Unpacking direct corporate lending and asset-backed securities – and why combining them strengthens investor portfolios

Private credit refers to direct loans made by non-bank lenders. For decades, lending was dominated by banks, but tighter post-GFC regulation, slower decision cycles, and a standardised product sale approach have left a gap that private credit managers increasingly fill.

As Privity Managing Partner Atiya Habib explained in a recent webinar (see link below for the full recording), “Over the last two decades, the rigid credit policies of banks and multiple layers of decision making mean by the time they can turn around a decision, the opportunity has run away from the business. Providers like us can service this segment more swiftly and with much more customised solutions and hands-on risk management”.

That combination of speed, customisation and enhanced oversight is exactly what makes private credit attractive to borrowers and valuable to investors.

At its core, direct lending is straightforward: a private credit manager lends directly to a corporate borrower, typically in the mid-market, for a specific purpose such as an acquisition, expansion or major contract win.

The private credit manager originates each loan directly and negotiates terms one-on-one with the borrower. This creates a uniquely hands-on relationship that prioritises solutions for borrowers and both downside protection and better risk-adjusted return for investors.

Each transaction is individually structured: loan purpose, repayment source, security, covenants and exit terms are all defined upfront. “We can trace the borrower’s cash flows and secure them with a full covenant suite,” Atiya explained. “Those covenants are our early warning signals. A breach tells us it’s time to get in the room and course correct before performance deteriorates”.

Another critical element is access. Privity’s team maintains direct relationships with C-suite executives and major shareholders of borrower companies. “If something goes off track, you want to be able to pick up the phone to the key decision makers,” Atiya believes. That proximity helps better capital protection and is rare in traditional bank lending where a relationship manager, who does not necessarily have deep structuring skills, manages 30-40 clients.

Direct corporate borrowers are typically growth-oriented and cash flow generative private companies with specific capital needs like expansion projects, acquisitions or large contracts that require financing.

While these firms are often healthy and profitable, they seek lenders who can move quickly and structure tailored solutions. Historically, these customers went to banks, however the customised nature of private credit means a private credit manager like Privity Credit can design a solution that fits the borrower’s business rather than forcing them into a box.

Because these are shorter-duration, event-driven loans (generally two to three years), they also provide investors with quicker recycling of capital and lower interest rate sensitivity than longer-dated bonds.

If direct lending is about lending to individual businesses, asset-backed securities (ABS) (sometimes called warehouses) are about lending to pools of thousands of smaller loans.

An ABS is a loan note backed by a diversified portfolio of financial assets such as car loans, equipment finance, small business loans or credit card receivables. These assets are housed in a bankruptcy-remote special purpose vehicle (SPV), commonly referred to as a warehouse.

Imagine a warehouse containing 15,000 to 20,000 individual car loans. Each borrower repays principal and interest monthly, creating steady cash flow to the SPV. Those cash flows then funds returns to investors.

ABS structures are organised into tranches i.e. senior and junior layers that differ in priority of claim on cashflows and assets of a warehouse and risk profile. Senior tranches have higher credit enhancement, meaning more protective cushion beneath them, while junior tranches earn higher yields for taking relatively more risk through lower credit enhancement.

This structure has three key strengths:

• Diversification: Thousands of small loans smooth out any individual defaults.
• Self-liquidating assets: Each loan amortises naturally, continually returning cash.
• Strict eligibility criteria: Only loans meeting defined quality rules can be included, ensuring the pool remains sound.

As Atiya outlined, “The highly diversified nature of the pool – high volume, low amount – is what drives value. Add self-liquidating cash flows and strict eligibility rules and you get a robust, repeatable source of yield”.

While both strategies sit within private credit, they create value in different ways. Direct loans deliver higher returns through deep due diligence, robust covenant protection, continuous monitoring and premium pricing. ABS delivers value through diversification, origination based on strict rules and the structural safeguards of the warehouse.

In Privity’s portfolios, the blend is typically around 60% corporate loans and 40% ABS. “The two buckets add value through different dynamics,” Atiya explained. “ABS structures are expensive to set up and require scale, but they provide highly diversified exposure. Corporate loans, on the other hand, provide customised structured solutions and premium pricing. Together, they deliver stability and attractive returns”.

For investors, this combination helps solve the traditional trade-off between yield and capital preservation.

Private credit lending to mid-cap companies is generally illiquid because most loans are risk managed and held until maturity, with an extremely limited secondary market. Investors looking to invest in this asset class understand the inherent lack of liquidity. Privity has introduced a new layer of flexibility by creating a liquidity sleeve within the portfolio.

As Head of Distribution Nigel Credlin explained in the webinar, “We’ve built a liquid credit sleeve inside this portfolio. It will have ABS, it will have direct loans – they’re our specialties – and then we’re outsourcing around 15% to a liquid credit manager. That component is marked daily and liquid monthly”.

This structure allows advisers and investors to rebalance more easily, while the core 85% remains in stable, unlisted credit strategies. “For your average adviser and client, they’ll be able to manage their portfolios, access liquidity when needed and still get exposure to the private credit and ABS they’ve never been able to access before,” Nigel said.

In a world where many investors already carry significant property and bank exposure, private credit, particularly through diversified corporate lending and asset backed structures, offers a genuine alternative.

As Nigel pointed out, “Most investors already have plenty of property exposure including in their home, their investment properties their REITs and even their bank stocks, which are essentially home lending machines. Private credit gives them something different: real economic lending, diversified away from property, with attractive income and lower correlation to public markets”.

The result is a portfolio that delivers diversified income, disciplined risk management and exposure to the productive economy, not just to market sentiment.

Private credit, when thoughtfully constructed, is more than a niche alternative. It’s an income and yield driver for modern portfolios.