Beyond direct lending: the growing opportunity in asset-based finance

Private credit has become one of the fastest-growing areas of alternative investing. Over the past decade, advisers have become increasingly familiar with direct lending strategies that finance private equity-backed companies. However, direct lending represents only one segment of the broader private credit universe.

For Owen Libby, principal in alternative credit at Blue Owl Capital, a much larger opportunity exists within asset-based finance, a segment of private credit focused on financing everyday economic activity.

“When people hear private credit, they often think immediately of direct lending,” Libby says. “But there’s a much broader ecosystem of credit opportunities tied directly to the real economy.”

Financing the real economy

Asset-based finance lends against pools of assets, not operating cash flows. These assets include equipment leases, aircraft financing, consumer receivables, and small business loans. The strategy sits closer to everyday economic activity than corporate lending.

Many underlying cash flows come from ordinary transactions. Mortgage payments, credit card balances, equipment leases, and small business loans all generate contractual payment streams. These can be financed through private credit structures.

“The way we think about asset-based finance is really access to the real economy, “Libby says.

A structural shift in lending markets

The scale of this opportunity is substantial. Outstanding assets that could potentially be financed through asset-based strategies already run into the trillions of dollars globally. Yet only a relatively small portion of capital is currently dedicated to the space. This imbalance has created an environment where investors can step in to provide financing in areas that were historically dominated by banks.

Regulatory reforms made it significantly more expensive for banks to hold certain forms of credit risk on their balance sheets. As a result, many institutions have retreated from segments such as equipment leasing and consumer lending.

“Banks used to hold many of these assets themselves, but regulatory changes have made it much more expensive for them to keep risk on their balance sheets,” Libby says.

More recently, the sharp increase in interest rates has reinforced this shift. When government bonds yielded close to zero, banks and institutional investors were willing to extend credit to a broader range of borrowers in search of yield.

As policy rates increased, that dynamic changed quickly. Higher risk-free returns reduced the incentive to hold more complex credit exposures, leaving gaps that private capital could fill. Libby explains:

“When you can buy a Treasury yielding five per cent, some institutional investors simply step away from these types of assets.”

Hard assets and financial assets

Within asset-based finance, investments typically fall into two broad categories: hard assets and financial assets. Hard asset strategies involve lending secured against physical collateral such as equipment, aircraft or infrastructure-related assets. In these cases, lenders have claims over tangible assets that can be repossessed or sold if borrowers default.

Financial asset strategies, by contrast, involve lending against pools of receivables such as consumer loans, credit card balances or small business financing. These portfolios often contain thousands of individual loans, spreading risk across a wide base of borrowers rather than concentrating exposure in a single corporate credit.

“In many of these portfolios the average loan might be only a few thousand dollars, but there can be tens of thousands of loans in a single pool,” Libby says.

Structural protections

Another distinguishing feature of asset-based finance lies in the way cash flows are structured. Many investments in the sector are self-amortising, meaning borrowers repay both interest and principal gradually over the life of the loan. This differs from many corporate loans, where the principal is repaid in full at maturity.

As a result, clients progressively recover their capital as payments are made. So this reduces reliance on refinancing or capital market exits at the end of the loan term. These structural characteristics can help mitigate risk and create more predictable cash flow profiles within advised portfolios.

The role of data science in credit analysis

Managing portfolios that contain thousands of individual loans requires significant analytical capability. Data science has therefore become a central component of modern asset-based finance strategies. Advanced modelling tools allow investors to analyse decades of historical credit performance, monitor asset pools and stress test portfolios under different economic scenarios.

“Data science plays a massive role in how we underwrite and monitor these investments,” Libby notes.

For advisers building diversified private credit portfolios, asset-based finance can offer exposure to different drivers of return compared with traditional direct lending. Corporate lending relies heavily on the operating performance of private companies, while asset-based finance draws returns from contractual payments generated across households, businesses and equipment markets.

As private credit continues to expand, Libby believes investors will increasingly recognise the role this segment can play within portfolios.

“It’s an asset class tied directly to everyday economic activity,” he says. “That’s what makes it such a compelling complement within private credit portfolios.”