Defensive by design: the case for asset-backed lending in 2026

This instalment in our series on asset-backed lending (ABL) explores the key value propositions of this area of finance in the current market environment. We explain why ABL is largely insulated from the challenges facing many direct‑lending (DL) strategies, including redemption pressure, valuation volatility and sector‑specific stresses.

Why asset-backed lending in 2026?

As explained in the first article in our series, ABL offers a blend of yield, protection and diversification, with risk secured by real assets. This can hold particular appeal for investors seeking capital preservation and uncorrelated returns, especially in a market where other assets can appear overvalued and are prone to volatility.

Key features of LOIM’s ABL strategy include:

• 1st lien senior loans secured against assets, with 80-90% recovery rates for asset-backed finance generally¹
• Predictable income with typically higher yields than bonds
• Short durations (average maturity is 18 months) reduce interest rate and inflation risk, enabling rapid repricing
• Short maturities, amortising structures and rapid loan turnover support liquidity

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ABL is a cycle‑agnostic, all‑weather source of stability

Certain characteristics distinguish LOIM’s ABL strategy. For one thing, our focus on loans of less than USD 50 million limits competition from bigger players, allowing for better terms and pricing.

Larger competitors also tend to concentrate on just two or three sectors, such as specialty finance. By contrast, our loans are backed by a wide range of collateral. Examples include government tax refunds, media assets (such as film catalogues, TV rights, music royalties, video-game royalties), infrastructure and legal claims. These types of assets are generally insulated from the broader economic cycle.

Our exposures also extend across geographies and end‑uses, further reducing cyclicality and eliminating exposure to AI‑driven sector risk. For example, in real estate we lend in Europe, the US and in developed Asia, and the assets can range from  nursing homes and student housing to logistics and residential properties.

‘We favour investments which are uncorrelated to other markets and economic conditions. ABLs are generally not affected by what’s going on, fundamentally’.

Georges Gedeon
Co-Portfolio Manager, LOIM Asset Backed Loan

Recent events have underscored the resilience of ABL. Many Business Development Companies (BDCs) that lend directly to middle-market enterprises have struggled to meet investor redemptions. This stems from a mismatch between the their long‑term, illiquid loan investments and the quarterly liquidity that BDCs promise to shareholders. Their use of leverage amplifies this vulnerability during economic slowdowns.

At the same time, many BDCs have been forced to mark down portfolios because of a heavy concentration in software, which is under pressure from emerging AI‑driven disruption. LOIM ABL, by contrast, has less than 1% exposure to software.

Read more: Could a stock market correction dilute the impact of AI capex on the US economy?

Additional concerns around fraud, opaque borrower capital structures, off‑balance‑sheet SPVs and even double‑pledged collateral have further increased risk and reduced transparency across parts of the market.  LOIM ABL invests in simple, transparent capital structures where it is typically the only debt, and where visibility and control over collateral is paramount.

Differentiation of LOIM Asset Backed Loan strategy²

Our strategy does not seek to enhance returns using leverage. We maintain an average loan maturity of just 1.5 years and ensure that liquidity for investors is fully aligned with our investments. Crucially,  every loan we originate is secured by real, measurable collateral. Even if a borrower fails or markets weaken, the asset securing the loan provides a reliable way to recover capital. ABL collateral is underwritten at conservative LTV ratios across the diversified asset base.

Read more: LOIM’s Asset Backed Loan strategy: built for diversified, defensive returns

What about the risks of default?

Defaults are an unavoidable feature of the private-credit market. Yet, because ABL is secured against real, monetisable assets, even if a borrower fails, the lender usually gets all or most of their money back. With LOIM ABL, the protection offered by diverse collateral ensures high recovery rates in the event of default.

The collateral underlying each investment is often fragmented, diversifying risk³

At the same time, a well-diversified portfolio means that even if collateral proves to be unrecoverable in case of a default, such a loss can be absorbed while maintaining relatively stable overall returns.

A further point to note is that by structuring deals with appropriate maintenance covenants, the lender can often earn extra fees from borrowers requiring waivers, amendments and adjustments, which can result in higher returns than initially underwritten.

A disciplined path to stable returns

Taken together, these features highlight the strength and resilience of ABL in today’s market. By focusing on smaller transactions, maintaining broad collateral diversification and avoiding the structural weaknesses seen elsewhere in private credit, LOIM’s ABL strategy is designed to deliver stable, asset‑backed returns with controlled risk.

Conservative underwriting, short loan maturities and strong alignment between liquidity terms and underlying investments further support capital preservation. And while defaults remain an inherent part of private credit, diversified exposures and real‑asset security help ensure high recovery rates and reduce the impact of individual setbacks.

In an environment marked by volatility, shifting sector dynamics and growing scrutiny of lender structures, ABL continues to offer a consistent, disciplined and transparent investment approach.