The surging opportunity in asset backed private credit

Asset backed lending (ABL) is an increasingly prominent area of private credit, offering investors a blend of yield, protection and diversification. In an environment marked by uncertainty and shifting market dynamics, ABL merits attention from those seeking capital preservation and uncorrelated sources of return. 

In the first of a three-part series on ABL, we explain the distinctive features of the loans and introduce the diversity of opportunities available. The second insight will examine in more detail why ABL is particularly well-positioned in 2026. Finally, we will highlight the particular aspects of LOIM’s Asset Backed Loan strategy and provide illustrative examples of the broad range of co-investment deals available to us. 

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ABL vs direct lending: what’s the difference? 

Asset backed lending (or asset-based finance/asset-backed credit as it is known in Europe, or specialty finance, as it is most commonly known in the US) refers to private credit investments backed by assets, which generate contractual cash flows. 

ABL sits within the private credit ecosystem, but operates very differently from traditional direct lending (DL) because it involves short term loans secured against the collateral, which can be liquidated if necessary. Underwriting therefore focuses mainly on the quality, cash generation and value of the assets, rather than on the borrower’s profitability and future earnings potential.

Corporate direct loans, by contrast, are largely tied to a company’s long-term business prospects and ability to generate cash flows. Put simply, ABL is driven by what the borrower has today, rather than what it might earn tomorrow.  

In DL, if the borrower can’t meet its obligations, the restructuring process can be protracted and complex. In ABL, it is more straightforward to take control of, and monetise, the collateral assets. This generally results in higher recoveries for ABL.  

As with other areas of private credit, ABL has gained popularity amid the retrenchment in traditional bank lending following the global financial crisis. At LOIM, we believe that ABL provides superior risk-adjusted return potential and better access to liquidity than most DL funds. That said, we also believe that there is room for both high-quality ABL and DL strategies in portfolios for diversified private credit exposure.

Key differences between asset-backed lending and direct lending¹

Steady returns, low volatility and better liquidity than many alternatives

ABLs offer stable, consistent return potential with an attractive, largely uncorrelated risk/reward profile. This typically results in the steady, predictable income of a bond, but with more downside protection and typically higher yields.

In summary, advantages of ABLs include: 

• Relatively low risk. ABLs are often backed by large, diversified pools of assets (such as thousands of invoices or individual inventory items), or clearly identified collateral (e.g., real estate or a contracted payment), so even if a borrower defaults, recovery rates tend to be higher than with DL loans. In ABL, the lender has the contractual right to seize and liquidate the underlying collateral
   
• Shorter duration. Unlike 7-to-8-year, non-amortising DL loans, ABLs are often repaid within months. This reduces interest-rate risk and allows subsequent loans to be repriced or renewed to maintain target returns 
   
• Less leverage, more resilience. ABL funds don’t need to employ leverage to generate attractive returns. This supports stability through cycles
   
• Natural liquidity. Short maturities, amortising structures and rapid loan turnover mean capital is often returned frequently, providing agility and options for reinvestment. The structure of the loans aligns well with an evergreen strategy. This can be a draw for those who want access to liquidity without giving up higher yields.
   

Read more: Harnessing private markets to invest in structural shifts: LOIM’s approach

A nascent segment of private credit that is ripe for expansion 

Over the past decade and a half, ABL has evolved from a niche investment strategy into a key growth engine within private markets. It still remains a relatively underpenetrated area of private credit – providing the potential for a large and attractive investment opportunity.

To illustrate the potential scale of the market, consider the following figures: the ABL market is estimated at USD 5.2 trillion², yet private credit accounts for only around USD 170 billion³ of that, resulting in a penetration rate of just 3%.

We see ABL attracting a broader institutional base as the market grows, generating longer track records and larger AUM totals

- Jim Karp, Co-Portfolio Manager, LOIM Asset Backed Loan 

By comparison, private credit holds roughly 25% of the USD 3.5 trillion DL market⁴. This disparity suggests substantial room for growth as institutional capital increasingly seeks secured, short duration alternatives.

Many early adopters of ABL strategies have been family offices, which generally can take earlier-stage strategic positions without the constraints faced by large pension funds and insurers. As the asset class builds longer track records and larger AUM totals, it is starting to attract a broader institutional base, in our view.

The next article in our series will look more in depth at the features and market developments that make ABLs particularly attractive in 2026 – from current yield dynamics to the macro forces shaping demand.