Concerns have been growing about private credit investments over the past few months, but Lotfi Karoui, managing director at Pimco, argues that these concerns are mostly related to corporate direct lending, and the broader private credit space is still offering attractive opportunities – particularly in asset-backed finance (ABF).
“This narrow focus can miss the bigger picture,” Karoui said. “Private credit extends well beyond direct lending and continues to merit a place in well‑diversified portfolios. ABF and high quality consumer and mortgage credit have continued to offer meaningful diversification and more attractive value than direct lending.”
Read more: Hidden assets: Special report on asset-backed finance
Karoui said she particularly sees interest in asset-based finance growing as a diversifier, with the asset class offering a “large and underappreciated” opportunity.
“ABF is generally less correlated with the corporate earnings cycle and benefits from structural downside protection. Selective exposure to consumer and mortgage credit, particularly related to higher-income households, can offer a more attractive risk/reward profile,” she said.
“As the cycle matures, the relative appeal of ABF as a diversifier is likely to continue to increase, precisely because returns are driven more by collateral and structural protections than by pure earnings growth.
Read more: Blackstone private credit fund sees surge in redemptions
“The opportunity set spans a wide range of exposures across the economy, including residential and commercial real estate, consumer credit, and specialty finance. And unlike direct lending, which is predominantly non‑investment‑grade corporate credit, ABF may provide investment‑grade‑like risk profiles that are less capital‑intensive for large allocators.
“The result is a large and still underappreciated opportunity where diversification and downside resilience, rather than headline yield alone, underpin the investment case.”
Recent PIMCO research using public securitised products as rough beta proxies for ABF – an approach that abstracts from both liquidity premia and manager selection alpha – suggested that potential ABF risk-adjusted returns are not only more attractive than direct lending, but also exhibit greater resilience to market downturns and lower sensitivity to fluctuations in risk sentiment, as proxied by equity returns.
Read more: Oaktree brings asset-backed finance to wealth investors
