Capital Decanted - Season 2, Episode 10: Asset-Based Lending: An Asset Class or a Collection of Esoteric Collateral?

Release Date: June 24, 2025

Hosts: John Bowman and Aaron Filbeck
Guests: Cedric Henley (Partner & Chief Risk Officer, SLR Capital Partners) and Greg Turk (Deputy CIO & Head of Private Markets, Illinois Police Officers Pension and Investment Fund)

Introduction to Asset-Based Lending (ABL)

John Bowman opens the episode by highlighting the evolution of various financial strategies from niche practices into mainstream tools. He emphasizes that Asset-Based Lending (ABL) shares a similar "coming of age" story, transitioning from a last-resort financing option to a vital component for business expansion, inventory financing, growth, acquisitions, and cash management. Bowman describes ABL as highly idiosyncratic and complex, requiring specialized expertise to navigate effectively.

Defining Asset-Based Lending

John Bowman explains ABL as loans secured by a company's specific assets, unlike traditional loans that rely on creditworthiness and cash flow. The collateral can range from tangible assets like real estate and machinery to intangible ones such as intellectual property and accounts receivable. He uses the example of a mortgage to illustrate the basic concept, noting that while the idea is straightforward at a micro level, it becomes intricate across diverse industries and collateral types.

Evolution and History of ABL

Aaron Filbeck delves into the history of ABL, tracing its roots back to ancient Mesopotamia around 3000 BC, where merchants borrowed against goods and livestock. He outlines key historical milestones, including its proliferation during the Industrial Revolution and its critical role during the Great Depression and the COVID-19 pandemic. Filbeck highlights how ABL has evolved from desperation capital to a strategic tool for working capital optimization and business growth.

Current Landscape and Market Sizing

Filbeck provides an overview of the current ABL ecosystem, estimating its size at approximately $800 billion in 2025. He contrasts true ABL with Asset-Based Finance (ABF), noting the significant differences in origination and structuring. Filbeck explains that while ABF involves pooling and securitizing assets, true ABL focuses on individual, bespoke loans originating from private credit platforms and banks. He also discusses the geographical distribution, with the U.S. holding nearly half of the global market and Asia rapidly catching up due to growing economies and diversified supply chains.

Types of ABL and Collateral

Filbeck categorizes ABL into three main groupings:

1. Hard Assets: Physical properties like real estate, infrastructure, and machinery.
2. Balance Sheet Assets: Collections such as accounts receivable, inventory, and equipment.
3. Specialty Finance: Esoteric assets like royalties, healthcare R&D, and insurance contracts.

He emphasizes the diversity and bespoke nature of ABL, illustrating with examples from various industries, including AI cloud companies leveraging expensive Nvidia GPUs as collateral.

Role of Private Lenders vs. Banks

Cedric Henley explains that private lenders have gained significant ground in the ABL space, especially after regulatory challenges led banks to retreat. Private credit firms like SLR Capital Partners focus on specialized and complex collateral types, requiring deep technical expertise and robust valuation processes. Unlike banks, which often follow an originate-to-distribute model, private lenders maintain ownership of the loans, allowing for more flexibility and tailored solutions.

Due Diligence and Risk Management

Henley and Greg Turk discuss the rigorous due diligence required in ABL. This includes assessing the liquidation value of collateral, continuous monitoring of asset quality, and ensuring accurate and timely reporting from borrowers. They highlight the importance of specialized appraisal expertise and the challenges posed by unique and esoteric collateral types. Turk notes that effective risk management in ABL involves tight covenant structures and proactive engagement with borrowers to mitigate potential defaults.

Investment Opportunities and Challenges

Greg Turk shares insights on why ABL is becoming increasingly attractive to investors. He mentions the growing market size, diversification benefits, and lower correlation with traditional credit assets. However, he also cautions about the complexities and the necessity for specialized knowledge to achieve favorable risk-return profiles. Turk emphasizes that successful investment in ABL requires partnering with experienced managers who possess deep domain expertise and robust operational capabilities.

Halftime Segment with Franklin Templeton

Matt Brancato, Head of Alternative Sales at Franklin Templeton, joins the conversation to discuss common challenges advisors face when allocating to alternatives. He outlines three key lessons:

1. Shared Language: Ensuring all parties understand and define alternative investments consistently.
2. Tools, Not Classes: Viewing alternatives as tools to achieve specific portfolio outcomes rather than distinct asset classes.
3. Early Cycle Opportunities: Encouraging proactive allocation to capture emerging opportunities rather than reacting to past performance.

Brancato underscores the importance of education and strategic alignment in successful alternative investment allocations.

Key Takeaways

• Complexity and Specialization: ABL is a highly specialized and complex asset class requiring deep expertise in various collateral types and industries.
• Private Lenders' Ascendancy: Private credit firms are increasingly predominant in the ABL space, offering tailored and flexible financing solutions beyond traditional bank offerings.
• Rigorous Due Diligence: Effective ABL investment demands comprehensive due diligence, continuous monitoring, and robust risk management practices.
• Investment Appeal: ABL offers diversification benefits and attractive risk-return profiles, making it a compelling option for sophisticated investors despite its complexities.
• Educational Gaps: Success in ABL investments is contingent upon bridging educational gaps and fostering clear communication among stakeholders.

Notable Quotes

• John Bowman (00:06): "Instead of skimming the surface, we dive into the heart of capital allocation."
• Aaron Filbeck (05:18): "ABL loans are snowflakes. They're each unicorns to borrow from our family, office, friends."
• Cedric Henley (07:50): "True ABL is a fraction of ABF, requiring bespoke solutions and specialized expertise."
• Greg Turk (84:23): "With ABL, you're dependent on the assets, ensuring a better risk-return profile."

Conclusion

This episode of Capital Decanted provides an in-depth exploration of Asset-Based Lending, highlighting its historical evolution, current market dynamics, and the intricate processes involved in effective investment and risk management. Through expert insights from industry leaders Cedric Henley and Greg Turk, listeners gain a comprehensive understanding of why ABL is becoming a pivotal component in modern capital allocation strategies. The discussion underscores the necessity for specialized knowledge and robust due diligence to navigate the complexities of this unique asset class successfully.