Asset-backed funds are considered a major growth engine for private credit, but which areas within the asset class look most attractive? Aysha Gilmore reports that…
Asset-backed funds (ABF) have been considered the “new kid in stock” within private credit, set to overtake direct lending as the next source of industry growth.
Overall, private debt is expected to exceed $2tn (£1.5tn) this year, and “ABF has already been identified as a key driver of private debt growth in 2026”, said Kyle Shonak, chief trading officer for North America, and Mark Bohntinksy, global head of credit at Gordon Brothers. By 2029, ABF is expected to include 29 percent of assets under management in private debt portfolios.
The opportunity set remains huge, with unsubsidized asset-based lending estimated at $5.5tn in the US alone, according to data from Oliver Wyman, with private credit currently holding a share of less than 5 percent.
“The ABF market is a multi-billion dollar market that can be settled, but private credit penetration is still in its infancy,” he said. Jennifer Marques, mmanaging director and head of strategy and planning at Oaktree.
But, within this huge market, which ABF segments present the greatest opportunities for asset managers and distributors.
Read more: The next frontier in ABF: The $20tn opportunity and the challenge of scale
A tale of two homes
For managers investing in ABF, a clear distinction emerges between investment grade (IG) and non-investment grade (non-IG) strategies, which are often compared to the distinction between insurance and insurance income.
A growing trend has been the expansion of the insurance-driven side of ABF, which focuses on IG-rated assets. Major players, such as Blackstone and Apollo, have leaned heavily on this space in recent years.
For Joel Holsinger, head of alternative credit at $623bn Ares Management, the most compelling opportunity is on the non-IG side.
He explains: “It’s a tale of two cities. “The insurance side is going to continue to grow, and you’re going to see a continued transformation of traditional insurance from where it is today.
“On the non-IG side, I think the market is just getting started and it’s nowhere near the pre-GFC size.”
Ares Other Debt Funds he currently owns small equity stakes in several players operating on a related value, non-IG basis, rather than in captive models that feed insurance balance sheets.
In this non-IG space, Holsinger highlights residential mortgages, digital infrastructure and mutual funds as being of particular interest. He added that activity has been very strong in all these areas, as funding continues to grow strongly.
A similar view is held by a large US-based asset manager, which focuses on global credit, which believes that the current opportunity is in sectors that are not particularly suitable for insurance premiums.
“It’s a big market,” said a senior executive at the company. “I think there is still a lot to be done in this sector, and we don’t see a rush in investment, especially in the unregulated area as there is not enough money to chase deals.
“That’s where we see the opportunity for improved productivity today. You have this great supply and dynamic demand; we’re looking at that space where the banks have left but they don’t quite fit the official IG rating and that keeps competition in the unrated space very low.”
Transport and equipment finance
Oaktree Capital Management uses an “all-weather, go-anywhere” strategy, with a strong focus on equipment finance, especially during the downturn in US regional banks, he explained. Marques. The strategy targets key consumer goods such as medical equipment and forklift trucks.
“Our focus areas today include equipment finance, transportation, consumer choice – where we like the financing of essential goods and services, solar housing, home improvement loans for example – and certain categories within digital infrastructure,” he said.
Fabrice Fraikin, managing partner and founder of Kartesia Asset Finance also highlights the potential in transport, the company focuses on specialist transport finance in the small and underserved European market.
“There is strong growth potential in our market segment, particularly driven by the decarbonisation goals of 2030, 2040 and 2050,” he told ACI. “We focus on transportation assets that are, by definition, mobile, standard and supported by a deep secondary market. If a credit situation arises, we can take it back and remarket it.”
However, when asked if volatility in oil and gas linked to regional tensions poses a risk, especially conflicts in the Middle East, he says the strategy is “well hedged, as the fund holds fundamental assets”.
“Even if the current geopolitical environment proves challenging, we maintain control over the assets, which maintains their value,” he adds.
Read more: Obra Capital appoints new MD to expand ABF strategy
Sweeter than vanilla
Some managers, such as European credit firm Northwall Capital, see the biggest opportunity in financial receivables and “less vanilla” assets, such as contractual income rights and insurance assets.
In 2021, low prices fueled competition within this segment and in 2022 financial assets became scarce, but in the past few years, participants re-entered the market in large numbers, said Thomas Hengstberger, managing director, asset-backed and portfolio opportunities at the asset manager.
“In recent years, 2025-2026, we have seen increased competition in all asset classes,” he told ACI. “Within financial acquisitions we still see great opportunities where there are high barriers to entry with knowledge experience or a general understanding of the product.”
Hengstberger notes that consumer loans often have greater exposure to macroeconomic risk factors than insurance assets or contractual income rights. As a result, these areas may show resilience if market conditions deteriorate.
Loans to net asset value (NAV) are also attractive to asset managers, said Peter Hutton, head of NAV funds at Arcmont Asset Management, pointing to rising levels of acquisitions across Europe and the US.
He suggests that adoption in the central European market is about 40 percent, while in the US it is less than 30 percent, up from almost zero 10 to 15 years ago. Hutton explains that the slow take-up in the US has been due to structural differences, while European funds often include special purpose vehicles (SPVs) below fund level and act as borrowers, making NAV borrowing easier to use.
“However, that is changing now, funds in the US are now being built through SPVs and I would say the rate of acquisitions in the US right now is faster than in Europe,” Hutton said. “Over the past few years, there has been a significant increase in the number of early adopters of NAV. In general, if a sponsor has used a NAV loan in one fund, they will likely use NAV in their next fund, given the ‘win/win’ benefits for sponsors and private equity limited partners alike.”
Is the data center evolving or exploding?
However, not all places are very attractive. Some segments are starting to lose their appeal as competition intensifies, data center lending being a good example.
Artificial intelligence (AI) is increasingly dominating venture capital, accounting for around a third of funding in the UK and nearly two-thirds in the US, with a few mega-rounds driving a growing share of overall investment.
Against this backdrop, Holsinger says Ares is more selective in data center lending. “There’s a lot of money in the money in the data center space, especially on the lending side,” he explains. “It still looks, but the banks are very active here.”
As banks have built capacity in the data center space, he says, it has led to a greater concentration of risk. “We’re seeing interest in secondary derivatives as capital release in that data center segment, but primary derivatives are not as interesting,” he adds. “This creates a lot of opportunity across the wider infrastructure, whether that’s toll roads or cell towers for example.”
AI and market jitters
ABF’s appeal could grow further, amid broader concerns about private debt exposure in the software sector set to be affected by the rapid expansion of AI.
Fraikin says ABF’s strategies remain strong as “the strategy is not solely based on the value of the borrower’s business. Instead, the focus is on the underlying assets being financed”.
That said, recent market events have highlighted potential risks. The bankruptcies of Tricolor Holdings and First Brands Group, both tied, to varying degrees, to ABF structures, have raised concerns, particularly regarding security models. At the same time, significant financial inflows into ABF increase pressure on management to deliver.
Fraikin emphasizes that discipline and expertise in the space are important. “Not being diligent enough about credit quality, underlying assets and collateral can lead to complex credit situations,” he said. “The problem we’re seeing in the markets is excess capital combined with pressure to invest in subprime or subprime mortgages.”
Although the ABF continues to gather momentum, this opportunity is becoming increasingly bleak. As large funds fill the space, returns will depend heavily on management’s ability to avoid congestion, be more selective and maintain discipline.
