"Asset-based lending" has become a buzzword in private credit, often applied loosely to any strategy with collateral. But true corporate asset-based lending—as practiced by specialists for decades—operates with a particular discipline that newer entrants often lack.
The lessons from traditional ABL practitioners are relevant across private credit. In an environment where deal velocity has sometimes trumped credit rigor, returning to fundamentals matters. The cost of complacency is real, and recent high-profile losses have illustrated what happens when discipline erodes.
What True ABL Discipline Looks Like
Traditional asset-based lenders operate with a distinct mindset. The collateral isn't just security to be realized in a workout; it's the foundation of the underwriting itself. The lender must understand the borrower's business model deeply enough to assess collateral quality, monitor it continuously, and liquidate it effectively if necessary.
This requires capabilities that not all lenders possess: rigorous field examinations, transparent verification processes, deep understanding of collateral liquidation dynamics, and a willingness to prioritize credit integrity over deal velocity.
The principles translate beyond traditional ABL:
Understand the borrower's business model. Underwriting isn't just financial modeling; it's understanding how a business operates, where cash flows originate, what drives performance, and what could cause deterioration. Lenders who treat underwriting as a spreadsheet exercise miss critical risk factors.
Maintain rigorous, transparent verification. Trust but verify isn't just a cliché. Lenders who rely on sponsor representations without independent verification are exposed when those representations prove optimistic or false.
Prioritize credit integrity over deal velocity. In competitive markets, pressure to close deals quickly creates incentive to cut corners. The lenders who maintain discipline—who are willing to lose deals rather than compromise credit standards—perform better over full cycles.
The Cost of Complacency
Recent high-profile losses have illustrated what happens when discipline erodes. In some cases, lenders relied on borrower representations that proved unreliable. In others, collateral verification was inadequate. In still others, the pressure to deploy capital led to compromised underwriting standards.
The commonality: complacency about risks that rigorous credit discipline would have identified. The lessons reinforce what experienced practitioners have always known: credit fundamentals don't change even when markets do.
Distinguishing Genuine Capability
Not all lenders claiming ABL or "asset-based" strategies possess genuine capability. The label has been applied to everything from traditional working capital lending to equipment finance to specialty finance strategies with limited collateral support.
Due diligence should focus on actual capabilities: Does the manager have dedicated professionals with relevant experience? What is the track record through credit cycles? How is collateral monitoring actually conducted? What workout resources exist?
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There aren't many true corporate asset-based lenders in private credit. But those that exist have generally maintained the discipline the strategy demands, through multiple cycles and market environments. Their practices offer lessons for the broader private credit market.
The Bottom Line
Complacency carries a cost, and that cost is entirely avoidable for lenders who remain grounded in fundamentals. The growth of private credit has attracted new entrants, not all of whom possess the credit discipline that experienced practitioners developed over decades. As credit cycles mature and losses emerge, the lenders who maintained rigor will be distinguished from those who competed on speed rather than skill. For allocators, the lesson is clear: due diligence on credit processes and workout capabilities matters as much as return profiles and deal flow metrics.