Capital Decanted – Episode #6 S2: Decanter's (Half) Dozen: Asset Based Lending

Date: September 9, 2025
Hosts: John Bowman & Aaron Filbeck
Guests: Cedric Henley (SLR Capital Partners), Greg Turk (Illinois Police Officers Pension Fund)

Main Theme & Purpose

This episode spotlights Asset Based Lending (ABL), the #6 “most influential” show of the season. Instead of delivering hot takes or superficial perspectives, John and Aaron deliver an in-depth exploration of ABL’s history, distinctive features, evolution, real-economy applications, and challenges in portfolio allocation. They’re joined by two seasoned ABL professionals—Cedric Henley and Greg Turk—for rigorous, practical insights.

John and Aaron frame ABL as a coming-of-age story in private credit’s evolution, focusing on its rise from “last resort” finance to a robust, diversified and specialized capital tool.

Key Discussion Points & Insights

1. Why ABL? Why Now? ([00:00–06:30])

• Selection as ‘Half Dozen’ Highlight: The episode exemplifies Capital Decanted’s mission—tackling complicated, misunderstood asset classes that mix “multi-layered, complicated, misunderstood nature” with current market heat.
• ABL’s Big Shift: From being a “fringe” or “last resort” product for distressed borrowers, ABL has moved into the mainstream as a critical source of flexible capital for business expansion, inventory, R&D, and more.
• ABL’s Complexity: “Each of these loans are snowflakes… if you’ve seen one ABL loan, you’ve seen one ABL loan.” (John, 04:55)
• Uniqueness: No other credit strategy on the show has been as idiosyncratic, or as difficult to treat as a “single asset class.”

2. ABL in Plain English: What Is It? ([06:34–12:45])

• Simple Primer: Unlike traditional loans based on a company’s financials, ABL is underwritten and secured primarily on the value of specific collateral—anything from real estate or inventory to patents, royalties, or accounts receivable.
• Key Mechanic: “Lender has the right to seize that collateral if the borrower defaults.” (John, 07:55)
• Examples: Home mortgages are essentially a consumer-sized version of ABL.
• Contradiction: “It’s a fairly straightforward concept at the micro level… but expanded to myriad complex industries and collateral types.” (John, 08:50)

3. A Brief History of ABL ([12:45–20:35])

• Origins: Dates back to ancient Mesopotamia, where merchants would borrow against goods or land.
• Evolution:
  • Middle Ages: Royalty and mercantile finance (e.g., Henry VII "ABL’d" to invade France! [14:25])
  • Industrial Revolution: Manufacturing firms’ balance sheet-heavy, cash-poor needs
  • Great Depression/Crisis: Lifeline in tight credit environments
  • The 1980s onward: ABL split its identity—working capital lines (for payroll, expansion) AND its “distress stigma” as lender-of-last-resort.
  • COVID Era: “ABL was an unprecedented lifeline for many… to survive that cash desert.” (John, 16:55)
• Key Takeaway: ABL’s growth and purpose have been cyclical, meandering, and non-linear—serving as both emergency liquidity and strategic balance sheet tools.

4. Five Key Business Archetypes Suited for ABL ([20:35–27:25])

John groups the major real-economy ABL users:

1. Long Payment Cycle / Extended Supply Chain: E.g. apparel, healthcare, international trade.
2. Lumpy or Seasonal Businesses: E.g. toys, holiday stores, agriculture, tourism.
   • Memorable moment: “Halloween stores—oddest business model ever... cash balances struggle for 350 days a year.” (John, 21:44)
3. Industrial Products: Capital-intensive, delayed revenue realization. E.g. mining, auto parts.
4. R&D-Focused Companies: Life sciences, pharma, biotech, leveraging patents/future royalties.
5. Growth Financing: Early-stage, thin-cash-flow companies that can’t access traditional debt.
   • Contemporary example: AI/cloud companies leveraging their racks of Nvidia GPUs as collateral. “You get layers and layers of Nvidia GPU collateral… potential systemic risk?” (John, 26:52)

5. Market Sizing and Landscape ([27:25–32:38])

• ABL Market Estimate: ~$800bn globally in 2025 (out of ~$2.5tn in private credit)
• Growth: Forecasted 10–13% CAGR, possibly >$1.3tn by 2030.
• Collateral Breakdown: 45% Accounts Receivable, 35% Inventory, 15% Equipment, rest “long tail.”
• User Profile: 2/3 of ABL now goes to SMEs, not just large firms.
• Industry Breakdown: Manufacturing (~33%), Healthcare (20%), Retail/Wholesale (~20%), Tech (~15%).
• Originators: Banks still lead (40%), but private capital firms are rapidly gaining (30%+).

6. Diving Deeper — Typologies & Mechanics (Aaron’s Segment, [32:38–55:04])

• Three Collateral Categories:
  1. Hard Assets: Real estate, infrastructure, commodities.
  2. Balance Sheet Assets: Receivables, inventory, equipment, NAV loans.
  3. Specialty Finance: Consumer loans, royalties, insurance contracts.
• Banks vs Private Lenders:
  • Banks: More standardized, focus on asset-heavy, higher-grade collateral, prefer “originate-to-distribute” (syndicate/sell loans).
  • Private Lenders: More bespoke, handle riskier, esoteric assets, greater monitoring, more hands-on due diligence.
• Loan Mechanics:
  • Laser-focus on collateral, not borrower health.
  • Constant monitoring, frequent appraisals—much more so than with, e.g., a mortgage.
  • ABL loans are “like a mortgage, but on a constantly changing pool of properties.” (Aaron, 46:35)
• Due Diligence Challenges:
  • Requires deep subject-matter experts (valuing IP vs. oil rigs vs. consumer portfolios, etc.), often both in-house and third-party.
  • Sourcing and repeatable deal flow matter greatly (network-lenders vs newcomers).
• Risks/Considerations:
  • Wrong-way risk, fraud (e.g., Arena Television case where collateral didn’t exist), collectibility.
  • “You can get really specific and esoteric with some of this collateral.” ([11:51], Aaron)
  • Buy Now, Pay Later: “You can’t seize a burrito from Chipotle if a customer defaults!” ([53:38], Aaron)
  • Generally, ABL yields sit between public high-yield and direct private credit, but heavily dependent on collateral complexity.

7. Expert Roundtable: GP & LP Viewpoints ([64:22–96:28])

Market Shift: From Banks to Private Credit

Cedric (SLR):

• Regulatory constraints and ‘income statement hiccups’ have forced banks to retreat from more complex/specialized ABL; private platforms have filled the gap.
• “It used to be, 10, 15, 20 years ago, you went ABL because you didn’t really have the cash flow route… Now it’s become a solution provider, not just last-resort.” (67:15)

Evolution of Collateral

• Now includes everything from traditional inventory and equipment, to R&D royalties, future cash flows (esp. in healthcare, software).
• Private lenders can offer more complete, custom solutions.

Syndication & Partnerships

• Private lenders are not buyers of bank-originated deals; they prefer relationships/direct deals and increasingly “club” with other GPs (frenemies) and offer co-invests to LPs.

Bank vs Private Credit Competition

• Banks only competitive for lowest-risk loans (SOFR +150). For riskier (SOFR +375–400+), private credit dominates.

Default & Monitoring

• “A lot of ABL, the real work begins once you’ve booked the loan.” (Cedric, 74:53)
• Monitoring is intense—constant tracking of borrowing bases, liquidation values, and company reporting.

LP Diligence & Allocation

Greg (Illinois Police Officers Pension):

• ABL due diligence is “layered”—on the GP, the underlying loan/structure, and the collateral.
• Needs deep, longstanding domain expertise, especially as collateral types proliferate.
• For allocators, focus is less on rigid categorization and more on risk-return and long-horizon outcomes.
• Correlation tracking is now standard: “Am I just buying the same loan three times...?” (Cedric, 83:33)
• Co-investments and specialization (e.g., SLR in healthcare) are keys to negotiating higher barriers to entry and better risk-adjusted returns.

Institutional Caution

• ABL is not for “credit generalists”; needs custom teams per collateral type.
• Due diligence cannot be rushed—“If you get the phone call that somebody needs to close in three weeks, that’s generally a really bad phone call.” (Cedric, 94:50)
• Fraud risks are higher when urgency/opacity increases.

8. Notable Quotes & Memorable Moments

• “Each of these loans are snowflakes. They’re each unicorns... If you’ve seen one ABL loan, well, you’ve seen one ABL loan.” (John, 04:55)
• “It’s not for generalists. This is for investors who can build out a team that can have the expertise to be able to analyze collateral, but also go through the workout process when things get really tough.” (Aaron, 97:53)
• “In ABL land, your covenant package and your structuring is tighter than you’re going to see on a cash flow side.” (Cedric, 74:53)
• “The iceberg metaphor—outside the water you see just this little bit of this beautiful credit against a piece of machinery, but underneath the water is a whole lot of process, complexity, expertise, and workflow needed to make sure you do that.” (John, 101:40)

9. Practical Takeaways for Listeners & Investors

• ABL is both older than you think (historically) and newer than you realize (institutional adoption, specialization, collateral diversity).
• Success in ABL requires:
  • Laser focus on collateral valuation, monitoring, and due diligence
  • Custom underwriting expertise per asset type
  • Willingness to embrace hands-on, labor-intensive processes
• Investors must look beyond traditional asset class buckets—ABL is a portfolio tool, not neatly defined or easily benchmarked.
• Bank retrenchment and crowded direct lending are tailwinds for ABL’s growth.
• Market structure and returns:
  • Shorter, amortizing/revolving loan structures
  • Lower yields (on average) than direct lending, but with better downside protection
• Fraud and “wrong way risk” are non-trivial—real GP expertise and process are the best moat.
• The opportunity set is growing, but the best managers and platforms invest heavily in human capital, specialized teams, and data.

Timestamps Index

• 00:00 — Episode Introduction & Framing
• 06:30 — What is ABL? Key Mechanics Explained
• 12:45 — History of ABL: Ancient to Modern Times
• 20:35 — Real-Economy Archetypes for ABL Use
• 27:25 — Market Sizing, Profiles & Segmentation
• 32:38 — Aaron’s Segment: Collateral Types, Due Diligence, Risk
• 55:04 — Shift to Lower Yields, Crowded Lending, Market Headwinds
• 64:22 — Guest Segment (Cedric & Greg): Real-World ABL Deep Dive
• 97:53 — Takeaways, Recap, Strategic Big Picture
• 101:40 — Metaphors & Final Thoughts
• 102:04 — Lightning Round (App Choices) & Outro

Summary Table

| Topic | Key Takeaways | |----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------| | ABL Definition | Loans secured primarily by specific assets (tangible or intangible), not cash flows. | | Market Evolution | Aging out of “last resort” to mainstream solution for liquidity, balance sheet optimization, R&D, and growth. | | Collateral Types | Vast and growing: hard assets, inventory, accounts receivable, IP, royalties, equipment, NAV, consumer finance, insurance. | | Lender Landscape | Banks still lead volume, but private capital platforms quickly gaining; private lenders handle more complexity and hands-on diligence. | | Due Diligence | Extensive, multi-layered process—GP, loan structuring, collateral valuation/monitoring—requiring deep, often industry-specific expertise. | | Investor Fit | Not a true “asset class”—a tool for portfolio management and diversification; should be evaluated by exposure, risk-return, duration/liquidity, and fit with other credit buckets. | | Risks | Asset volatility, fraud, “wrong-way risk”; requires ongoing monitoring, frequent re-valuation, tight issuance/collections processes. | | Yields | Sits between public high-yield and direct lending, but dependent on collateral complexity; generally lower than direct lending but with better downside protection via collateral recovery. | | Growth Prospects | Strong (10–13% CAGR), especially outside U.S. (notably Asia); SMEs and tech use cases on the rise; strong demand as direct lending crowding increases. | | Manager Alpha | Derived from specialization (by collateral/industry), sophistication in valuation/monitoring, deep deal networks, and operational intensity. |

Further Resources

If you’re new to asset based lending or just want to go deeper:

• See prior Capital Decanted episodes on private credit, GP stakes, secondaries (for “coming of age” comparative context)
• Guest organizations: SLR Capital Partners, Illinois Police Officers Pension Fund

Final Word

Asset Based Lending is neither a monolith nor a fringe curiosity. It’s a fast-evolving, deeply complex segment demanding specialist skills, strong monitoring, and meticulous allocation strategy. For institutional investors, it’s a toolkit for unlocking unique exposures—not a substitute for credit generalist thinking.

“What you see above the water is a beautiful piece of credit; below the surface is all the complexity, diligence, and workflow needed to do it well.” (John, ~101:40)

End of Summary.