terms of if they are building that partnership with you, they would rather kind of be with you instead of maybe going to the competitor that may be a tad more aggressive on the bips. I mean, is that something you're saying? Up up absolutely, and there's this there's a you you know you you you're familiar with each other with the way you're working. Uh there may be, you know, there in in in any business, in any cycle, there'd be good times and bad. And it, you know, in the bad times, it shows who's a good partner. And you know, are you are you aggressively uh uh going after everything, or are you trying to and and kind of you know shut the business down and get your money back, or are you trying to be uh you know a good partner and find a solution to you know to to continue growing the business and to if there are any issues, maybe maybe fixing them. And and that of course builds a you know builds builds a uh trust in a in a in a relationship. And then there's also of course the flexibility that you have as a you know as a as a as a smaller manager, uh, as opposed to, for example, a bank. I mean a bank will at all you know at all times be cheaper than our capital, but there be maybe so many uh delays and and and hoops and uh things attached, strings attached to it, that you never never actually get that cheaper money because you know, in theory it's there, but you know, or this this this asset doesn't qualify, and that, you know, oh well, we have to run that through that committee, and we'll you'll hear back in a couple of months, and then the opportunity is gone, etc. So, you know, being being flexible and being a good partner uh is you know is is something that's that's definitely worth uh cultivating. Yeah. Well Matthias, it's been great having you. Uh, I think we've covered uh a lot of great interesting topics. There's much more to cover in the space, um, you know, in terms of practical case studies, and I think what's quite interesting is also the way you set up the different fonts. Uh so I'm sure we'll have other opportunities to discuss all that. Uh before we let you go, is there maybe anything else that you wish to mention um, you know, to our audience? Um anything else you know you want to touch on, I guess? Yeah, well, thanks for uh thanks first of all for for the opportunity to speak with you. I think it's been you know very uh very very interesting, and I hope I was able to give a you know good overview of what we're doing and what uh what's happening in our space. But of course, if uh if your audience has any uh any more questions or wants to learn about more trades in in detail, I think it's you know some of it is sounds very theoretical and very sort of abstract. And if we talk about LTVs and advance rates and borrowing base and and all these things, and and and really getting into you know into single trades and understanding, okay, you know, who's doing what and what's the underlying asset, and oh my god, that's something that you know I've done as well, I've I've seen as well, and you know, seeing the real world uh uh implementation, that's that's that's very uh you know, that's very useful and very happy to uh to have uh you know to have further discussions with you or with uh with uh with your audience. Yeah, we'll we'll put your different links uh in below the different streaming platforms so people can reach out directly to you um and hopefully have uh longer and and better even better conversations, I guess. But uh thank you for for coming. Thanks for having me. Until next time. Thank you very much.