Early Drivers of Private Credit Expansion

The Global Financial Crisis in 2008 marked a turning point for private credit. Regulatory changes, such as Basel III globally and Dodd-Frank in the U.S., forced banks to scale back corporate and asset-based lending. Heightened capital requirements, stricter underwriting standards and balance sheet restrictions effectively curtailed banks’ core lending function.

As banks continued to retreat from lending, private credit funds stepped in to fill the void (see Figure 2). Initially, they focused on middle-market companies that were too small or complex for syndicated loans or public issuance. By offering speed, certainty of capital and tailored financing structures that banks struggled to match, private direct lenders solidified their critical role in the ongoing secular shift in the lending market.

Today, the asset class is expanding well beyond corporate direct lending (see Figure 3), demonstrating the growing demand for efficient capital and resilience of private credit across the capital structure.

Following the Global Financial Crisis, central banks aggressively cut interest rates and injected liquidity into the economy, driving down yields. Institutional investors, including pension funds and insurers, turned to private credit as a way to meet their return targets. Private credit offered attractive features, including a premium for bespoke transactions and downside mitigation. This combination made private credit a compelling extension, or even a replacement product, for traditional fixed income allocations.

The regional banking crisis of early 2023, triggered by rapid deposit withdrawals, highlighted a long-standing vulnerability: the mismatch between banks’ short-term funding (deposits) and long-term obligations (loans). As in 2008, the stress led to tighter lending standards, constraining credit availability. Borrowers once again turned to private lenders, whose structures do not rely on deposit funding and who utilize much longer bases of capital.

This disruption reinforced private credit’s role in offsetting the funding and liquidity risks inherent in the banking system. Today, private credit continues to be the critical bridge in this asset/liability mismatch, ensuring continuity of capital availability even during periods of systemic stress.

Attractive yields, structural protections, diversification and active risk management have historically resulted in lower defaults and better recoveries—and ultimately capital flows in private credit (as illustrated in Figure 1). But a byproduct of this has been the narrowing of the spread advantage relative to public markets since the 2022-2023 period. Historically, private credit has offered a 220–350 bps spread premium over comparable public assets. Today, that premium averages around 125–300 bps, depending on credit quality and tenor. Despite this recent moderation in risk premiums, relative spreads remain compelling, particularly in light of lower volatility, tighter structures, and superior recovery dynamics typical of private credit.

ABF offers diversified risk profiles across industries and collateral types that translate into attractive income streams for investors looking to expand private credit allocations. Examples of steady income streams include long-term aircraft leases, monthly car payments and take-or-pay contracts linked to infrastructure assets. Diversification across sectors, borrowers and collateral types reduces idiosyncratic risk and enhances portfolio resilience.

Another key characteristic of ABF is that returns are driven by the performance of asset pools rather than corporate beta, resulting in low correlation to public fixed income, leveraged loans, and high yield bonds. Unlike traditional corporate credit, ABF is not dependent on the enterprise health or profitability of individual companies, as repayment is secured by the cash flows and collateral of underlying assets. This structural independence makes ABF less sensitive to broader market sentiment and economic cycles, helping it remain resilient during periods of market volatility. As a result, ABF serves as a valuable stabilizing component in multi-asset portfolios.

The structure of ABF is also a defining characteristic. ABF transactions are executed through bankruptcy-remote special-purpose vehicles (SPVs) that legally separate assets (e.g., loans, receivables, leases or real estate) from the originator’s balance sheet and, by extension, from their corporate credit. The SPV holds ownership of those assets and pledges them as collateral to secure financing from a private credit lender or investor. In essence, the SPV enhances investor protection by isolating credit risk, ensuring that the lender’s exposure is linked solely to the performance of the underlying assets rather than the broader financial condition of the originator.

In addition, protective covenants are carefully incorporated into deal structures, and data-driven credit underwriting utilizes historical data and statistical models to estimate the likelihood that a borrower will default. Lenders analyze credit scores, income, debt ratios and other factors to assign probabilities of repayment or default. They also perform in-depth analysis of the underlying assets to estimate the recovery value in the event of obligor defaults. These probabilities, along with qualitative inputs, help determine lending decisions, interest rates and risk-based pricing to ensure expected returns align with potential credit losses.

With strong collateral coverage, consistent cash generation and customized deal structuring, ABF strategies can deliver higher risk-adjusted yields relative to comparable corporate credit risk. Similar to other private credit transactions, the spread differential to the broader syndicated loan market is further enhanced by the less liquid nature of ABF, and the secured nature of the assets supports resilient performance and capital preservation.

ABF investments are typically self-liquidating, with cash flows from the underlying assets used to repay principal and interest on a consistent basis. This structure eliminates reliance on corporate credit exposure while providing more predictable income streams, as investors benefit from intermittent de-leveraging and a gradual return of capital over time.

While ABF provides structural downside protection, it isn’t immune to macro volatility. In a major economic downturn, defaults may rise in this sector as in public markets. However, private credit’s negotiated structures allow greater flexibility for proactive intervention to manage stress scenarios. Moreover, losses in private markets are likely to be unevenly distributed—unlike public markets where managers indexed to a benchmark move in lockstep—making manager selection even more critical.

These characteristics have helped to accelerate asset allocation into ABF, which has increased to 18% in 2024 from 10% in 2023.⁶ Yet, private lenders still represent less than 5% of the $5.5 trillion ABF market.⁷ This is about to change. Investor appetite is growing—in fact, 58% of private credit managers plan to prioritize ABF strategies this year,⁸ and 44% of insurers intend to expand long-term allocations to ABF.⁹

It is important to note that execution quality in ABF is not uniform across managers. Structures provide a framework, but it is the specialist that determines underwriting discipline, collateral selection, monitoring rigor, and recovery performance. Managers with vertically integrated platforms—combining origination, underwriting, monitoring, and servicing—bring the specialized expertise needed to navigate complex asset-based finance sectors. Evaluating aircraft loans, for instance, requires understanding residual values, lease structures, and global mobility trends, whereas assessing music royalties demands insight into intellectual property rights and streaming revenue durability. These are fundamentally different skill sets that generalist platforms often lack.

That distinction between execution quality becomes especially important when market conditions deteriorate or risk controls weaken. Recent headlines around fraud and accounting issues among certain specialty finance originators highlight how rapid inflows can mask weak controls. As liquidity tightens, discipline becomes the key differentiator. Recent isolated defaults underscore that rigorous underwriting and downside protection matter most when capital is plentiful—and that patient investors with dry powder are best positioned to capitalize when others retreat.

Insurance companies

Insurance companies prioritize stability, liability matching and capital efficiency. For insurers operating under risk-based capital frameworks, ABF can be more capital-efficient due to its collateralized nature and its ability to achieve high ratings. ABF can also help align insurers’ duration, cash flow and risk profile of long-term policyholder obligations. Because of their focus on predictable income, capital preservation and regulatory capital optimization, investment-grade private credit—a significant portion of which is asset-based—has become a key area for many insurance companies.

Strategic rationale 

Insurers aim to match long-dated liabilities with stable assets, seeking yield enhancement relative to public investment-grade bonds without materially increasing risk. Regulatory capital requirements under Solvency II (Europe) and the National Association of Insurance Commissioners (U.S.) influence how insurers allocate assets by assigning higher capital charges to riskier investments. As a result, careful structuring of portfolios and transactions are essential to balancing return objectives with capital efficiency.

Core allocation

Typical exposures include senior secured direct lending as well as ABF across receivables, leases and trade finance, and specialty finance in areas such as aircraft leasing or mortgage servicing rights—each offering predictable, collateralized cash flows.

Preferred structures and portfolio impact 

Insurers favor rated secured lending executed through bankruptcy-remote SPVs for structural protection and compliance with rating agency and regulatory requirements. They commonly invest via SMAs that are tailored vehicles designed for insurance general accounts. The result is stable, long-dated income, enhanced capital efficiency and low mark-to-market volatility, supporting solvency ratios (i.e., available capital to required capital ratio) and policyholder obligations.

Pension funds

Pension funds are steadily increasing allocations to private credit—typically 3–6% of total assets, with leading systems targeting 5–10%¹¹ over time. According to S&P Global Market Intelligence, 77 of 118 U.S. pension funds remain under allocated, suggesting continued growth potential. The asset class offers a compelling mix of yield enhancement, diversification, and downside protection, appealing to pensions seeking equity-like returns with lower volatility.

Strategic rationale 

Unlike insurers, pensions don’t match liabilities directly but view private credit as a core income and diversification strategy suited to their long-term, patient capital. Their tolerance for illiquidity aligns with private credit’s relationship-driven, hold-to-maturity nature. Amid funding pressures and persistently low public yields, pensions turn to private credit to boost returns and reduce equity reliance. The collateralized structure of asset-based finance adds further protection—particularly valuable as corporate defaults rise—offering enhanced downside mitigation.

Core allocations 

Allocations span direct lending (as a bond replacement), infrastructure debt (long-dated, contractual income), and opportunistic or distressed credit to capture excess returns from market dislocations. ABF exposure offers further diversification benefits and downside protection by providing access to real economy.

Preferred structures and portfolio impact

Pension funds continue to allocate capital across direct lending and ABF strategies to capture stable income and diversification benefits. But some are moving beyond senior debt to invest in mezzanine and equity tranches of ABF capital structures, seeking enhanced returns.

Family investors

Family investors are increasing allocations to private credit to capture yield and diversification. In today’s market, yield serves as a form of liquidity, providing regular income distributions that help offset longer holding periods. At the same time, private credit offers structural protections for debt investors—including covenants, collateral, and seniority in the capital structure—which enhance capital preservation.

Private credit’s bespoke and flexible structures align well with families’ long-term objectives, delivering steady cash flows and exposure to real-economy assets without materially compromising liquidity. Family investors typically pursue direct equity opportunities, while their private credit exposure tends to come through co-investments and funds offering institutional-quality underwriting and diversified borrower and strategy exposure.

Given their flexible, patient capital base, larger family offices are increasingly building direct origination or partnership capabilities, whereas smaller families tend to favor multi-manager or semi-liquid vehicles to achieve stable income and preserve wealth over time.

Sovereign wealth funds

Sovereign wealth funds (SWFs) are increasing allocations to private credit as well. Leveraging scale and long investment horizons, SWFs invest through large mandates, strategic partnerships and joint ventures. Their typical investments span direct lending and structured and opportunistic credit, with an emphasis on control, customization and risk-adjusted returns over public market volatility. Private credit’s longer duration and illiquidity align well with sovereign funds’ long-term investment horizons, while partnerships with leading managers provide access to high-quality deal flow and scalable deployment opportunities across regions and sectors.