Private Credit's 'Bubble' Problem Isn't Asset-Backed Lending's Problem

How "Private Credit" Became A Catch All

In reality, what began as a differentiated alternative has matured into a diverse ecosystem with fundamentally different credit behaviors and outcomes across cycles. Corporate direct lending and asset-backed finance (ABF), for example, represent two distinct credit regimes: one centered on operating performance, the other on collateral value. Yet, when stress shows up in one segment, it gets misread as a warning sign for the entire credit asset class. While that may be a compelling narrative for why private credit as a whole has become a victim of its own success, it's an incomplete picture.

Two Different Risk-Return Profiles

Direct and senior lending strategies have structural profiles that are very different from bespoke and asset-based lending.

The Private Credit Monolith

The monolithic view ignores the fact that while corporate direct lending appears to be exhibiting late-cycle dynamics, the asset-based lending segment is seeing increased interest as capital moves toward sub-strategies less directly tied to an uncertain macroeconomic backdrop.

On the corporate side:

• The "Shadow" Rate: While formal default rates sit near 2.1%, the reality underneath is more complex. The "true" distress rate, including selective defaults and companies kept on life support via sponsor interventions or PIK (Payment-in-Kind) toggles, is now approaching 5.0%.
• The 'Narrative' Risk: These structures often represent a bet on Adjusted EBITDA and management projections. However, when the economy wobbles, "Adjusted" earnings are often the first thing to vanish, leaving lenders dependent on future operating performance or recovery rather than hard collateral.

Meanwhile, collateral-backed structures continue to benefit from stable valuations and steady investor confidence, absent the liquidity pressure that characterizes corporate-dependent strategies.

These indicators are not a reason to exit the private credit asset class altogether, but rather a reminder to understand precisely where risk sits on the spectrum. While the corporate narrative softens, the structural signal in other segments continues to strengthen.

Asset-Backed as Structural Defense

Asset-backed lending doesn't underwrite management projections; it underwrites asset value and downside risks. Research shows that collateralized and asset-specific lending exhibits different loss behavior and recovery characteristics than solely cash flow-dependent strategies, particularly during periods of liquidity tightening and economic slowdown. In downside scenarios, recovery is based on enforceable rights and asset value, not EBITDA normalization. Because duration is typically shorter, capital reprices more quickly across cycles and is therefore more representative of real-time risks.

Treating these exposures interchangeably ignores the reality that in a risk-off or tightening cycle, the difference between lending to a business and lending against an asset isn't just a nuance, it's the entire risk profile.

Capital is quietly reallocating into asset-backed structures to address the massive gap between the $6+ trillion addressable ABF market and the portion currently reached by private capital.

Distinctions Matter More Now

In a market marked by uncertainty, the difference isn't simply in return ambition. It's where the risk ultimately resides, and the current macro environment is no longer forgiving. Treating the exposures as interchangeable obscures real risk and understates the structural differences that ultimately drive outcomes in stressed markets. Growth dispersion across sectors and issuers has widened as well as softened in some industries, rate expectations remain uncertain and prone to volatility, and refinancing is no longer assumed and instead comes with materially higher hurdles.

Risk is still on the table, but in late cycle, these characteristics matter more.

The Bottom Line

The underlying strategy and approach to underwriting, structuring, and risk management is more important than the asset class. One approach is a bet on momentum and macro cycles, refinancing windows, and market sentiment, while the other is a bet on mechanics and contracted cash flows, collateral coverage, and control.

Adjusted EBITDA has increasingly taken on the qualities of a narrative construct rather than a reliable measure of financial resilience. In periods of stress, investors would be better served by looking beyond earnings adjustments and focusing on the quality, durability, and enforceability of the underlying collateral.

Key Takeaways:

• Mean reversion hurts growth stories more than asset values. A logistics company missing EBITDA targets still owns trucks with tangible resale value, even if enterprise value compresses.
• First-lien isn't enough anymore. Cash-flow-independent collateral is needed when coverage ratios deteriorate.
• Recovery drives returns: 10–12% yields in ABF are typically structured at ~85% LTV against hard collateral, whereas 11–13% corporate private credit often relies on enterprise value stability and par recovery assumptions—resulting in materially different risk/return profiles.

EBAM's Perspective

At EBAM, this hasn't been a reactive pivot or a yield chasing exercise; it is core to our DNA and the specific thesis we have been executing since our founding in 2021. ABF doesn't care about a CEO's vision or "projected" cash flows-it is a senior claim on the tangible, stable-valued assets.

• Stability: KBRA's latest surveillance shows a 98% rating stability ratio for Investment Grade ("IG") ABS, even as they project record issuance of $385+ billion for 2026.
• The Recovery Edge: This structural seniority is why collateralized lending exhibits drastically different recovery characteristics. Senior asset-backed structures often see recovery floors of 70% to 90%, compared to the significantly lower recoveries typical in unsecured corporate workouts.