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"Private credit: when direct lending and asset-based lending unite"

Private credit, once the domain of institutional investors, is now capturing retail interest. Discover how asset-based lending (ABL) and direct lending can offer diversification and stability in your portfolio. Learn how these strategies provide unique risk/return profiles and protection during economic instability, making them compelling options for modern investors.

Private credit is rapidly gaining traction, presenting unique opportunities outside the realm of traditional banking. Initially rooted in institutional investment, private credit is now becoming accessible to retail investors, though this increased accessibility necessitates a greater emphasis on investor education. The market primarily consists of three segments: direct lending, asset-based lending (ABL), and opportunistic credit.

Direct lending, which makes up about 45% of the market, involves providing loans to corporations. This approach supports diversification and complements traditional investment portfolios. On the other hand, ABL is distinguished by its reliance on specific assets, which provides security and the potential for unique returns. Unlike direct lending, ABL involves complex, asset-secured loans that offer stable cash flows and high-income potential. With assets such as aircraft and machinery, ABL requires specialized management but can offer protection during economic instability.

Retail investors can benefit by working with managers who diversify across various asset types and economic cycles. Together, ABL and direct lending can enhance portfolio stability, offering returns with low correlation to traditional markets. However, investors must be aware of the associated risks, including liquidity, credit, and concentration risks, which often necessitate longer investment horizons.

Understanding these strategies can help investors optimize the risk/return profile of their portfolios in the increasingly accessible private credit space. By leveraging the expertise of experienced managers, investors can navigate the complexities of this market and potentially achieve favorable outcomes.

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