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Private credit has had a rough stretch. High-profile defaults and bankruptcies have shaken confidence across the sector, but asset-based finance (ABF) has held up noticeably better. In this Q&A, adapted from the ABF Journal podcast, Rita Garwood, editor-in-chief of ABF Journal, talks with John Robuck, head of the Financial Institutions Group at Capital One, about the structural features insulating ABF from broader private credit anxiety, the surge of institutional capital flowing into the space, where leverage becomes risky, and what separates a well-structured ABF deal from the next cautionary tale.
Garwood: Private credit has been making headlines a lot over the last year, and it’s taken some real hits from high-profile defaults and bankruptcies. Why has ABF held up differently during the same time period? What do you believe is insulating it from the same type of anxiety we’re seeing in private credit?
Robuck: Happy to provide some thoughts on that. ABF is definitely a little different than other sectors within the private credit ecosystem. It’s anchored to tangible cash-flowing assets rather than enterprise value or EV multiples. It also utilizes strong structural credit enhancements, including over-collateralization, borrowing-base formulas, and automated cash sweeps. Those are important structural protections compared to other sectors within private credit. The facilities are also bankruptcy remote, which insulates the collateral from corporate-level contagion. And lastly, ABF facilities are typically characterized by diversified cash flow streams with contractual priority, as well as asset-level control, which gives a more resilient structural buffer. That’s what allows ABF products and loans to be more resilient than the rest of private credit.
Garwood: So what is it about ABF’s structure? Is it the collateral, the underwriting process, the recovery mechanics? What do you believe makes it behave differently than direct lending when things get stressed?
Robuck: I think it’s all of those things. Risk is isolated in bankruptcy-remote SPVs — special purpose vehicles that separate the asset pool from the originator’s liabilities. That’s really important when you’re looking at liquidating and receiving your principal back as a lender. Underwriting is based on historical data — typically static pool loss curves and tangible liquidation values across various stress scenarios — instead of forward-looking earnings or EBITDA growth. We also have dynamic borrowing bases that recalculate capacity based on real-time asset performance. And in times of stress, the benefit of these structures is that the collateral self-liquidates through a binding cash waterfall, leading to higher recoveries without having to negotiate the value of the underlying business. You already know what the assets are worth — you’re just collecting the cash at that point.
Garwood: There’s been a surge into ABF recently. Do you attribute that to investors rotating out of riskier private credit strategies, or is it genuinely new capital coming into the space?
Robuck: I think it’s actually a genuine influx of new capital. The primary sources include insurance companies, pension funds, and sovereign wealth funds — three large buckets of institutional investors. ABF is attracting this capital because it delivers attractive yields at investment-grade risk, and a lot of these investors get preferential regulatory capital treatment, which makes ABF even more attractive. It’s an efficient way to deploy capital. Asset managers are also reallocating capital away from corporate direct lending due to compressed risk-adjusted spreads, and they view ABF as a way to diversify their private asset holdings. So we think this represents a fundamental expansion in the overall private asset market rather than simply a reshuffling of existing funds. The pie continues to get larger, and ABF is an increasingly important part of it.
Garwood: So do you believe this becomes a permanent core allocation for institutional portfolios, rather than just a trend?
Robuck: I think there are a couple of reasons for that. First, ABF fills a critical funding gap left by commercial banks due to regulatory evolutions — there’s real demand for it in the market. It also serves as an essential permanent diversifier for institutional investors who are currently overallocated to enterprise value risk. Those same institutional investors are looking for ways to stay involved in private assets as private assets become more important in the overall economy. ABF is a way to diversify away from that enterprise value risk. We’ve also talked directly with institutional investors, and what we’ve found is that ABF is becoming a baseline portfolio allocation — not something they’re doing as a trial balloon. It’s now part of the foundation of their mandate, which I think makes this much more permanent than it’s been in the past.
Garwood: Within ABF, which asset classes or sectors are seeing the most investor interest right now, and why?
Robuck: I’ll highlight three areas where we tend to see the most activity. The first is subscription lines — highly favored due to near-zero historical default rates, high-quality institutional LPs, a lot of diversity, and an important relationship angle to providing those facilities. They’re also at scale, so you can deploy a fair amount of capital relatively easily. It’s competitive, but if you have the capabilities to go after that market, you can put real capital to work. The second is commercial equipment leasing — physical assets offer strong liquidation recoveries and act as an effective inflation hedge. And third, notwithstanding some of the headlines around the consumer, granular consumer receivables — auto or home improvement, for example — attract capital due to their relatively short duration, predictable asset performance, and attractive relative spreads. All three provide transparent, high-velocity cash flows backed by strong historical data — strong non-loss data for sublines, and strong recovery data for the other two.
Garwood: How do different financing structures in ABF differ across collateral types — say, consumer receivables versus equipment finance? Are lenders leaning more on advance rates, structural leverage, or covenants to manage risk?
Robuck: All the levers get pulled by lenders, and each case is a little different. For consumer receivables, we’re relying on advance rates, excess spread, and performance triggers to absorb any fast-moving defaults in the underlying pools. On the equipment leasing side, we’re focused on physical asset liquidation values — really understanding where those markets are and supporting platforms that understand the underlying asset values. We also look at residual value caps and cross-collateralization there. On the specialty finance side, those tend to involve larger loans, so we lean heavily on concentration caps, originator net worth covenants, and equity cushions. But across all sectors, advance rates, borrowing-base availability, and performance triggers are our primary tools.
Garwood: Leverage has been a real flashpoint in private credit. How is leverage typically applied in ABF deals, and where’s the ceiling before it starts to look like the same risk layering that hurt direct lending?
Robuck: Leverage in ABF is fundamentally different compared to direct lending or leveraged finance. The advance rate is applied to specific asset pools based on valuations of the underlying assets, rather than an EBITDA multiple on an enterprise. There’s also tranching of risk, which allows the market to remain predominantly investment grade — an important structural element. As far as risk layering, it becomes dangerous in the ABF context if managers go too far down the capital stack, or combine hold-co debt with debt that’s already leveraged at the SPV level. That’s something we focus on closely. When you start to see a lot of hold-co debt, that’s when you’re flying a little too close to the sun. For us, maintaining a senior position in the waterfall, along with our leverage ceilings, keeps us insulated from potential losses.
Garwood: Are there any early warning signs of overheating anywhere in ABF? Do you see pockets that could become the next area of concern, the way direct lending was affected?
Robuck: The obvious answer is loosening standards — new lenders coming in and loosening eligibility criteria, like allowing delinquent loans to stay on a borrowing base too long, or not acting fast when they should. Those are red flags we’re focused on. Another area we watch is aggressive NAV lending. Not all NAV lending is bad, but financing illiquid pools at high loan-to-values with significant refinancing risk presents a challenge. We’ve seen modest levels of NAV lending so far, but a significant amount of aggressive growth there would be a concern. And then deep subprime consumer finance — when lenders move further down the capital stack despite tight spreads and the pressures consumers are already facing on debt and wages. We don’t play much in the deep subprime market, but when you see more lenders crowding into that space, it’s a sign things are overheating.
Garwood: Let’s talk about underwriting. Has it held up in ABF as more capital has poured in, or is increased competition leading to a loosening of standards?
Robuck: Around the edges, for any given deal, you’ll sometimes see some loosening. But at the market level, banks have been pretty disciplined. Bank-led facilities have largely maintained risk controls. We’ve documented a lot of our own requirements and have well-established underwriting and lending standards that we’ve discussed at length with regulators, so there’s helpful regulatory oversight there too. Banks have also learned from historical issues with these structures and have maintained discipline. Where you feel it most is around spread compression — that’s happening across the board. From time to time you’ll see unique, bespoke transactions where there’s real innovation taking place, and with innovation comes complexity. We want to provide solutions for our clients, but we also have to think through how those structures play out, because with a lot of innovation, you don’t have much of a track record to lean on. That’s where we tend to focus. But at the core, the structural mechanisms — bankruptcy remoteness, priority cash flow waterfalls — remain largely uncompromised.
The other thing worth mentioning is that public asset-backed securities and ABS markets provide valuable market data transparency and help establish benchmarks. If there’s ultimately an ABS or CLO transaction, you need to make sure you’re originating or lending on assets that will clear that market. Originators and lenders alike stay focused on the public capital markets to determine what’s appropriate — there’s a built-in discipline there.
Garwood: What separates a well-structured ABF deal from one that could turn into the next cautionary tale?
Robuck: I’ll go back to those same structural pillars, but one thing we’re very focused on is having triggers in place that let us put a backup servicer in — one that’s ready to execute a seamless transition if the originator or servicer fails. We spend a lot of time underwriting and getting to know these management teams and their business models, but it’s also important to plan for what happens if things aren’t what they seem: how do we bring in a servicer that can step in and service the underlying collateral? I think the strongest deals have the ability to enforce automated cash flow sweeps and performance covenants that preserve collateral coverage before any originator insolvency ever occurs. It’s rare for that to actually happen, but a well-structured ABF deal has the ability to make those changes. Weak deals are fairly obvious — you see dilution of the collateral cushion over time, paired with an inability to actually take action. The good thing about these structures is you get a lot of granular data on collateral performance that you can compare against the public market, so you tend to see problems coming. It shouldn’t be a huge surprise. It’s about making sure your structure has the ability to pull those levers — to take bad collateral out of your borrowing base, or stop lending on it, quickly.
Garwood: How do you talk to a client who might be nervous about private credit broadly, but still curious about ABF specifically? What’s your pitch, and what are the honest caveats?
Robuck: If you’re looking at risk-adjusted returns, ABF is a tremendous opportunity for investors. It’s also a great space for us as a lender — we can provide balance sheet lending, advisory, and ABS execution. Having the ability to warehouse and support the full cycle of these facilities and originators adds real value to those platforms. The caveat is that it requires a lot more operational intensity and ongoing portfolio management — rigorous, day-to-day auditing and continuous monitoring of the collateral. In some other private credit sectors, you’re financing a term loan: you get quarterly reporting, maybe a financial covenant, and often not even that much rigor. To do well in this space as a lender or investor, you need to get your hands dirty — really understand and unpack the data. That requires institutional infrastructure to manage the portfolios, and good relationships with backup servicers in case a transition is ever necessary. It’s more operationally intensive, and that’s the one real caveat.
Garwood: Last question — five years from now, do you think ABF is described as a distinct asset class in its own right, or as a permanent load-bearing pillar within private credit generally?
Robuck: I think it’ll be a load-bearing pillar of private credit. Private credit is evolving past direct lending — if you think back to private equity, it started as fairly traditional LBO financing, then expanded into real estate and infrastructure as it matured and diversified. I think you’ll see the same thing on the ABF side. The scale of non-bank intermediation also ensures ABF will continue to grow — that’s structurally a benefit. And once it becomes the foundation of institutional portfolios, given its resiliency and the attractiveness of the returns, I think you’ll see institutional investors continue to re-up their investments in ABF. That adds a lot more stability to the funding of these facilities, and therefore to the ABF market overall.
Garwood: Well, thank you, John, so much for talking with me today and answering all these questions. I appreciate you taking the time.
Robuck: Of course — it was great chatting with you. Thanks, Rita.