The private credit landscape is undergoing a significant transformation as investors increasingly turn to asset-based lending strategies to diversify portfolios and capture yield in today’s challenging market environment.
Asset-based finance—secured lending backed by physical or financial assets—has emerged as a compelling segment within the broader private credit universe. Unlike traditional corporate lending that relies primarily on cash flow metrics, asset-based strategies offer unique structural protections through direct claims on tangible collateral.
“We’re seeing remarkable appetite for asset-based lending solutions,” notes David Liu, head of AB’s Private Alternatives division. “These strategies provide natural protection against inflation while delivering yields that typically exceed traditional fixed income by 300 to 500 basis points.”
The rise of this financing approach comes at a pivotal moment. With bank lending constraints tightening following regional banking stress earlier this year, middle-market companies face growing challenges securing capital through conventional channels. This funding gap has created ripe opportunities for alternative lenders to step in with bespoke financing solutions.
According to data from Preqin, private credit fundraising reached $191 billion in 2022, with asset-based strategies capturing an increasingly significant portion of these flows. Industry analysts expect this trajectory to continue, with asset-based private credit potentially growing to a $1 trillion market by 2028.
What’s driving this surge? Beyond attractive yields, asset-based lending offers compelling defensive characteristics. The loans are typically secured by specific assets—ranging from real estate and aircraft to intellectual property and specialized equipment—providing a clear recovery path should borrowers face financial distress.
This structural protection becomes particularly valuable during economic uncertainty. While traditional corporate lending may face heightened default risks during downturns, asset-based portfolios have historically demonstrated more resilient performance. During the 2008 financial crisis, recovery rates on asset-backed facilities significantly outperformed unsecured corporate debt.
The diversification benefit also proves attractive to institutional investors. Asset-based lending spans numerous sectors—transportation, real estate, consumer finance, healthcare, and technology—allowing for targeted exposure to specific economic segments without direct market correlation.
“What makes asset-based strategies particularly compelling in today’s environment is their inflation-hedging potential,” explains Cara Johnson, senior analyst at Highland Capital Research. “Physical assets like real estate, infrastructure, and specialized equipment tend to appreciate during inflationary periods, enhancing the underlying collateral value.”
For investors new to this space, understanding the nuanced risk profiles across different asset classes remains essential. Aircraft finance presents different considerations than intellectual property lending or consumer receivables. Each requires specialized underwriting expertise and sector-specific knowledge.
The operational complexity also creates meaningful barriers to entry, which helps preserve attractive economics for established managers. Successful execution demands specialized teams capable of evaluating collateral quality, structuring appropriate lending terms, and actively managing assets throughout the investment lifecycle.
Despite the growing enthusiasm, challenges remain. Regulatory frameworks continue evolving, potentially impacting certain lending categories. Competition has intensified in some segments, particularly real estate and transportation finance, potentially compressing returns for less differentiated strategies.
Looking ahead, industry experts anticipate continued innovation within asset-based lending approaches. Emerging technologies enable more sophisticated collateral monitoring and valuation techniques. Climate-focused lending—financing energy transition projects secured by renewable infrastructure—represents another growth frontier.
For allocators constructing diversified portfolios, asset-based strategies offer compelling relative value compared to traditional fixed income and equity investments. The combination of contracted cash flows, structural protection, and inflation-hedging potential creates a compelling risk-reward profile, particularly during periods of market uncertainty.
As one portfolio manager noted, “The beauty of asset-based lending is its fundamental simplicity—loans secured by specific, identifiable assets that generate predictable cash flows. This transparency becomes increasingly valuable when broader market conditions deteriorate.”
For investors seeking yield enhancement without assuming excessive credit risk, asset-based lending strategies deserve serious consideration as a core allocation within private market portfolios.
