Our expectations, laid out in the outlook for 2025, {European & Australian ABS: Rounding up 2024 and looking ahead to 2025}, included high issuance volumes across both European and Australian ABS and for asset performance of collateral to remain relatively stable - despite rates remaining higher for longer than market expectations.

2025 year to date Market review - were our expectations in line with reality?

Focus themes:

Tariff impacts and Macro economic uncertainty

After a strong start to the year in Q1, markets faced uncertainty in Q2 given President Trump's tariff announcement. Although new issue markets did grind to a halt and spreads widened to levels comparable to early 2024, volatility in securitised credit was lower than corporate credit given lower credit spread duration and higher average ratings. This was further dampened in European and Australian securitised credit by the low exposure to rate volatility as assets are predominantly floating rate. See our review of this period here: {Lessons from Liberation Day: Is now the right time to consider diversifying into securitised credit?}

As markets rebounded, European ABS primary markets saw a strong pick up in May with issuers keen to get deals priced before the annual Global ABS conference in Barcelona, early June. Despite increased supply, spreads retraced from April wides with the secondary market subdued by investor focus on new issue markets.

Strong Technical demand and supply from less traditional sectors

A continued lack of mezzanine issuance and strong demand from investors persisted during the first half of the year. As a result, post the April tariff-induced volatility, spreads have reached YTD tights across asset classes globally. This has encouraged not only repeat issuers to come to market but also some new sectors/collateral included in transactions. Examples are RMBS transactions including HELOC (Home Equity Line of Credit) mortgage collateral in the UK and issuers transitioning previously private platforms to public markets.

The second half of July and August gave us the traditionally quiet pipeline in Europe. In Europe, it is worth noting deals were still being placed privately or preplaced in part due to the more atypical collateral financed such as equity release products and legacy mortgage pool securitisations.

On the regulatory front, June saw the release of the new EU securitisation framework proposals where key themes include changes to capital and reporting requirements, the motivation of which is to lower barriers for both issuers and investors. It is noted that the implementation is on a long-time horizon, likely through to 2027, given continued consultation and lengthy legislative process. Further detail is provided towards the end of this note.

Expectations to Year End 2025

The last few months of 2025 are expected to be shaped by a complex and evolving geopolitical and macroeconomic landscape. Political and geopolitical risks are front-of-mind for market participants and we expect this dynamic will persist into year-end and beyond. Investor sentiment remains highly sensitive to developments in global trade policy as well as the pace of Federal reserve rate cuts. Political developments in the U.S. and the potential escalation of the conflict in Ukraine add further layers of complexity to the investment environment.

Notwithstanding this backdrop, technicals for the ABS market globally remain strong. Supply of new issue paper has held up well, with volumes similar to those seen in 2024, and spreads tightening as demand has held up. However, macroeconomic fundamentals do remain a concern for specific jurisdictions. We remain vigilant for any changes in performance of the underlying consumers, and we look to rating agencies to maintain appropriate performance assumptions to limit rating risk for our investors.

Issuance

Despite the markets facing uncertainty during Q2 and the inevitable stall in primary issuance across Europe and Australia, issuance volumes as at end September 2025 are at just over €71bn in European ABS, slightly lower than the issuance year to date in 2024.

We expect issuers to capitalise on windows of market stability, leading to concentrated bursts of primary activity--September being a prime example with €14.6bn of transactions priced, the highest month of issuance since May 2024. Absent any macro shocks, we expect European ABS 2025 issuance to beat the annual record for post GFC issuance volume set in 2024.

In Australia, YTD issuance volumes have been high at AUD50.9bn as at end September largely on par with last year's breakout year for issuance which had reached AUD$59.4bn for the equivalent period. September was also a post GFC record month for issuance. With a strong pipeline for October, we expect issuance volumes to remain at a strong cadence during October and November with issuers aiming to have deals priced before the annual Australian Securitisation Conference, late November.

Asset Performance

Performance of underlying collateral In European ABS has remained stable across most sectors aided by the decline in rates observed to date and continued resilience of employment statistics.

In Australia, asset performance varied by receivable type and lender, but the lower interest rate environment is broadly viewed as supportive for borrowers. Generally, collateral performance has held up relatively well despite pressures on household servicing costs, helped by floating-rate structures and gradual policy easing.

Spread Dynamics and Demand

Given the continued supply demand dynamic for mezzanine issuance, we continue to see high subscription levels in primary and competitive BWIC auction processes in secondary for mezzanine investment grade bonds. For larger, more established platforms, denominated in EUR, we continue to see the placement of senior paper can be affected by bouts of large supply with newer issuers often less covered and at wider spreads.

Australian ABS spreads have compressed significantly across the capital structure, with the single A and BBB rated tranches pricing similarly to European transactions during September. The credit curve is relatively flat compared to European issuance with the more senior parts of the capital structure still offering a significant basis to their European counterparts.

Also, the breadth of issuers and emergence of new collateral types, structures and issuers across Europe and Australia continues to present opportunities for investors to earn a premium over more traditional platforms.

We note that structured finance spreads across sectors and jurisdictions are testing on to post GFC tights but continue to hold that the benefits on holding securitised products which include; a pickup to similarly rated corporates, limited spread duration, and exposure to floating rate assets. We discuss structure finance as an alternative to corporate credit.

Regulatory Activity continues to evolve

Market participants were kept busy as always, with non-market related regulatory activity - in particular, the EU regulatory reform and UK autos ruling (see below)

UK Auto Court Rulings:  We covered the uncertainty that Court rulings provided UK auto lenders and ABS investors in our article here, "Uncertainty Weighs on UK Auto Lenders Due to Recent Court Rulings", at the start of the year.

What did the Supreme Court decide?

The Supreme Court overturned the Court of Appeal's decision and ruled that UK dealers did not owe a fiduciary or disinterested duty to the borrowers. This removed the spectre of widespread, large claims for compensation based solely on hidden commission arrangements. There is still some work being done by the FCA on a potential redress scheme focusing on Discretionary Commission Arrangements (DCAs), which were banned in 2021.

Impact on UK Auto ABS?

As we noted in our piece above, the impact on UK Auto Asset-Backed Securities (ABS) did remain limited, thanks to strong structural protections and credit enhancements, although secondary liquidity was more challenged until more clarity was reached. Publicly distributed issuance in UK Auto ABS across bank and non-bank lenders, was €3.6bn in 2024 compared to no issuance at all seen until September this year, in the space.

Will UK Auto ABS issuance pick up?

We do expect a pickup in issuance, as demonstrated by the first UK Auto ABS to price since the since the Supreme Court ruling. In mid-September, VW UK placed Driver 10 publicly with the senior class A spread at 60bp and 100bp above SONIA, on the Class B and with an increased deal size to just over €700mn due to demand. This compared very well to the previous Driver transaction price in September 2024, where the senior tranche also priced at 60bp over SONIA.

The transaction placement is a positive signal for UK non-bank lenders and will have given them confidence in execution. That said we do note that given lower origination volumes, the funding needs of these lenders may be more muted in the near term.

European Securitisation Regulation: A consultation was launched in Q4 2024 by the European Commission to gather feedback from the industry on a wide range of issues pertaining to the EU securitisation market.

The legislative proposals were presented in June 2025 and overall, the reaction from market participants was positive regards proposed changes to the STS framework.

We limit our discussion here on the proposed changes to high level comments as the final proposals come out next year but the aim on the proposals is stated as to reduce barriers to issuance and investment in EU securitisation.

The expected changes include those we believe are most relevant, below:

• Capital Requirements Regulation (CRR) Updates: Adjustments to risk-weighted asset floors for bank investors with reduced risk weightings meaning banks may find securitised investments more attractive compared to other fixed-income alternatives.

• Due diligence obligations: EU investors may see more simplified due diligence requirements (for example for repeat platform issuers) when investing in EU securitisations, shifting compliance responsibility to the sell-side party. However, non-EU based securitisations will still need to meet full due diligence requirements.

• Reporting & Disclosure Reforms: A simplified reporting template for private securitisations is expected, reducing compliance burdens while maintaining transparency. Additionally, securitisation repository reporting may be extended to include private deals.

• Solvency II Reforms for Insurance Investors: The industry has seen proposals that could unlock greater participation from EU insurers which has been constrained post GFC by stringent capital treatment.

'Show me the incentive and I'll show you the outcome.'
Charlie Munger

Investing in a company means putting your capital in the hands of managers who decide how it's used. Managers have access to information you don't, and their personal incentives may differ from yours. Since people naturally act in their own self-interest, ensuring managers' interests align with yours is critical. At Canopy, we believe the most effective alignment comes through meaningful ownership, whether from founder-operators, family-controlled businesses, or executives with substantial equity positions.

Historical out performance of aligned management

Companies with aligned management consistently outperform their peers. Bain & Company's analysis of S&P 500 firms from 1990 to 2014 showed that founder-led companies delivered cumulative total shareholder returns 3.1 times greater than other companies over this period, as shown in Figure 1 below.

^{Source: Bain & Company.}

One might argue this simply reflects the exceptional performance of technology companies over this period, many of which happen to be founder-led. However, even when technology firms were excluded from the analysis, founder-led companies still delivered 1.8 times the returns of their peers.

Academic research suggests this outperformance stems partly from differences in how founder-led companies allocate capital and innovate. Fahlenbrach's 2009 study of 2,327 firms from 1992-2002 showed founder-led companies invested 22% more in R&D and 38% more in capital expenditures than their non-founder-led peers, and delivered annual share price outperformance of 8.3% even adjusting for risk factors. This combination - higher investment and superior returns - demonstrates that founder-CEOs don't just spend more on growth, they're better at selecting which investments will create value.

Lee, Kim, and Bae's study of S&P 500 companies from 1993 to 2003 showed founder-led companies generated 31% higher citation-weighted patent performance (a measure of innovation impact) versus non-founder-led companies. The advantage remained at 23% even after controlling for higher R&D spending, indicating they innovate more efficiently. The study also found that founder-led companies tend to produce more breakthrough innovations (patents in the top 5% by citations).

However, alignment does not universally drive optimal outcomes. Morck, Shleifer, and Vishny's 1988 study of 371 Fortune 500 firms revealed an inverted U-shaped relationship between management ownership and firm value. The study found firm performance improved substantially when managers increased their ownership positions above 5%, but then declined again as ownership levels increased beyond 20%, potentially indicating entrenchment and value destruction.

This entrenchment effect is particularly pronounced in family-controlled firms. The Morck study found evidence that older firms run by founding family members underperformed compared to those led by unrelated officers. As family ownership stakes increase beyond optimal levels, concentrated voting control can insulate management from market discipline and traditional governance mechanisms. Entrenchment risk may manifest through nepotism in senior appointments, excessive compensation, retention of underperforming family executives, resistance to strategic changes that threaten control, and conservative financial policies that prioritise stability over growth.

The ownership mindset

We believe companies with properly aligned management teams outperform for several fundamental reasons:

• Long-term perspective: When managers have significant personal wealth tied to company performance and expect to remain with the business, they think and plan over fundamentally longer time horizons. In contrast, professional managers without meaningful ownership often face quarterly earnings pressure, shorter tenure expectations, and career advancement timelines that encourage more immediate results.
• Faster decision-making: When founders or aligned managers have clear ownership stakes and authority, they can make critical decisions quickly without navigating competing interests or extensive approval processes. Professional managers often face more complex stakeholder dynamics and committee structures that slow decision-making.
• Risk tolerance for innovation: Founders are often more willing to cannibalize their own products or pursue disruptive innovations, while professional managers at large companies may be incentivized to protect existing revenue streams and avoid career-threatening risks.
• Cultural cohesion: When managers have long-term ownership stakes, they're more likely to invest in building a strong workplace culture, employee development, and talent retention since they'll benefit from the long-term performance gains.