Key Takeaways
- • Direct lending represents an estimated 45% of the total private credit market, according to the Board of Governors of the Federal Reserve System cited in the article, and is the segment most retail investors are likely exposed to.
- • Asset-based lending (ABL) is distinguished from direct lending by its security in specific hard or financial assets, such as aircraft, machinery, commercial mortgages and equipment, which places those assets beyond the reach of general corporate creditors.
- • ABL loans and leases are often self-amortizing, with each periodic payment reducing outstanding principal, which the article argues can help derisk a portfolio.
- • Manulife John Hancock Investments argues that retail investors seeking ABL exposure may be better served by a diversified manager that allocates tactically across asset types rather than building specialist-manager portfolios.
- • The article flags liquidity, default and concentration risks, noting that ABL funds are typically geared to qualified investors with longer time horizons and that shares may be illiquid and speculative.
Summary
A Manulife John Hancock Investments commentary examines the distinction between direct lending and asset-based lending (ABL) as retail investors gain greater access to private credit strategies that have long been used by institutional investors, pension plans, foundations and endowments. The article divides the private credit market into three categories: direct lending, ABL and opportunistic credit. Direct lending and opportunistic credit carry largely corporate risk, including competitive pressures, input costs, access to funding and regulation, whereas ABL has limited corporate exposure because investors hold specific assets.
The article states that direct lending, defined as loans to corporations by non-bank entities, represents an estimated 45% of the total private credit market, citing the Board of Governors of the Federal Reserve System. Direct loans are designed to support companies and private equity sponsors and are said to offer customized terms, diversification potential and a complement to a traditional 60/40 portfolio.
On ABL, the commentary argues that hard-asset collateral, such as aircraft, machinery, commercial mortgages and equipment, is a defining feature, and that specialized origination and underwriting command a premium. ABL loans and leases are often self-amortizing, meaning each payment includes principal as well as interest. In periods of instability, the article contends that ABL lenders can repossess and redeploy assets, such as aircraft and shipping equipment, while direct lenders compete over a borrower's remaining assets in restructuring.
The article recommends that retail investors consider a diversified manager that allocates across ABL asset types, citing resource constraints and limited access to niche specialists. It notes that ABL may offer absolute return potential with low correlation to traditional markets. The commentary also includes risk disclosures: private credit faces credit and liquidity risk, ABL collateral may lack a ready market, capital is typically committed for the loan term, and concentration risk arises from sector exposure. Fund shares are described as illiquid, speculative and not listed on any exchange, and the article carries standard disclaimers that past performance does not guarantee future results.
The article states that direct lending, defined as loans to corporations by non-bank entities, represents an estimated 45% of the total private credit market, citing the Board of Governors of the Federal Reserve System. Direct loans are designed to support companies and private equity sponsors and are said to offer customized terms, diversification potential and a complement to a traditional 60/40 portfolio.
On ABL, the commentary argues that hard-asset collateral, such as aircraft, machinery, commercial mortgages and equipment, is a defining feature, and that specialized origination and underwriting command a premium. ABL loans and leases are often self-amortizing, meaning each payment includes principal as well as interest. In periods of instability, the article contends that ABL lenders can repossess and redeploy assets, such as aircraft and shipping equipment, while direct lenders compete over a borrower's remaining assets in restructuring.
The article recommends that retail investors consider a diversified manager that allocates across ABL asset types, citing resource constraints and limited access to niche specialists. It notes that ABL may offer absolute return potential with low correlation to traditional markets. The commentary also includes risk disclosures: private credit faces credit and liquidity risk, ABL collateral may lack a ready market, capital is typically committed for the loan term, and concentration risk arises from sector exposure. Fund shares are described as illiquid, speculative and not listed on any exchange, and the article carries standard disclaimers that past performance does not guarantee future results.
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