Private credit firms chase opportunities in asset based lending as US banks withdraw

Kellie Ell

Reporter

Lending against assets is becoming the fastest growing part of private credit. The market is expected to grow from roughly USD 787bn in 2024 to more than USD 1.26trn in 2028, according to a report by Research and Markets, a data and statistics firm.

While US banks have been pulling back from other areas of private credit for decades, they remained the dominant force in asset based lending (ABL) until recently. But the demise of several regional US banks — including SVB and Signature Bank in early 2023 — caused regulators to tighten scrutiny and require banks to keep more cash on their balance sheets.

“The behemoth that was providing main street financing is currently not in a position to do it in a substantial way,” says Aneek Mamik, partner and global head of financial services at Värde Partners. “The banks may return, but for now they’re focused on deleveraging and simplifying their business models to stand up to the scrutiny of the regulators.”

TJ Durkin, head of structured credit and specialty finance at TPG Angelo Gordon, believes banks have less capital because of the uptick in deposit withdrawals last year and now need to rebalance. “They haven’t been able to keep up with their money market funds, so they effectively have to figure out what to do with what they already have,” he says. “There are asset sales coming out of banks as they seek to release capital. Then there’s the question of how to fill the resulting financing gaps that are arising now that [banks] are capital constrained.”

“Are we witnessing the creation of an asset class?”

Aneek Mamik, Partner and global head of financial services | Värde Partners

Durkin estimates that about two thirds of credit in the US is asset based, indicating the size of the potential opportunity.

But there are other factors at play, too. “The attractive yield was what drew investors’ attention to the asset class,” says Mamik. “And as more investable assets are generated, there will continue to be demand for asset based finance.”

Mamik believes that in direct lending, low barriers to entry and an upsurge in capital have lead to spread compression and a rise in borrower-friendly covenants. “All the while,” he says, “asset based finance strategies remained resiliently structured from a credit standpoint.”

Private credit managers with capital to deploy continue to move into the space. One example is Ares. In March, the alternative investment giant acquired Ansley Park Capital, incorporating the lending and specialty finance platform and existing team into its alternative credit strategy. With Ansley Park, Ares is able to offer equipment finance loans between USD 5m and USD 100m, where the equipment serves as collateral for the loan.

Joel Holsinger, partner and co-head of Ares alternative credit, believes rebalancing at banks is the major factor behind the rise in asset based credit. “USD 12trn is sitting on bank balance sheets. Now, it’s not going to go to zero. But if a trillion, or two trillion, of that leaves the bank system, we believe that could be a massive tailwind that converts asset based credit’s existing tailwind into a jet stream.”

At the same time, LPs are looking to diversify their portfolios and build their exposure to asset based lending, says David Ross, managing director and head of private credit at Northleaf Capital Partners. “They see the benefit of similar high cash yield, coupled with the ability to achieve greater portfolio diversification and lower correlation. It’s complementary for them.”

Mamik adds: “The looming question over the next six to 18 months is whether asset-based finance becomes a formal component of LP allocations, in a way that five or six years ago there was not much middle market direct lending and now it is established. Are we at that same moment as it relates to asset-based finance? Are we witnessing the creation of an asset class that will be obvious to people as one that takes a material allocation going forward?”

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