Most people traditionally look to stocks, bonds, real estate, and other “safe” investment solutions when developing their portfolios. But often, those people mistaken “safe” for “simple”. However, there are certain structured financing offerings that may take a little more work to understand but may be worth it, such as asset-backed securities (ABS).
“Often complex financial instruments are seen by retail investors as only for institutional or more sophisticated investors,” says Richard Cayne of Meyer International. “But prudently vetted asset-backed securities generate significant returns.”
Asset-Backed Securities are Simple at the Core
The ABS issues that get the most attention are those that have some sort of debt underlying the offering, such as loans, credit card debt, and mortgages. But, there are also certain types of ABS that are built on receivables, such as commercial leases or franchise royalties.
Nevertheless, they all have the same fundamental structure. First, a special-purpose vehicle (SPV) is created to acquire the relevant assets, be they credit card debt or licensing royalties. To raise the fund to purchase these assets, the SPV sells ABS, in either debt or equity forms, in those assets. Finally, the cash flowing from those assets are then paid to the ABS investors as agreed.
Although ABS instruments tend to revolve around assets that need to be bundled to get financing (remember the sub-prime mortgages of 2008?), but the SPVs are meant to protect the investors in case the asset originator goes bankrupt. There are also mitigations of credit risk, which is too complex to get into here.
Wait, did you mention sub-prime mortgages?
Yes, the credit crisis of 2008 was affected to some extent by a type of ABS, specifically mortgage-backed securities that bundled sub-prime mortgages, which are loans written to people with less that optimal credit. In theory, the product itself wasn’t the issue, it was the execution and maintenance.
Ask someone in the know for more info
As was demonstrated by the events of 2008, investing in asset-backed securities can be problematic, but that was because people didn’t conduct proper due diligence, asking the right questions. Talking to someone like Richard Cayne, with years of experience in these types of investing, can go a long way to make sure your money is wisely invested.