Asset-backed finance has been feted as the largest growth engine for private credit, but which areas within the asset class are looking most attractive? Aysha Gilmore reports…
Asset-backed finance (ABF) has been deemed the “new kid on the block” within private credit, set to overtake direct lending as the industry’s next driver of growth.
In total, private credit is projected to surpass $2tn (£1.5tn) this year, with “ABF already being identified as a primary catalyst for private credit growth in 2026”, says Kyle Shonak, chief transaction officer North America, and Mark Bohntinksy, global head of credit at Gordon Brothers. By 2029, ABF is expected to account for 29 per cent of assets under management in private credit portfolios.
The opportunity set remains vast, with unpenetrated asset-based lending estimated at $5.5tn in the US alone, according to Oliver Wyman data, with private credit currently holding less than a five per cent share.
“The ABF market is a multi-trillion dollar addressable market, but private credit’s penetration is still in the early innings,” says Jennifer Marques, managing director and head of strategy and structuring at Oaktree.
But, within this sizable market, which segments of ABF present the greatest opportunities for asset managers and allocators
Read more: The next frontier in ABF: A $20tn opportunity and the challenge of scale
A tale of two cities
For managers investing in ABF, a clear divide is emerging between investment-grade (IG) and non-investment grade (non-IG) strategies, often likened to the split between insurance and non-insurance capital.
A growing trend has been the expansion of the insurance-driven side of ABF, focused on IG-rated assets. Large players, such as Blackstone and Apollo, have leaned heavily into this space in recent years.
For Joel Holsinger, co-head of alternative credit at $623bn Ares Management, the more compelling opportunity lies on the non-IG side.
“It is a tale of two cities,” he explains. “The insurance side will continue to grow, and you’ll see an ongoing transformation of traditional insurance from where it is today. I believe we’re nearing the end of the economic cycle, after which the market will reset and grow from there.
“On the non-IG side, I think the market is just getting started and nowhere near the size of what it was pre-GFC.”
Ares Alternative Credit funds currently own minority equity stakes in several players operating in the relative value, non-IG segment, rather than in captive origination models feeding insurance balance sheets.
Within this non-IG space, Holsinger highlights residential mortgages, digital infrastructure and fund finance as particularly interesting. He adds that activity has been especially strong across these areas, with fund finance continuing to gather momentum.
A similar view is held by a large US-based, global credit-focused asset manager, which believes the current opportunity lies in segments less suited to insurance capital.
“It is a huge market,” says a senior executive at the company. “I think there is still a lot to do in the sector, and we are not seeing crowding in investments, particularly in the unrated space as there is not enough capital chasing the deals.
“That is where we see an enhanced yield opportunity today. You have this favourable supply and demand dynamic; we’re looking to that space where the banks have left but are not a good fit for a formal IG rating and that is keeping competition in the unrated space especially low.”
Transportation and equipment finance
Oaktree Capital Management runs an “all-weather, go-anywhere strategy,” with equipment finance a key focus, particularly amid the pullback from US regional banks, explains Marques. The strategy targets essential-use assets such as medical equipment and forklift trucks.
“Areas in focus for us today include equipment finance, transportation, select spots within consumer – where we favour essential goods and services financing, residential solar, home improvement loans for example – and certain segments within digital infrastructure,” she says.
Fabrice Fraikin, managing partner and co founder of Kartesia Asset Finance also highlights the potential in transportation, with the firm focusing on specialist transportation finance in the European small and lower mid-market.
“There is strong growth potential in our market segment, especially driven by decarbonisation targets for 2030, 2040 and 2050,” he tells ACI. “We focus on transportation assets as they are, by definition, mobile, standard and supported by a deep secondary market. If a credit situation arises, we can repossess the asset and remarket it.”
However, when asked whether oil and gas volatility linked to geopolitical tensions poses a risk, most currently the conflict in the Middle East, he says that the strategy is “well protected, as the fund owns the underlying assets”.
“Even if the current geopolitical environment proves more challenging, we retain control of the assets, which preserve their value,” he adds.
Read more: Obra Capital appoints new MD to expand ABF strategy
Sweeter than vanilla
Some other managers, such as European alternative credit firm Northwall Capital, are seeing the greatest opportunity in financial receivables and “less vanilla” assets, such as contractual income rights and insurance assets.
In 2021, low base rates drove heightened competition within this segment and in 2022 financial assets became somewhat scarcer, but over the last couple of years, participants have re-entered the market in greater numbers, says Thomas Hengstberger, managing director, asset-backed and portfolio opportunities at the asset manager.
“In recent years, 2025-2026, we have seen competition increasing again across asset classes,” he tells ACI. “Within financial receivables we still see good opportunities where there are high barriers to entry through informational experience or general understanding of the product.”
Hengstberger notes that consumer lending tends to have greater exposure to macroeconomic risk factors than insurance assets or contractual income rights. As a result, these areas may prove more resilient if market conditions deteriorate.
Net asset value (NAV) lending is also appealing to asset managers, with Peter Hutton, head of NAV financing at Arcmont Asset Management, pointing to the rising adoption rates across both Europe and the US.
He suggests adoption in Europe’s mid-market is around 40 per cent, while in the US it is just under 30 per cent, up from virtually zero 10 to 15 years ago. Hutton explains that the slower uptake in the US has been due to structural differences, with European funds more commonly incorporating special purpose vehicles (SPVs) below the fund level and that acts as a borrower, making NAV lending easier to implement.
“However, that is now changing, funds in the US are now being set up with an SPV and I would say the rate of adoption in the US is currently quicker than in Europe,” says Hutton. “In the last couple of years, there has been a significant increase in the number of first-time NAV users. Typically, if a sponsor has used a NAV loan on one fund, they will likely use NAV on their next fund as well, given the ‘win/win’ benefits for sponsors and their private equity limited partners alike.”
Data centre boom or bust?
However, not all areas are becoming more attractive. Some segments are starting to lose their appeal as competition intensifies, data centre lending being a prime example.
Artificial intelligence (AI) is increasingly dominating venture capital, accounting for around a third of UK funding and close to two-thirds in the US, with a handful of mega-rounds driving a growing share of overall investment.
Against this backdrop, Holsinger says Ares is becoming more selective within data centre lending. “There is a significant amount of capital in the data centre space, mainly on the lending side,” he explains. “It’s still attractive, but banks have become more active here.”
As banks have built up capacity in the data centre space, he says, it has led to a significant concentration of risk. “We are seeing second derivative interest such as capital relief on that data centre piece, but the first derivative is less interesting,” he adds. “This is creating more of an opportunity across the broader infrastructure landscape, whether that’s toll roads or cell towers for example.”
AI and market jitters
ABF’s appeal could increase further, amid wider concerns about private credit’s exposure to the software sector that is set to be impacted by the rapid rise of AI.
Fraikin argues that ABF strategies remain relatively insulated as “the strategy does not rely solely on the borrower’s enterprise value. Instead, the focus is on the underlying assets financed”.
That said, recent market events have highlighted potential risks. The bankruptcies of Tricolor Holdings and First Brands Group, both tied, to varying degrees, to ABF structures, have raised concerns, particularly around securitisation models. At the same time, significant capital inflows into ABF are increasing pressure on managers to deploy.
Fraikin stresses that discipline and expertise in the space is critical. “Insufficient due diligence on the credit quality, the underlying asset and the collateral can lead to complex credit situations,” he says. “The problem we are seeing in the market is an excess of capital combined with a pressure to deploy it into loans that are not of high quality or are backed by weak collateral.”
While ABF continues to gather momentum, the opportunity is becoming more nuanced. As capital floods into the space, returns will increasingly hinge on managers’ ability to avoid crowding, be more selective and maintain discipline.
