Private credit’s decade-long focus on direct lending is cooling faster than most managers expected. Their LPs are not asking whether to diversify anymore. They are asking how fast managers can do it, and whether the operating model behind the strategy can actually keep up.
The Case for Diversification
Direct lending’s rise over the past ten years was built on a simple pitch: reliable, floating rate income backed by strong covenants and direct borrower relationships. That pitch still holds, but it no longer stands alone. According to Rede Partners’ Private Credit Market Intelligence Report 2026, 70% of institutional LPs expect diversification beyond direct lending to become the dominant trend in private credit over the next twelve months, while barely 6% plan to grow their exposure to mid and upper mid-market direct lending at all.
The market’s own composition backs this up. Direct lending’s share of new private credit allocations dropped from 58% in 2023 to 44% in 2025, as capital moves into asset-based finance (ABF) and specialty finance strategies. The reasons are not complicated: spread compression, intensifying competition, and some high-profile credit events have led LPs to take a closer look at underwriting standards. Managers who once competed on relationships and speed are now competing on price, with too much capital chasing too few quality deals.
Asset-based finance offers a structurally different risk and return profile. ABF loans are protected by a diversified collateral base and less tied to the corporate credit cycle, giving LPs a genuine diversification benefit. For managers with the discipline to build it properly, ABF is proving to be a meaningful source of differentiated returns, not just a defensive pivot.
But ABF demands a different operating model, and that is where many managers underestimate the lift required to diversify profitably at scale.
Five Places the Model Gets Tested
- Servicing complexity multiplies. A direct lending book might carry dozens of large, closely monitored borrower relationships. An ABF pool can carry thousands of receivables, leases, or contracts, each requiring its own servicing, collections, and performance tracking. To support this complexity, existing servicing systems or third-party providers may need to be augmented or, in some cases, replaced entirely with purpose-built solutions.
- Valuation has to move faster. Quarterly, committee-driven marks calibrated to single-name credit do not translate to cash-flow-based valuation of diversified pools, which demand marking that is more frequent and far more data-intensive. Valuation governance, data inputs, and review processes typically need to be redesigned around this tighter cadence rather than stretched to accommodate it.
- Data infrastructure becomes the bottleneck. ABF depends on ingesting loan-tape-level data from originators and servicing partners, a fundamentally different data model than most platforms are built to absorb at scale. Data pipelines and reporting tools built around borrower financial statements often need to be rebuilt to reconcile this volume and format of information.
- Risk and credit systems need substantial reconfiguration, not a patch, to monitor diversified, granular portfolios rather than concentrated, single-name exposures. Exposure limits, monitoring tools, and reporting templates generally need to be rebuilt around pool-level metrics instead of single-name concentration.
- Organizationally, firms face a genuine choice: fold ABF underwriting into the existing credit team or build a distinct function with its own skill set, incentives, and reporting lines. Either path typically requires new hiring plans, incentive structures, or training programs to support the mandate credibly.
Readiness Will Decide Who Wins
None of this is a reason to avoid ABF. The managers moving early are the ones positioned to capture differentiated returns before the strategy becomes as crowded as direct lending. But investment in refining the operating model and technology to support the new underwriting capability will be required for many managers to grow ABF at scale. Servicing, valuation, and risk infrastructure built for direct lending are unlikely to translate directly to the asset class.
How Alpha Can Help
Alpha has 1500+ consultants globally supporting operations and technology change across financial services. Our specialist Alternatives team has advised many of the leading alternative credit managers leading the diversification into ABF and the vendors that support them. Our relevant recent projects include:
Operational readiness assessment: We evaluate ABF specific functions (servicing, valuation, data, and risk) against and flag the people and process changes needed to support them.
Loan tape data ingestion and portfolio monitoring: We help managers build the technology and support models to ingest borrower and loan tape data reliably and at scale to enable real-time monitoring and glean portfolio insights.
Finance and operations assessment & system selection: We assess finance and operations capabilities against the demands of ABF and lead system selections where technology gaps are identified.
Implementation Support and Program Management: We help design and implement the systems and processes ABF strategies demand, so the back office scales with the strategy.
Contact Us Today
If your firm is evaluating a move into asset-based finance, let’s talk.
Authors:
Alex Glaister | Senior Partner, Alpha Alternatives
Bill McMahon | Senior Partner, Alpha Alternatives
Supporting authors:
Elly Wardle | Senior Manager, Alpha Alternatives
Chris Martinich | Senior Consultant, Alpha Alternatives
