Private credit has captured the attention of institutional investors over the past decade, particularly as banks have retreated from direct lending and sponsors have filled the void. But according to PIMCO’s Chia-Wen Teoh, senior vice-president at the firm, the next phase of private credit’s evolution is already underway, and it looks markedly different from the sponsor-backed corporate loans with which most investors are familiar.
Asset-based finance, a lesser-known but significantly scaled component of private credit, is the sector on which Teoh believes investors should now focus. Speaking at The Inside Network’s recent Alternatives Symposium, Teoh laid out a compelling case for why asset-based lending offers better diversification, downside protection and return potential than many corners of the traditional credit market.
Unlike the high-profile corporate deals that dominate headlines, asset-based finance underpins daily life. “If corporate credit is Wall Street,” Teoh said, “asset-based finance is Main Street.” Mortgages, auto loans, credit cards, student loans, aircraft leases and even Spotify royalties fall within the ‘asset-based finance’ ambit. These are tangible, often secured exposures to real assets and services with which we interact every day.
This visibility and embedded value, Teoh argued, is fundamental to the sector’s resilience. The majority of loans in asset-based finance are backed by hard collateral, homes, cars, aircraft and inventories, which makes them less sensitive to economic shocks. “You are senior-secured against assets with residual value,” he noted, “and that creates durable income and strong downside protection.”
Teoh emphasised three core features of the asset-based finance opportunity: durability of income, diversification, and downside protection. Loans are typically amortising, with cash flow coming in steadily over time, unlike the bullet payments common in corporate credit. This front-loaded repayment structure reduces the need to rely on favourable future market conditions.
Another distinctive element is the diversification in borrower exposure. Asset-based lending pools can consist of tens of thousands of small loans, which are often sourced through non-bank originators and digital lending platforms. This granularity reduces concentration risk and introduces sectoral diversification that corporate credit often lacks.
The macro backdrop for asset-based finance is also supportive, particularly when viewed through the lens of the US consumer. Despite negative media coverage, Teoh noted that US households have been deleveraging steadily for over two decades. Household equity is at record highs, driven by rising property values; and many borrowers, especially near-prime and prime, remain low-risk.
This is in stark contrast to the corporate debt market, where leverage ratios remain elevated. “Debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) across US corporates is still around six times,” Teoh said, adding that payment-in-kind (PIK) interest structures are starting to reappear. Rising PIK usage is often a red flag, signalling borrower stress and deferred defaults, especially in a higher-rate environment.
While corporate credit spreads have narrowed, asset-based finance continues to offer more attractive risk-adjusted returns. In private direct lending, spreads have compressed to 450–550 basis points, even as risks have arguably increased. “You are being paid less for taking more risk,” Teoh observed. By comparison, asset-based finance still offers 200–300 basis points of spread premium, partly due to its relative inefficiency and lower competition among managers.
Teoh was clear that asset-based finance is not a replacement for traditional direct lending, but a complement. The amortising structure, granular credit analysis and collateralisation make it a natural pairing with other floating-rate credit exposures. Moreover, it introduces a mix of fixed and floating-rate investments, adding duration benefits as interest rates fall.
In terms of implementation, PIMCO sources deals in three primary ways: forward flow agreements with originators, secondary purchases of seasoned loans from banks and fintechs, and direct bilateral relationships with lenders. This flexibility allows the firm to access scale and tailor credit criteria depending on market conditions.
Teoh outlined four core sectors within asset-based finance where PIMCO sees the most opportunity. The first is US residential housing, where homeowners are well-capitalised and loan-to-value ratios remain conservative. The second is the $2 trillion US student loan market, which is undergoing a structural shift as traditional banks retreat from the space.
Third is digital infrastructure, particularly loans backed by inventory of high-performance computing components and data centre development. And the fourth, presented through a detailed case study, is aviation finance. With global travel rebounding and aircraft supply constrained, lessors are seeing rising lease rates and low vacancy across fleets.
Aircraft leasing, Teoh explained, is underpinned by multi-year leases on globally mobile assets. Most leases are triple net and ‘hell-or-high-water,’ meaning the airline pays for insurance, maintenance and continues to make payments regardless of aircraft condition. With demand at an all-time high and supply-chain lead-times stretching into the next decade, aviation finance is exhibiting strong fundamentals and high single-digit to low-teens unlevered returns.
Teoh offered advisers three takeaways for asset-based finance. First, it is a large and under-allocated market with attractive returns. Second, it represents a shift in private credit toward the real economy, with a focus on the consumer rather than the corporation. And third, the structure of the asset class, collateralised, amortising, diversified, offers important resilience and yield potential for portfolios navigating uncertain markets.