Asset-Based Finance: What Institutional Investors Need to Know
Muted return expectations, increasing difficulty in sourcing traditional financing, and advancements in technology have paved the way for alternative financing options to become mainstream. Firms are hatching innovative private credit structures and vehicles to support funding demands and provide new fuel for investment.
Despite persistent inflationary pressures and global uncertainties, private credit has proven to be incredibly resilient, presenting higher yields in the face of higher-for-longer rates. Because of the strategy’s strength during periods of volatility, the market has seen an increase in the number of private debt funds. As competition and demand for greater product variety heats up, the private markets have seen a noticeable shift toward asset-based finance (ABF), a form of lending that uses a company's assets as collateral. Often referred to as asset-based lending (ABL), ABF strategies have grown to rival direct lending ($91 billion commitments) as the second most popular private credit strategy, drawing $45.69 billion in commitments in 2025.i It is not a stretch to imagine a private credit world in which ABF overtakes direct lending as the prime strategy.
As more institutional investors and firms explore ABF, it's crucial to understand the growth dynamics, key considerations, and operational impacts of this asset class.
Advantages and drawbacks of ABF
At its core, ABF and other specialty finance strategies enable borrowers to secure funding using assets such as receivables, inventory, or equipment as collateral. The appeal lies in its structured approach: Lenders evaluate the intrinsic value and liquidity of the underlying assets rather than relying solely on the borrower’s credit profile. This financing model offers a dual advantage: Borrowers gain access to capital while investors invest in a pool of loans backed by tangible assets. But like any allocation, investing in ABF requires thorough due diligence so that investors understand both the advantages and obstacles:
Improved access to capital
Requirements for credit history and financial track record can prove to be a roadblock for many companies, especially startups and those in high-growth phases. ABF removes this barrier by focusing on asset valuations rather than a borrower's credit score. For their part, investors like the asset class because the loan is backed by tangible assets.
Investment diversification
The diversity and granularity of ABF strategies offer allocators new sources of uncorrelated return, downside protection, and a steady income stream. Types of ABF include loans secured by everything from inventory and intellectual property to pools of consumer or business loans. The asset class is also appealing because of its exposure to a variety of underlying assets covering sectors and geographies. This diversification helps reduce overall risk to any one particular asset class or company, giving lenders a more balanced investment strategy and opportunity to diversify their loan portfolios.
Protection from economic headwinds
Economic uncertainty can create pockets of market dislocation that occur when stressful conditions lead to large, widespread asset mispricing in the financial markets.ii Because alternative credit tends to be uncorrelated to market swings, investors can expect ABF to generate stable returns. What’s more, ABF is typically structured to deliver a consistent cash flow from its underlying assets.
Asset and collateral risk
Effective ABF reporting requires visibility far beyond the fund level; managers need to report and monitor risk at the individual borrower level. The borrower assumes a greater risk if the loan defaults as the lender can repose collateralized assets. Conversely, the value of the collateral or underlying assets can fluctuate, meaning that the lender may not recover the full amount in the event of a default.
ABF requires complex monitoring
Managing ABF products can be costly, time consuming, and complex because they require constant monitoring. Collateral valuations can also be resource-intensive and complicated due to the constant need to run borrowing base calculations.
Growth drivers of ABF
Pooled business loans and pooled consumer loans, which aggregate individual consumer loans into a single financial instrument, have gained significant traction in recent years. These loans offer investors a diversified portfolio of assets, reducing the risk associated with individual loans.
Market demand
The ability to secure funding quickly, with fewer conditions, has made ABF an increasingly popular financing choice for many mid-market companies and SMBs. This growing acceptance is expanding the pool of available assets and providing investors with a more liquid and tradable investment option.
Opportunity to mitigate risk
By using assets as collateral, lenders can mitigate their risk. If a borrower defaults, the lender can seize the related assets. ABF presents a potentially safer option for lenders, which can lead to more favorable terms for borrowers.
“Momentum will continue, but mix is shifting. We see assets under management (AUM) exceeding $2 trillion in 2026 and approaching $4 trillion by 2030. Investing is shifting from a corporate lending focus to the ABF market, while EMEA and APAC will gain momentum. Mergers & acquisition (M&A) and leveraged buyout (LBO) activity will escalate, increasing competitive pressures among lenders but also opening more funding opportunities. ABF will lead growth as partnerships, asset origination accelerates. Alternative asset managers are looking to fund newer, more diverse pools of assets – increasingly consumer loans and data infrastructure credit. New partnerships are spurring origination opportunities while alternative asset managers will continue stepping up as banks remain constrained in certain lending activities.” — Moody’siii
Key considerations for investors exploring ABF
While the benefits of ABF are clear, investors must be aware of several considerations, including asset valuation, regulatory obligations, market conditions, and operational readiness.
Unpredictable market conditions
Even though private credit is not directly correlated to public markets, deteriorating economic conditions can impact the value of the assets and borrower's ability to repay the loan. While ABF can offer more flexible terms, interest rates tend to be higher compared with traditional loans. Investors should monitor these conditions closely and be prepared to adjust their strategies accordingly.
Asset valuation
Investors need to ensure assets are accurately valued and that their value is stable or increasing. This requires a thorough understanding of the asset types and the markets in which they operate. To accurately value assets, lenders and borrowers will need to perform borrowing base calculations to determine the amount of money the lender is willing to give a borrower and how much available credit a borrower has. Several intricacies influence these calculations based on the type of asset, industry, and lender policies. Regular revaluation and monitoring are also essential to maintaining the integrity of the collateral. While the assets provide a layer of security, the creditworthiness of the borrower remains important. Thorough due diligence to assess a borrower's financial health, management team, and business model is essential to enhance the overall security of the investment.
Legal and regulatory framework
The legal and regulatory environment surrounding ABF can vary significantly by jurisdiction. Investors must be familiar with the laws and regulations that govern the regions where they are investing.iv This includes understanding the rights of lenders in case of default and the processes for asset seizure and liquidation.
Operational challenges in ABF
ABF can be more operationally intensive than traditional lending due to the need to manage and track collateral, provide accurate NAV calculations, and monitor market conditions. Connectivity should pull in data and validate it from a number of sources when dealing with multiple borrowers and data for the underlying collateral. Firms working with securitized pools of loans will have to ingest and normalize unstructured data coming in via loan tapes, structured Excel or CSV files from lending platforms that often contain 40, 50, or more different columns and tens of thousands of unique transactions. Having the right operational and data infrastructure in place to support new asset classes across lifecycle events, including systems for asset valuation, monitoring, and reporting, is crucial. Some firms may find that moving to more scalable, less resource-intensive solutions can drive efficiency and reduce operational costs.
Specialized knowledge and expertise
As with any investment in a new asset class, firms must make sure they have the skills and operational processes in place to support new requirements for data collection and reporting. Centralizing performance analytics across all asset classes and lending platforms can provide a comprehensive view of the portfolio and improve decision-making. Technology capable of managing complex loans and experienced professionals who understand the asset class are invaluable.
The outlook for ABF
The continued growth of ABF is expected to drive further innovation and expansion in the market, supported by advancements in technology and the development of new asset classes. While new asset classes can provide diversification and potentially higher returns, they also come with unique challenges and risks. Investors and businesses must be prepared to develop the right expertise to manage these assets effectively.
By understanding the key factors driving the interest in ABF, investors can make more informed decisions and navigate its complexities. Advanced technology and robust data management systems will be essential for realizing these benefits and ensuring long-term success in the ABF market. By staying ahead of the curve and leveraging the right tools and platforms, investors and businesses can position themselves for success as the asset class continues to rise.
Authored By
Imran Khan
In his role at Arcesium, Imran is responsible for showcasing Arcesium’s operational platform and data platform. Specializing in the alternatives and credit space, Imran has previous experience at a number of FinTechs working in AI, private credit, and reconciliation. Imran’s expertise lies in bridging technical solutions with client needs, driving business growth, and fostering long-term partnerships.
Share This post
[i] S&P Global, January 7, 2026. https://www.spglobal.com/market-intelligence/en/news-insights/articles/2026/1/global-private-credit-fundraising-increased-in-2025-96448289
[ii] WEF, January 21, 2026. https://www.weforum.org/meetings/world-economic-forum-annual-meeting-2026/sessions/are-markets-mispricing-the-future/
[iii] Moody’s, January 21, 2026. https://www.moodys.com/web/en/us/insights/credit-risk/outlooks/private-credit-2026.html
[iv] DLA Piper, September 2023. https://www.dlapiper.com/en-us/insights/publications/2023/08/international-asset-based-lending-guide
