Forget Direct Lending? Goldman Sachs Says Asset-Backed Finance Is the Next Big Private Credit Opportunity

Private credit investors may be looking beyond traditional direct lending, as growing demand for financing tied to AI data centers, power infrastructure and domestic manufacturing puts asset-backed finance in the spotlight.

Vivek Bantwal, global co-head of Private Credit at Goldman Sachs Asset Management and co-CEO of the Goldman Sachs BDC complex, told CNBC that asset-backed finance is emerging as one of the most attractive growth areas in private credit, with borrowers increasingly willing to pay a premium for the flexibility and certainty that private lenders provide.

A recent Goldman Sachs survey found that 58% of respondents wanted to increase their commitments to asset-backed finance, highlighting growing investor interest in a segment that could benefit from America’s expanding infrastructure needs.

“I think there’s a real demand for capital in that space,” Bantwal said, pointing to new power plants, transmission upgrades, data centers and domestic manufacturing facilities as major sources of financing demand.

He said borrowers are increasingly willing to pay more for private financing in exchange for confidentiality, customization and greater certainty than they might receive in public credit markets.

Asset-Backed Finance Offers Investors a Premium

Bantwal compared the opportunity to the growth of direct lending roughly a decade ago, when borrowers began turning to private lenders for financing solutions that traditional markets could not always provide.

He said asset-backed finance deals can generate between 100 and 200 basis points of additional spread compared with what the same borrower might pay in public fixed-income markets.

For investors, the strategy can also provide diversification within fixed-income portfolios by offering exposure to risks similar to investment-grade credit while providing an additional return premium in exchange for less liquidity.

The opportunity comes as private credit investors reassess their exposure to traditional direct lending amid growing concerns about redemptions, borrower quality and the liquidity of investment vehicles.

Redemption Pressure Hasn’t Deterred Institutional Investors

Despite the negative headlines, Bantwal said institutional investors remain interested in increasing their private credit allocations, attracted by the asset class’s historical risk-adjusted returns and diversification benefits.

He attributed some of the redemption pressure across wealth-focused direct lending vehicles to concerns about how easily investors could access their money after products were marketed as semi-liquid.

“When people realized that the liquidity was more nuanced than the term semi-liquid implies, they started redeeming,” he said.

Bantwal said Goldman deliberately describes its vehicles as evergreen rather than semi-liquid to avoid creating unrealistic expectations.

"We’ve been very fortunate. We have not had the redemption issues that others have had. And our performance matters too. So we’ve had a very, very low non-approval rate. We’ve had attractive returns. So we think the combination of marketing the product with the appropriate nuances and good performance has left us in a different place than most of our peers," he said.

Credit Quality Depends on Manager Selection

Bantwal also acknowledged growing differences in portfolio performance across the industry. He said the average BDC non-accrual rate was 1.77% at the end of the latest quarter, compared with just 0.10% for Goldman’s BDC business.

He argued that higher interest rates do not automatically mean more defaults, particularly for lenders that account for borrowers’ ability to handle rising borrowing costs during underwriting.

He also distinguished between planned payment-in-kind interest arrangements and loans amended to allow PIK payments after borrowers encounter cash-flow problems, describing the difference as “good PIK and bad PIK.”

Ultimately, Bantwal believes disciplined underwriting and careful capital deployment will determine which managers can capitalize on private credit’s next growth opportunity.

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