As spreads compress and corporate default risks mount, institutional investors are formalizing asset-backed finance as a standalone allocation — and the managers best positioned to capitalize are those with the deepest product stacks.
The next battleground in private credit allocation is no longer direct lending.
Institutional investors that spent the last decade pouring capital into sponsor-backed corporate loans are increasingly carving out dedicated allocations to asset-backed finance, searching for shorter-duration assets, diversified collateral pools and contractual cash flows less tied to traditional corporate default cycles. What was once viewed as a niche opportunistic strategy is steadily becoming a core allocation category in its own right.
The San Diego City Employees’ Retirement System recently committed $25 million to Oaktree Capital Management’s debut asset-backed finance fund, which is targeting $2 billion. Oaktree has invested opportunistically in ABF for years but has never before raised a dedicated vehicle. This distinction reflects both where institutional demand has arrived and how the competitive landscape in private credit is evolving.
The $13.7 billion pension fund now explicitly distinguishes between “cash flow lending” — traditional non-investment-grade corporate direct lending — and “asset-based lending,” which encompasses financing backed by pools of loans, leases, receivables, mortgages, royalties and other contractual cash flows. That shift, embedded in the pension’s investment policy, reflects a broader evolution underway across institutional portfolios.
For years, private credit allocations were largely synonymous with direct lending funds financing sponsor-backed middle-market buyouts. But as spreads compress, leverage remains elevated and refinancing risk looms in a higher-rate environment, allocators are increasingly looking beyond corporate credit for new sources of yield and diversification.
Asset-backed finance offers a structurally different proposition. Rather than relying primarily on enterprise value and sponsor support, ABF strategies are secured by pools of cash-flowing assets with contractual repayment streams. The collateral can range from consumer loans and equipment leases to infrastructure receivables and transportation assets.
Consultant materials prepared for the San Diego pension repeatedly emphasized “self-liquidating” structures, shorter duration and diversification away from corporate risk — language that is increasingly surfacing in institutional due diligence discussions around private credit more broadly.
Structural changes in banking markets are also fueling the opportunity. As regulatory pressures and capital requirements push banks away from portions of specialty finance and structured lending, alternative asset managers have moved aggressively to fill the gap.
Oaktree is far from alone in trying to institutionalize the strategy.
Some of the largest alternative asset managers are rapidly building dedicated ABF platforms as pensions, insurers and wealth channels increase demand for contractual cash-flow exposure outside traditional corporate lending.
Apollo Global Management (NYSE: APO) has long used its insurance relationships to scale exposure across aviation finance, consumer receivables and mortgage credit, while firms including Ares Management (NYSE: ARES), Blackstone (NYSE: BX), KKR (NYSE: KKR) and Carlyle (NYSE: CG) have all expanded deeper into specialty finance and asset-backed lending in recent years.
The market is also drawing firms with roots in structured credit rather than classic sponsor finance. Castlelake — which, like Oaktree, is owned by Brookfield Asset Management (NYSE: BN) — built its business around aviation, consumer finance and other specialty lending sectors. Other established ABF players include the Blue Owl (NYSE: OWL)-owned Atalaya Capital Management, Magnetar and Sound Point.
Blue Owl closed a $2.9 billion fund last month while Soundpoint raised $1.5 billion for its most recent vehicle. .
Large multi-strategy firms appear particularly well-positioned to capitalize.
Brookfield completed its acquisition of the remaining stake in Oaktree it did not already own earlier this year, bringing the firm under full ownership as Oaktree launched its institutional ABF strategy. Together with Castlelake, Brookfield now controls a broad credit platform spanning opportunistic credit, direct lending, structured credit and dedicated ABF strategies.
Oaktree’s proposed fund targets net returns of 12 percent to 15 percent using relatively modest leverage of about 0.5x. While the vehicle is a first-time dedicated fund, the firm points to a two-decade history investing across structured credit and opportunistic asset-backed sectors, including mortgages, equipment finance and esoteric asset-backed securities. Critics note, however, that those historical investments were largely opportunistic — a meaningfully different risk profile from the core-focused strategy the new vehicle intends to pursue.
The strategy also underscores how the lines between traditional private credit and structured finance are beginning to blur. Oaktree’s pitch combines the language of institutional direct lending — downside protection, senior secured exposure and risk control — with expertise historically associated with securitized products markets.
