Introduction to Specialty Credit

Specialty credit has gained attention within the private credit universe in recent years. While direct lending remains the most established private debt strategy, specialty credit offers exposure to a broader set of opportunities. It centers on transactions backed by pools of collateral, where repayment depends primarily on the performance and contractual cash flows of underlying assets rather than a borrower’s projected EBITDA.

As a result, it can provide diversification benefits and attractive risk-adjusted returns within a credit portfolio. Despite its growing relevance, specialty credit remains relatively underexplored compared with traditional private debt strategies.

What is specialty credit?

Specialty credit represents a broad and evolving segment of private credit that extends beyond traditional corporate lending (Figure 1). It mostly centers around asset-backed strategies, where repayment depends primarily on the value and cash flows of underlying collateral rather than a corporate borrower’s earnings:

• Asset-backed lending (‘ABL’): loans made to businesses secured by hard or financial assets
• Asset-based finance (‘ABF’): a broad term for financing arrangements secured by assets, including (whole) loans, securitizations, leasing, factoring, etc.

Specialty credit investing therefore places greater emphasis on collateral quality, cash flow durability, structural protections, servicing capabilities, and the legal framework supporting the assets. This differs from direct lending, where underwriting focuses on a company’s earnings and ability to generate future operating cash flows.

Importantly, specialty credit is not a single, homogeneous strategy, but rather a broad ecosystem of sub-strategies spanning hard assets, financial assets, and selected forms of corporate exposure. The opportunity set includes equipment leasing, aviation finance, consumer lending, royalties, litigation finance, NAV lending, and residential and commercial mortgages, among others. Many of these assets are closely tied to everyday economic activity and exhibit quality return drivers across sectors.

Beyond the diversity of underlying assets, specialty credit also differs from traditional corporate lending in the structure and timing of cash flows. Many transactions are backed by self-amortizing asset pools that return principal progressively as underlying assets generate cash flows. This contrasts with typical direct lending loans, where investors receive periodic interest payments and depend on a refinancing, sale, or other liquidity event for a large bullet repayment at maturity. Specialty credit investments often exhibit a more front-loaded cash flow profile, reducing exposure earlier in the investment lifecycle and helping portfolios naturally de-risk over time.

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