Asset-based investing, or asset-based finance, is a form of lending whereas the loans are backed by income-generating hard assets, such as energy infrastructure or leased airplanes, or by pools of financial assets such as auto loans and residential mortgages. These assets secure the loan and generate their own cash flows.

Direct lending is a type of private credit in which the lender provides financing directly to a corporate borrower that is responsible for repayment. Asset-based private credit differs from direct lending in that repayment is primarily secured by specific income-generating assets, such as infrastructure or financial asset pools. This leads to more predictable recoveries if there’s a default. In contrast, private corporate loans depend on the company’s cash flow, and recovery after default can be slower and less certain. Asset-based loans are also highly diversified and are repaid gradually, not in a lump sum, and are not tied to the company’s overall financial health.
 

Learn More: Exploring Asset-Based Finance: Funding the Real Economy

No, asset-based investing is not new. The shift from banks to private credit, including asset-based finance, has been evolving for decades. The 2008 global financial crisis accelerated this transition as regulations such as Basel III in Europe and Dodd-Frank in the U.S. prompted banks to reduce their lending activities, particularly to middle-market companies. This created opportunities for private credit investors to step in, expanding their reach and diversifying across new economic segments. More recently, specialty finance companies have further fueled the growth of asset-based investing, partnering with private credit investors to provide capital to underserved markets. The continued expansion of asset-based finance demonstrates its established presence and increasing relevance within the broader private credit landscape.

Investors who access the asset-based finance market could find attractive potential returns and diversification. These investments offer a yield premium because they’re less liquid than similar public securities—and because lending arrangements can be complex. Along with healthy income, they also offer potential capital gains, because they’re often made at a discount.

Asset-based finance may also complement investments in direct corporate lending and public-market risk assets such as corporate bonds and equities. We believe they bring a level of economic diversification that may help cushion portfolios in declining and turbulent markets.
 

Learn More: Exploring Asset-Based Finance: Funding the Real Economy

Asset-based investments are less liquid than publicly-traded securities. Illiquidity is an intentional feature, offering tailored structures, stronger lender-borrower relationships, and enhanced yield.
 

Learn More: Public/Private Market Convergence and the Limits of Liquidity

Investors should approach allocating to private credit by considering where it fits best within their existing portfolio. Private credit’s low duration, modest beta, and attractive risk/return profile allow it to complement high-yield and high-income strategies in a fixed-income portfolio, boost income and diversification in a balanced portfolio, or serve as an equity surrogate with lower volatility and risk. Since private credit is less liquid, investors must balance it with liquid assets for effective rebalancing. Tax considerations are also important, especially if using private credit to replace equities. Selecting skilled managers with strong track records and robust risk-management processes is crucial.