The private credit market’s remarkable ascent to $2.1 trillion in global assets under management has fundamentally reshaped corporate finance, yet the anticipated M&A surge of 2025 has failed to materialize as expected. Despite early-year optimism that saw Q1 2025 deal volumes increase 16% year-over-year, the April tariff announcement and resulting market uncertainty have created a more complex landscape for dealmakers. In this environment, asset-based lending has emerged as a critical strategic tool, offering the flexibility and certainty that traditional financing structures struggle to provide.
For the dealmaker ecosystem—private equity firms, investment banks, legal advisors, specialty lenders, and turnaround advisors—understanding ABL’s evolution from a financing of associated with performance challenges to a sophisticated debt capital solution has become essential. With 58% of institutional investors prioritizing ABL strategies in 2025¹ and the broader asset-based finance opportunity estimated at $32 trillion², the convergence of ABL and private credit represents more than a trend—it signals a structural shift in how middle market transactions get done.
The numbers tell a compelling story: private credit now finances 84% of middle-market leveraged buyouts³, up from 65% just three years ago. Yet this dominance comes amid significant headwinds. The Federal Reserve’s maintenance of rates at 4.25%-4.50% through the first half of 2025⁴, combined with trade policy uncertainty, has created what EY-Parthenon now projects as only a modest 1% increase in PE deal volumes for the full year⁵—a stark departure from earlier predictions.
The private credit transformation reshapes deal dynamics
With traditional banks supplying less than 20% of all credit to businesses according to Apollo’s estimates⁶, and regulatory and liquidity pressures circling many bank balance sheets, private credit has filled the void with remarkable efficiency. The market’s projected growth to $2.64 trillion by 2029⁷—representing a 9.9% CAGR—underscores its permanent place in the capital structure toolkit.
“Unusually elevated policy uncertainty and its consequences are recurring themes in our conversations with private equity sponsors and management teams,” observed Lawrence E. Golub, CEO of Golub Capital, in April 2025. “While high uncertainty makes it hard to draw conclusions from this quarter’s data, we expect private equity-owned businesses to continue to adapt to changing conditions as they have done during prior dislocations.”⁸ This cautious optimism reflects current market realities. The average middle market M&A valuation of 9.4x EV/EBITDA in 2024, while down from 9.6x in 2023, still presents challenges for buyers seeking appropriate returns in a higher rate environment⁹.
For private equity firms, the mathematics have become increasingly complex. With all-in borrowing costs for single-B-rated loans touching 8.0%¹⁰ and interest coverage ratios at record lows of just 2.34x for newly minted LBO transactions¹¹, the traditional playbook requires revision. This environment has driven average PE hold times to 8.5 years in 2024¹², creating mounting pressure for creative exit strategies and interim value creation.
The complexity is particularly acute in carve-out transactions, where private equity sponsors must navigate operational separation challenges while securing appropriate financing. According to Kathy Auda, Chief Risk Officer at Great Rock Capital, “When assessing carve-outs, Great Rock Capital focuses on pretty standard due diligence blocking & tackling: (i) the strength of the management team overseeing the carve-out and their operational experience, (ii) the need for new ERP or other systems to prop up the newly carved out business and (iii) the liquidity available to help smooth through bumps in the road during the carve-out. There are certain sponsors and financial/operational advisors that we have worked with who excel at carve-outs; while no two deals are the same, they have the playbook framework in place to effectively and efficiently work through the process.”
This operational focus becomes critical as carve-out activity continues to gain momentum in 2025, with sponsors seeking to unlock value in portfolio companies while navigating the complexities of standalone entity creation. For investment banks, identifying experienced operational advisors early in the process has become essential to successful execution. Legal advisors must understand the intricacies of transition service agreements and systems separation issues, while turnaround advisors find themselves providing risk mitigation as a premium service offering.
The shift toward asset-based structures offers one solution. As David Ross, Managing Director and Head of Private Credit at Northleaf Capital Partners, explains: “ABF helps to diversify portfolios away from corporate risk and provides strong downside protection through underlying asset collateralization. Low-correlation ABF is less influenced by macro, market and geopolitical shocks.”¹³
Asset-based lending emerges from the shadows
The global ABL market’s trajectory toward $1.43 trillion by 2029¹⁴—growing at a 12.5% CAGR—reflects more than simple market expansion. It represents a fundamental reimagining of how sophisticated borrowers and lenders approach capital structure optimization. With $633 billion trapped in working capital among S&P 1500 companies according to J.P. Morgan’s 2023 analysis¹⁵, the opportunity for ABL to unlock value has never been clearer.
Traditional advance rates remain competitive, but the real innovation lies in how ABL integrates with broader capital structures. The emergence of unitranche facilities combining ABL with cash flow lending, hybrid structures incorporating equity kickers, and sophisticated intercreditor arrangements has transformed ABL from a specialized tool to a versatile component of complex financings.
Dan Pietrzak, Global Head of Private Credit at KKR, frames the opportunity succinctly: “What many don’t realize is that ABF is also secured risk, backed by real collateral. That’s particularly compelling in periods like this, where tariff-driven cost pressures are front and center. Traditional unsecured credit depends on earnings forecasts and cash flow assumptions—both vulnerable to macro shifts. ABF, by contrast, is anchored in contractual structures tied to liquidation value, not speculative growth models.”¹⁶
This structural advantage has attracted significant institutional capital. Sixteen of 23 major North American private credit managers now have dedicated ABL capabilities¹⁷, while notable partnerships like Sixth Street’s $13 billion venture with Northwestern Mutual signal the mainstreaming of asset-based strategies. The trend extends to insurance companies, with 44% of major insurers planning increased ABF allocations according to Moody’s 2024 study¹⁸.
Documentation evolution balances flexibility with protection
While over 90% of broadly syndicated loans now carry covenant-lite structures¹⁹, the emergence of “cov-loose” structures represents a mid-risk path, retaining leverage covenants tested quarterly but at levels providing material cushion. For transactions below $50 million in EBITDA, full covenant packages remain standard, offering lenders meaningful monitoring capabilities while avoiding the operational restrictions that hamper value creation.
In this competitive environment, asset-based lenders face pressure to provide more flexible covenant packages while maintaining appropriate risk controls. Kathy Auda at Great Rock Capital explains their approach: “Great Rock Capital views financial covenants and minimum liquidity thresholds as important early warning signs of potential deterioration in the credit profile. We want to ensure that we are back at the table discussing options with management and the owner(s) at an early juncture, and covenant triggers provide such an opportunity. We work to be flexible in building out covenants that mirror a company’s profile and projections, but we try to limit covenant light and springing covenant deals to only the strongest profile credits.”
This disciplined approach to covenant design reflects a broader tension in the market between competitive pressures and prudent risk management. For private equity sponsors, understanding when covenant triggers provide early warning versus operational restriction becomes crucial to value creation strategies. Investment banks must structure deals that balance borrower flexibility with lender protection, while legal advisors craft covenants that mirror company profiles while maintaining lender rights. Specialty lenders find differentiation through thoughtful covenant design, particularly as broader market trends favor borrower-friendly terms.
Legal advisors navigating these waters must master increasingly complex intercreditor dynamics. The growth of unitranche structures—including the record $2.6 billion Stamps.com acquisition financing—has elevated the importance of Agreement Among Lenders (AAL) negotiations. With limited bankruptcy precedent testing AAL enforceability, careful drafting of waterfall provisions, voting rights, and enforcement mechanisms becomes critical.
Enhanced liability management transaction protections, anti-layering provisions in holdco structures, and sophisticated collateral-sharing arrangements require legal teams to balance standardization with bespoke solutions for complex situations.
Asset-based lending documentation: The foundation of risk management
The importance of robust documentation has become particularly acute given recent market volatility and trade policy uncertainty. Asset-based lenders have found their loan and security agreements tested by rapidly changing economic conditions, making careful contract negotiation more critical than ever.
Auda emphasizes this point: “Similarly to our stance on covenants, Great Rock Capital views its Loan and Security Agreement as a critical contract between us and our Borrower, and we take great care in negotiating the terms of that agreement to reflect the profile of the prospective borrower. To date, we rarely deviate from the core terms and conditions in our ‘standard’ LSA format. With some of the recent volatility in the markets created by the tariff uncertainty, the terms and conditions in our LSAs regarding eligibility criteria, reserves, and reporting have proven themselves to be vital risk mitigation tools.”
This documentation discipline becomes increasingly important as market conditions shift rapidly. For private equity sponsors, Loan and Security Agreement terms directly impact operational flexibility and the ability to execute value creation initiatives. Investment banks must understand how standard versus bespoke documentation affects transaction execution timelines and financing certainty. Legal advisors find that LSA negotiation becomes a competitive advantage, particularly in contested situations where speed and certainty matter. Specialty lenders use documentation discipline as both risk management and competitive differentiation, especially when market volatility tests the adequacy of contract protections.
Market participants adapt strategies for the new normal
Investment banks face a transformed competitive landscape where private credit’s speed and certainty advantages have captured market share across the size spectrum. The migration of deal sizes tells the story: 90% of LBOs financed in the broadly syndicated loan market in 2024 exceeded $1 billion, up from 62% in 2019²¹. This pushes banks to focus on jumbo transactions while ceding middle market territory to direct lenders.
Yet opportunities remain for creative advisors. The projected $620+ billion in high-yield bonds and leveraged loans approaching maturity in 2026-2027²² creates a refinancing wave requiring sophisticated structuring capabilities. Banks partnering with private credit funds—exemplified by collaborations between AGL Credit Management and Barclays or Centerbridge Partners and Wells Fargo—demonstrate how traditional players can maintain relevance through strategic alliances²³.
Specialty lenders benefit from the current environment’s emphasis on flexibility and speed. With 30% of institutional mandates now targeting specialty finance and opportunistic credit strategies (up from 21% in 2023), the ability to provide creative solutions for complex situations commands premium pricing. Asset-based lenders particularly benefit as borrowers seek to maximize liquidity while minimizing covenant restrictions.
For turnaround advisors, the combination of elevated hold periods, interest coverage pressures, and refinancing walls creates abundant restructuring opportunities. Jason Strife, Head of Junior Capital & Private Equity Solutions at Churchill Asset Management, captures the dynamic: “We’re in a period where I think private equity firms should really be exploring what the art of the possible is with their capital structure, ultimately creating better prospects for the business to grow into a return.”²⁴
The path forward demands strategic adaptation
As we navigate the remainder of 2025, several key trends will shape the confluence of ABL and private credit. The Federal Reserve’s “higher for longer” stance, with markets pricing only 2-3 rate cuts this year, maintains pressure on traditional LBO economics while benefiting floating-rate lenders. Trade policy uncertainty may persist, but the fundamental drivers of private credit growth—bank retrenchment, institutional allocation increases, and borrower demand for flexible capital—remain intact.
For private equity sponsors, success requires embracing ABL as a strategic tool rather than a fallback option. The ability to unlock working capital value, maintain operational flexibility, and optimize total cost of capital through hybrid structures will separate winners from also-rans. With 72% of market participants expecting leverage multiples to increase²⁵ in the first half of 2025, creative structuring becomes essential.
Investment banks must continue evolving from pure intermediaries to strategic advisors capable of navigating the complex interplay between public and private markets. Understanding when ABL enhances a capital structure, how to negotiate favorable intercreditor terms, and which private credit partners align with client objectives becomes as important as traditional modeling and valuation skills.
Legal advisors face the challenge of documenting increasingly sophisticated structures while maintaining enforceability and clarity. The rise of covenant-loose structures, proliferation of liability management transactions, and complexity of multi-tranche facilities require deep expertise and careful attention to detail. Staying current with evolving market terms while protecting client interests demands continuous learning and adaptation.
Conclusion
The convergence of asset-based lending and private credit represents more than a cyclical trend—it reflects structural changes in how middle market companies access capital. As traditional boundaries blur and new structures emerge, success belongs to those who master the expanded toolkit. Whether structuring a complex unitranche facility, negotiating an innovative bank partnership, or crafting an ABL facility that unlocks hidden value, understanding the strategic role of asset-based lending has become essential for all participants in the dealmaker ecosystem.
The remainder of 2025 promises continued evolution as market participants adapt to persistent uncertainty while positioning for eventual recovery. Those who embrace ABL’s flexibility, understand its integration with broader private credit strategies, and execute with discipline will find abundant opportunities in this transformed landscape. As one senior credit executive recently observed, “In a world where traditional assumptions no longer hold, the ability to see assets—not just cash flows—as a source of value creation separates the strategic from the tactical.”
For the dealmaker ecosystem, the message is clear: asset-based lending has moved from the periphery to the center of modern finance. Understanding its strategic application isn’t optional—it’s essential for navigating the confluence of forces reshaping middle market finance.
Footnotes
- Asset-Based Lending Market Size, Industry Report 2024-2032
- The growth of asset-based finance in private credit markets
- 2025 US Private Credit Outlook: More M&A, larger lenders, bigger market
- Federal Reserve Holds Rates Steady at May 2025 Meeting
- M&A outlook signals more subdued US deal market activity in 2025
- Private credit — a rising asset class explained
- Private credit forecast to reach $2.64 trillion in 2029
- 2025 US Private Credit Outlook: More M&A, larger lenders, bigger market
- Middle Market M&A Valuations Index
- 2025 Leveraged Loan Market Survey
- LBO Update: Dealmaking picks up, but not without risk
- Global Private Markets Report 2025: Braced for shifting weather
- Spotlight on David Ross, Managing Director & Head of Private Credit, Northleaf Capital Partners
- Asset-Based Lending Market Size, Industry Report 2024-2032
- Benefits of an Asset-Based Lending Financing Solution
- Private Credit 2025: Navigating Yield, Risk, and Real Value
- The growth of asset-based finance in private credit markets
- What might private credit hold in store for investors in 2024?
- Navigating the Club in Private Credit Deals
- U.S. Trendlines: New-Issue Private Credit Covenants Strengthen
- Behind the Private Credit Boom
- High-yield bond & leveraged loan maturity could create private credit opportunities
- Covenant Lite #6: Growing Trend of Bank / Private Credit Partnerships
- Junior debt set for resurgence
- Harris Williams | 2025 M&A Market Trends & Industry Outlooks
