First Eagle's ABL pitch is a manager decision

First Eagle Investment Management, which ICD's records put at $136.5 billion in regulatory assets under management, has a specific view about which loans belong in a credit book that still needs yield, and Larry Klaff, the firm's senior managing director and head of asset-based loans, lays it out in a September 23 commentary in Insurance AUM Journal. The asset-based lending he is making the case for consists of corporate facilities secured by inventory, accounts receivable, real estate, machinery and equipment, and intellectual property, carrying floating rates, tenors typically of five years or less, and structures that run as term loans or revolving lines of credit.

The argument rests on a market condition Klaff treats as durable—credit spreads are near historical tights, per Federal Reserve Bank of St. Louis data as of August 17, and capital remains available but on more conditional terms because investors have grown less willing to forgive mistakes. His claim is narrower: asset-based loans do not outyield the alternatives; they are paid for something the wider market has stopped charging for.

What carries the value, in his telling, is collateral and the architecture built around it—how the assets are sourced, underwritten, monitored and controlled. Facilities are underwritten as a first line of defense under genuine downside scenarios, with asset valuations verified and tracked through the term of the loan and liquidation assumptions included, and covenants, reporting requirements, cash controls, collateral triggers, remedies and intercreditor arrangements supply the enforcement layer. Beyond the paper, he lists softer inputs: management quality, borrower liquidity, customer concentration, supplier dynamics, the durability of the business model. The benefit in what he calls spreads with benefits is control.

Sourcing deserves the most scrutiny, because Klaff's barrier to entry is relationship-driven deal flow built on credibility with sponsors, companies, banks and other lenders, which he says gives established managers access that newer entrants cannot easily replicate. That is a reasonable account of how the middle market works, and it is also the sentence a manager with an established franchise would write. The implication matters more than the accuracy: if sourcing and monitoring are the return, the gap between two asset-based portfolios should be wider than the gap between asset-based lending and the rest of credit. For a general account, that converts an asset-class question into a due-diligence question about a specific team, what it has done with a borrower that stopped performing, and the size of the sleeve it can responsibly run.

There is a consistency in hearing this from First Eagle; in August, the firm's Sisco argued that private credit is no diversifier because it carries public credit's risk, with dispersion as the threat. The asset-based case is that logic carried one step further: if the label offers no protection, own the piece of the capital structure where the lender can see the assets, verify them and take them. Read together, the two make the same bet from opposite ends, and both point an insurer toward the same diligence.

The curve gives the pitch its second hook: on September 3, we wrote that the Fed's hold put general accounts in a duration decision as the long end traded at levels last seen in 2007. Locking in long duration at those yields is one answer; floating-rate paper with five-year-or-shorter tenors and collateral attached is the other—the one Klaff is promoting. Both get weighed in the same allocation conversation, and asset-based lending's case improves to the extent a general account wants to stay short and keep optionality on where the curve goes next.

Where the pitch is thinnest is the benchmark it chooses: a five-year floating-rate facility secured by working capital, receivables or equipment competes for an insurer's dollar against the short end of the investment-grade book and against the bank revolver market that prices much of this paper first. Private credit is the comparison the piece invites, but it may not be the right one. An insurer buying asset-based loans is paying for monitoring, control rights and illiquidity it cannot verify from outside the manager, and paying for them in a market where the spread has stopped compensating anyone. The honest reading of spreads with benefits is that the benefits are in the structure, the spread is the market's, and what a committee is really underwriting is the manager's workout desk. That is a manager allocation, sized like an illiquid sleeve; used as a yield substitute for a thin investment-grade book, it is a different and worse trade, and any committee that takes it as a category call will have bought the label and skipped the collateral file.

Collateral will decide the next downgrade cycle more than affiliation will, and the NAIC's widening solvency perimeter is writing the capital charge that ends the private-credit rating arbitrage. Klaff's four-word test—visibility, verification, priority and enforceability—describes what a formula that rewards collateral would ask a lender to prove. Whether the designation regime moves that way for asset-based facilities specifically is not something the commentary addresses. The direction of travel runs the same way on both sides of the trade, and the firm making the argument would benefit if the collateral-centric view prevails.

The screen for a general account is narrower than the pitch. Before agreeing to a spread, ask for a liquidation run on the actual collateral from the team that would have to take possession of it, and for the cash-control agreement that governs the day a borrower stops reporting—the documents Klaff says separate a working asset-based strategy from a hopeful one, and they belong in the manager's file rather than on the asset-class page.