Ask a few people what asset-based lending is and you’ll get a list of assets back: receivables, inventory, equipment. That’s fair. A lot of what we lend against looks exactly like that. But the asset type was never what made a deal interesting to me, or risky. Two lenders can finance the very same receivables and be taking on completely different risk, depending on how the deal is structured.
Here’s the thing I’m always separating out in my head when I look at a deal: what is actually securing the income? Take an airplane. Most people assume the airplane is the collateral. It isn’t. The leased contractual cash flows on that airplane may actually secure the source of return and be the primary collateral. The plane sits behind it as a backstop. A plane parked on a tarmac doesn’t pay anyone. The lease pays, every month, on a schedule. That distinction is most of my job, and it’s where the value in this strategy comes from.
What makes an asset “niche”
An asset usually ends up in our world for one of three reasons. It’s too small, it’s too complex, or it just can’t scale to the size a large fund needs.
Size is the obvious one. A deal that’s meaningful to us is rounding error to an institutional lender, so they don’t bother. Complexity is the more interesting filter. A generalist credit team at a bank doesn’t have anyone who can properly value a fleet of school buses, or inland marine barges, or oil wells, or the kind of infrastructure that gets leased out and lent against. Those are real, physical, hard assets, but you need specific expertise to understand what they’re worth and whether the cash flows behind them hold up. And scale is the last filter. Even a lender who could underwrite one of these can’t build a giant portfolio out of them, because the market for any single niche asset type isn’t deep enough.
What looks like a constraint to a large fund is the entire opportunity for us.
We underwrite the cash flow, not the borrower
This is the part that trips up advisors who are new to it.
A traditional bank is mostly underwriting the counterparty. Think about an auto loan, a home loan, a small-business loan. It’s recourse. Your personal credit or the credit of the business is on the line. If things go wrong, they come after you.
We’re doing something different. We’re underwriting the cash flows of a pool of collateral that’s been segregated and assigned only to our loan. It’s not backed by a personal guarantee. The collateral itself is a contract or an event of some kind: a lease, a mortgage, a loan, a stream of contractual payments. Those get pooled together, and that pool is the collateral. Sometimes the pool is tied to a physical asset like the airplane, but the cash-flowing piece is the contract. That’s what makes this an income-oriented tool. You’ve got contractual obligations to pay on a monthly or quarterly basis, spread across a wide range of counterparties, and that diversification is where the value sits.
A recent example I keep coming back to
One of my favorite examples right now is a deal we’re still in diligence on, so I’ll keep it general. It’s financing advertising spend for mobile games.
When I first heard “advertising spend as collateral,” my reaction was probably the same as yours. It sounds intangible and uncertain compared to an airplane lease. But the structure, particularly the seniority of the cash flows that sit senior to the company’s cash flows, is what makes it work, and most people get it backwards.
The instinct is to assume a game developer borrows a million dollars to spend on ads this month, hoping it turns into revenue later. That’s not it. In this case the revenue has already come in. The lender steps in afterward to pay the advertising invoices, because the ad spend is what’s in arrears, not the revenue. So you’re financing something where the results are already visible before you extend a dollar of credit. That changes the risk picture entirely.
What got me comfortable enough to keep digging? A lot of it was the lender’s track record, and honestly the fact that earlier in that track record they got burned. They weren’t always lending after the fact. They took some losses, then adapted their credit box and their structure to fix exactly those problems. I’d rather back a lender who has scar tissue than one who’s never been tested.
What we’re still working through is the durability question. Is this one game on a hot streak, or is the revenue consistent enough to keep paying? And a big part of the work, the part people forget about, is structuring our own facility. Is it a credit facility or a forward flow deal structure? Is there a first-loss cushion? Is it overcollateralized? What other credit enhancements reduce the risk, how are fees split, what do the payment and amortization schedules look like? That structuring is where a lot of the real protection gets built, and it’s the difference between a clean deal and a painful one.
The structure that makes it possible
If there’s one thing I’d want an advisor to actually understand, it’s the bankruptcy-remote SPV.
The assets, or receivables, get placed into a special purpose vehicle that sits in a silo, segregated from the operating business. The payments come into that segregated box, and from there they flow out to us. That’s what separates the collateral from the business risk of the borrower.
I want to be honest about why that matters, because it cuts both ways. Without that segregation, you’re right back to relying on the borrower’s whole business. A company might have plenty of leases coming in, but it also has expenses, and at the end of the day it could decide there’s nothing left to pay you. The SPV is what isolates the cash flows from that outcome. It doesn’t make the deal risk-free. Nothing does. It gives you a cleaner, more direct claim on the specific cash flows than you’d ever get as a corporate creditor.
The misconception I hear most
The one I run into constantly is that niche ABL is just direct lending with some collateral thrown in for appearances, and that you’re really backed by the borrower’s corporate creditworthiness.
That’s the thing to unlearn. The collateral isn’t decorative. It’s the basis of the entire loan, and it’s legally segregated from the business. Once an advisor sees that, the rest of the conversation gets a lot easier.
Why we bother with the small, complicated stuff
There’s real value in doing something most people aren’t doing.
We’re an independent sponsor. We don’t have the size or scale of an Apollo or a Blackstone, and that’s the point, not a limitation. We see completely different deal flow. In the lower-middle-market and below, we’re often the lender of only option, which means no one else is holding this exposure. We’re also not forced to deploy billions of dollars every quarter, and that pressure to put money to work is exactly the kind of thing that can quietly erode credit quality at larger funds, where you’ll often see several funds piling into the same deals and the same underlying borrowers.
In our experience, these assets tend to have low correlation to broad credit, partly because of their complexity and partly because they’re sector-agnostic and spread across very different borrower types. That said, the same things that make them attractive are what make them hard. They’re illiquid. They’re complex by nature. And being the only lender in a deal means there’s no comparable to check your work against, so the diligence has to carry more weight. We think that work is worth it. It isn’t the right fit for every portfolio, and any advisor should weigh it against their clients’ liquidity needs and objectives.
The short version is this: these assets are valuable precisely because they’re niche, distinct, and complicated enough to scare other people off. Clearing that complexity is the job.
Frequently asked questions
Are niche asset-based lending investments liquid, and how would I get my money back?
Generally, no. These aren’t liquid the way a public bond or an ETF is. The underlying collateral is a pool of contracts that pay over time, so the cash flows arrive on a schedule, but your access to principal depends entirely on the structure of the vehicle you invest through. Some are closed for a set term, others offer periodic repurchase windows. Before allocating, I’d look closely at a specific fund’s redemption terms and treat this as a longer-hold position rather than something you can exit on short notice. That said, most of our investments have tenures of 3-36 months and fully self-amortize which provides some visibility to liquidity versus strategies that must sell or refinance their assets.
What happens if the borrowers behind these loans stop paying?
This is the right question to ask. The segregated SPV structure gives the lender a direct claim on the specific cash flows rather than a general claim against the borrower’s whole business, and deals are often built with cushions like a first-loss tranche or overcollateralization to absorb some level of non-payment. None of that makes a loss impossible. If the collateral underperforms badly enough, investors can still lose money. What the structure does is change where you sit in line and what you’re actually relying on to get paid.
If there aren’t comparable deals to price against, how is niche ABL valued?
In normal conditions, we hold these positions at amortized cost, which is principal plus daily accrued interest. There’s no live market price to mark against, so the carrying value reflects what’s owed and what’s accrued rather than a quote that moves around day to day. The judgment comes in if a position becomes distressed. That’s when we move to models that account for the performance of the underlying contracts, so the value reflects what’s actually happening with the collateral. It’s worth understanding how any manager you’re evaluating handles both the normal case and the distressed case before you commit.
Where does the return actually come from?
In a lot of these deals, we’re lending to the lenders. They originate and hold the underlying loans and leases, and we provide the financing behind them, usually through a credit facility or a bilateral structure. Our return is the interest we earn on that loan. The lenders, in turn, get repaid from the contractual cash flows on the underlying collateral, so the whole structure ultimately rests on those payments coming in. In corners of the market with fewer competing lenders, the yield can be higher than in crowded segments, but that potential comes alongside illiquidity, complexity, and the diligence burden involved. I’d be skeptical of anyone framing higher yield as a free lunch. Returns are never guaranteed, and they depend on the underlying collateral performing as expected.
How does niche ABL fit alongside the private credit I already own?
I think of it as a diversifier, not a replacement. If your clients already hold middle-market direct lending, they likely have exposure to the same borrowers and sectors most large credit funds are chasing. Niche ABL tends to have lower correlation to that, because the deal flow and the asset types are different. How much to allocate comes down to a client’s liquidity needs, time horizon, and objectives, which is a conversation worth having before sizing any position.