By: Maria Otto
The Rise Of Private Credit
Asset-based finance has become one the fastest-growing frontiers of private credit, an asset class that itself expanded from $158 billion of assets under management in 2010 to nearly $2 trillion by mid-2024. Private credit’s rise accelerated after the 2008 Global Financial Crisis, owing to the regulatory response that raised the cost of originating and retaining certain forms of riskier credit for banks. The new regulations created a financing gap as banks were no longer willing to supply the pre-crisis levels of credit that smaller and riskier corporate borrowers continued to demand post-crisis. In the place of banks, non-bank lenders, who were not subject to the same regulatory limits and thus able to extend loans to ‘riskier’ borrowers, stepped in. At the same time, a decade of low interest rates dragged down traditional fixed income yields. The returns on publicly traded corporate ( bonds) and government (treasury notes) debt are anchored to policy rates, meaning that when rates are low, the returns on these instruments are also low. Lower returns meant institutional investors such as pension funds and insurers began channeling capital into private credit in search of higher yields. Non-bank lenders increasingly filled the space between this investor demand and borrowers that had become more expensive for traditional banks to finance.
This migration out of the banking system began with corporate credit as direct lending to mid-sized companies formed the first wave of private credit’s expansion. The second wave is increasingly positioned as stemming from a rise in asset-based finance (ABF). In 2025, KKR estimated the size of the ABF market at over $6.1 trillion USD, roughly double its previous 2006 high. Some industry outlooks now forecast that ABF will lead private credit’s growth in the coming years, with some projecting it could overtake direct lending altogether. Unlike direct lending, in which loan repayment depends on the ability of a single company to sustain its operating cash flows, ABF investments are repaid from the contractual cash flows of a defined pool of financial or hard assets. This structure has encouraged ABF’s reputation as a more conservative, collateral-backed complement to corporate lending. Because these asset pools that include car loans, mortgages, and consumer receivables like credit card payments are tied to everyday economic activity, the growth of ABF also offers a window into where credit is flowing in an increasingly divided economy at a time when US household debt stands at about $18.8 trillion USD. This article evaluates the structural features that differentiate ABF from direct lending, weighs them against its potential weak points, and employs its expansion as a lens into the “K-shaped” economy that underpins private credit’s fastest-growing frontier.
The Structural Case for ABF
The growth of the private credit market as a whole has served to show that regulation tends to relocate lending rather than eliminating it, so risk is transferred instead of wholly eliminated. The ultimate question that must be answered is whether ABF’s structure is able to shrink these risks in practice, rather than just in theory. The strongest case for ABF rests on three protections: amortisation, diversification, and collateral.
In a typical direct loan, a private credit fund lends to one company and assesses whether that company will generate enough operating cash flow, meaning cash produced by its core business activities, to repay the debt. The lender usually receives interest during the loan term, while most of the principal, meaning the original amount borrowed, remains unpaid until maturity. This leaves the lender exposed to the risk that the borrower is unable to refinance when the loan is due for full repayment. ABF uses a different repayment structure. Rather than relying primarily on the future earnings of one company, repayment comes from the cash flows generated by a defined pool of assets, which can range from auto loans or consumer receivables to aircraft leases and industrial equipment.
Many of these assets generate cash flows that repay principal throughout their lives, progressively reducing the lender’s exposure instead of concentrating repayment at a single maturity date. This difference gives ABF an important defensive advantage: a direct lender can be right about a company for four years and still suffer if the principal cannot be repaid in full at the loan’s maturity in year five, whereas an ABF lender may already have recovered a substantial portion of the principal owed before economic conditions deteriorate.
Diversification creates a second distinction. In direct lending, the performance of a loan can hinge heavily on one company’s financial condition. Problems such as the loss of a major customer, deteriorating margins, poor management or an unsuccessful acquisition can significantly impact the borrower’s ability to repay. By contrast, an ABF pool can distribute this borrower-specific risk across hundreds or thousands of borrowers, assets and, in some cases, geographic regions. This means that the failure of one borrower has a limited effect on the overall pool, although diversification provides less protection when borrowers are affected by the same economic conditions leading to simultaneous failures. These safeguards do not necessarily decrease the probability that a borrower defaults, their primary purpose is to reduce lender exposure if defaults occur.
The third point is collateral protection. ABF investments are also commonly held in a separate legal entity from the company that originated or arranged the assets. This structure can help protect the collateral, meaning the assets supporting the loan, if the originating company enters bankruptcy. ABF transactions may also include several contractual protections. The lender may provide only part of the value of the underlying assets, while junior or equity investors provide the remaining capital and absorb losses first.
In this respect, ABF can reduce three risks that are especially important in direct lending: dependence on one corporate borrower, reliance on refinancing at maturity and the concentration of principal repayment in one final payment. However, direct lending retains advantages that make it misleading to describe ABF as ‘safer’. The two forms of lending reduce different risks and create different forms of uncertainty.
This makes the comparison more nuanced than a simple description of ABF as direct lending with added collateral. Direct lending concentrates risk but can make that risk relatively visible: the lender knows and can monitor the company that must perform, intervening when it does not to prevent formal default through renegotiation and other forms of intervention. ABF disperses risk and returns principal earlier, but in doing so makes the lender more dependent on the quality of the pool and the assumptions used to create it. Ultimately, direct lending asks whether one borrower will still be able to repay several years from now. ABF asks whether enough borrowers will behave roughly as expected. It is this exchange of one form of risk for another that is the benchmark for judging the claim that ABF offers a more conservative form of private credit than direct lending.
ABF’s Points of Vulnerability
The ability of ABF’s protections to reduce risk ultimately depend on three questions: how the underlying loans are made or ‘originated’, how their underlying collateral is valued, and who ultimately owns and finances the risk.
The first question is an incentive problem. When the institution that makes a loan does not retain the risk associated with the loan it originated, there is less incentive for it to check the borrower carefully. One study conducted during the era of subprime (lower credit borrower) mortgages found that loans that were easier for the originator to sell, defaulted 10 to 25% more often than nearly identical loans that were harder to sell.. Yet, historical evidence does not suggest that securitisation, the bundling and selling of loans, automatically leads to the origination of riskier loans. For ABF, the key question is not if loans are originated to be sold, but how much risk the originator retains and how much information reaches the investor.
The second question is valuation. ABF protections depend on assumptions on the value of the underlying assets, default rates, and recoveries, but most private assets lack continuous market prices. The margin of safety created by ABF protections narrows if the assets are worth less than originally assumed or if defaults increase unexpectedly. This exposes an important gap between the case that ABF is structurally ‘safer’ and the actual evidence available to prove it. Theoretically, the case for protections reducing losses, and thus the risk to investors, is strong. However, there is less independent evidence to demonstrate how the modern ABF market at its current scale performs relative to corporate direct lending through a severe, prolonged economic downturn.
The third question is who owns the risk. The largest purchasers of ABF paper are now insurance companies, increasingly ones owned by the same private equity firms that manage the credit funds they are investing in. Regulatory treatment can reinforce insurer demand regardless of the underlying economics of the asset, raising the question of whether rapid capital inflow can eventually affect pricing discipline. Highly rated private assets, like ABF loans, can receive favorable treatment while the growing integration of private-equity firms, credit managers and insurers gives asset managers access to more permanent sources of capital to fund private credit investments. This means that ABF’s growth is influenced by regulation and institutional structure, not just investment fundamentals.
Banks have also remained part of this system. Although some lending migrated away from bank balance sheets, banks increasingly provide senior credit facilities to private-credit funds themselves. In effect, they have moved from financing some borrowers directly to financing the institutions that now hold the loans. This may reduce some forms of bank risk, but it also creates the risk that stress in private markets is channeled into the regulated financial system.
The central weakness of ABF is that each protection depends on assumptions about underwriting, valuation and the behaviour of the institutions surrounding the asset. The structure can reduce risk, but it does not make those assumptions irrelevant.
ABF and the K-Shaped Economy
The composition of ABF collateral also makes the market a useful diagnostic for the underlying health of an increasingly divided U.S. economy. U.S. household debt reached nearly $18.8 trillion in the second quarter of 2026, but the overall resilience hides substantial differences across income and credit-quality groups. Rates of delinquency for subprime consumers are currently approaching or surpassing those recorded during the 2008 downturn, whereas prime borrowers remain largely unaffected. The split reflects the K-shaped pattern visible across household finances. Federal Reserve survey data found that 34% of adults earning below $25,000 failed to pay all of their bills in full in the previous month, compared with just 7% of those earning $100,000 or more.
The divide is particularly visible in auto credit. Subprime delinquencies have risen substantially while prime borrowers remain far less affected, a divergence that predates the pandemic. More recent Federal Reserve research cautions that changes in credit-score composition exaggerate some measures of subprime deterioration, so the evidence does not indicate a universal consumer crisis. It instead points to stress that is increasingly concentrated among weaker borrowers. This distinction matters for ABF because borrower distress and investor losses are not the same thing. A household can struggle to meet an auto payment while the senior security backed by a diversified pool of similar loans continues to perform because collateral, junior capital and recoveries absorb losses first. ABF can therefore transform uneven household cash flows into assets that remain attractive to institutional investors even as the financial position of some borrowers deteriorates.
The insurer completes this financial chain. An individual purchasing insurance can indirectly become, through an insurer, private-credit fund and pool of consumer loans, a lender for another household’s car or credit card debt. The two sides of the K-shaped economy are not financially separate because they can often be linked through the same financial claims, leaving savers exposed to losses if borrowers are unable to repay their debts.
Conclusion
Asset-based finance has a credible claim to being a more conservative complement to corporate direct lending, but only in specific dimensions of risk. Gradual repayment reduces the amount of principal at risk over time, diversification limits exposure to individual borrowers, and collateral and junior capital that absorbs losses first can reduce losses for senior investors. At the same time, those protections shift greater importance onto underwriting standards, collateral valuations and the institutions financing the market.
The main limitation is evidence. Modern ABF has expanded rapidly without being tested through a severe downturn so its resilience rests partly on structural logic that has yet to be fully tested. This is especially significant in consumer ABF, where financial stress among households can coexist with continued performance for senior investors. This separation is one reason ABF can function effectively, but it also makes its apparent stability dependent on the assumptions built into each structure. The lesson from earlier cycles is not that complexity is inherently dangerous, but that protections become vulnerable if assumptions are mistaken for certainty. For now, ABF’s claim to conservatism is credible, but its ultimate proof remains on loans from a market cycle that has yet to deliver its first true test.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
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