Davidson Kempner highlights under‑funded opportunities within US collateral‑backed lending, emphasising stability and attractive returns amidst increasing competition in private credit markets.
Asset‑backed finance is being cast as a calmer harbour within an increasingly crowded private credit market, with Davidson Kempner arguing that collateral‑backed lending – notably US second‑lien residential mortgages and HELOCs – represents a large, under‑funded opportunity for investors.
In a white paper the investment firm said the US asset‑backed market, excluding agency mortgages, now exceeds $20tn, with roughly $2tn in public securities. The paper singled out three smaller, collateral‑backed categories it described as “steady eddies”, offering “compelling risk‑adjusted returns” within private ABF: US second‑lien residential mortgage lending, European SME asset‑based lending, and US mid‑ticket equipment finance.
Davidson Kempner estimated the current $590bn market for second‑lien mortgages and home equity lines of credit could grow by more than $2tn “due to the additional borrowing capacity homeowners have when taking current loan‑to‑value ratios relative to historic averages into account.” The firm contrasted those pockets with the rapid expansion of direct corporate lending , which it said has grown ninefold since 2015 , arguing that that growth has compressed spreads and reduced recovery rates, making certain collateral‑backed niches comparatively attractive.
According to the announcement, collateral‑backed financing can expand access to credit at lower cost for homeowners and businesses while offering structural protections , covenants, performance triggers and governance rights , that help mitigate downside risk and enhance credit quality. “By focusing on market segments that remain relatively underfunded yet supported by strong collateral performance, disciplined structuring, and durable spreads, investors can earn attractive risk‑adjusted returns,” the white paper said. “Just as an eddy provides calm within the turbulence of a river, these private ABF pockets can offer refuge from the crowded flow of direct lending, delivering stability, structure, and compelling returns in an increasingly competitive credit environment.”
The broader market context supports parts of that thesis. PIMCO has also pointed to an asset‑based finance universe north of $20tn (excluding commercial real estate), and has highlighted consumer lending , including residential mortgages, personal loans and student loans , alongside sectors with secular tailwinds such as aviation finance and data infrastructure, as fertile ground for private market investors. Industry forecasts further underline private credit’s rapid rise: one financial industry comment noted private credit expanded from roughly $280bn in assets under management in 2007 to about $1.5tn by 2022 and is expected to continue growing.
Historical mortgage market data provides perspective on the scale and role of second liens. Government‑sponsored analyses from 2019–2020 put second liens at roughly 4.5–4.6% of total mortgage debt outstanding, underscoring that while second‑lien balances have not dominated aggregate mortgage totals, they represent a material and persistent slice of households’ secured indebtedness.
Market participants say the appeal of collateral‑backed strategies rests on three practical features: recoverability driven by tangible collateral, structural protections that reduce creditor downside, and the potential for higher yields where capital is scarce. That combination is especially relevant now as many investors reassess exposure to direct lending amid tighter spreads and greater competition.
However, industry observers caution that scaling into second‑lien lending and other ABF niches requires careful underwriting and robust servicing, particularly given borrowers’ variable credit profiles and the potential for housing‑market volatility. The white paper’s call for “disciplined structuring” echoes that caveat: while ABF can diversify private credit allocations, success depends on granular asset selection, conservative loan‑to‑value assumptions and operational capability to enforce covenants and manage collateral.
For investors seeking alternatives to the crowded direct lending market, the Davidson Kempner analysis frames collateral‑backed finance as a compelling, if operationally demanding, avenue , one that could materially expand if lenders and private capital step into underwritten pockets such as second‑lien residential loans, European SME asset‑based lending and mid‑ticket equipment finance. The firm’s central contention is that these niches, supported by structural protections and resilient collateral performance, can deliver stability and “compelling risk‑adjusted returns” even as broader private credit dynamics evolve.
- https://alternativecreditinvestor.com/2025/12/12/collateral-backed-lending-private-credits-sweet-spot/ – Please view link – unable to able to access data
- https://www.pimco.com/se/en/insights/private-credit-asset-based-finance-shines-as-lending-landscape-evolves – PIMCO discusses the growth of asset-based finance, estimating the market (excluding commercial real estate lending) to be valued upwards of $20 trillion. The article highlights sectors such as consumer lending, including residential mortgages, personal loans, and student loans, as appealing opportunities for private market investors. It also mentions sectors with significant secular tailwinds, including aviation finance and data infrastructure, indicating a positive outlook for asset-based finance in the evolving lending landscape.
- https://www.forbes.com.au/brand-voice/uncategorized/mortgage-private-credit-ascf/ – This Forbes article highlights the rapid growth of the private credit market, estimating it to double in size to US$2.8 trillion by the end of 2028. It notes that private credit has grown from US$280 billion in assets under management in 2007 to US$1.5 trillion in 2022, now representing about 12% of the global alternative investments market. The article underscores the increasing importance of private credit in the global financial landscape.
- https://www.ginniemae.gov/data_and_reports/reporting/Documents/global_market_analysis_feb20.pdf – Ginnie Mae’s report provides insights into the US housing market, indicating a total value of $30.7 trillion in Q3 2019, with second liens comprising 4.6% of the total mortgage debt outstanding. The report highlights the dominance of agency MBS, accounting for 62.2%, and private-label securities at 4.1%. It underscores the significant role of second liens in the US housing finance system.
- https://www.ginniemae.gov/data_and_reports/reporting/Documents/global_market_analysis_apr20.pdf – Ginnie Mae’s April 2020 report details the US housing market’s total value at $30.9 trillion in Q4 2019, with second liens accounting for 4.5% of the total mortgage debt outstanding. The report highlights the composition of the mortgage market, with agency MBS at 61.6%, private-label securities at 4.0%, and unsecuritized first liens at 30.0%, emphasizing the role of second liens in the housing finance system.
- https://www.ginniemae.gov/data_and_reports/reporting/Documents/global_market_analysis_apr20.pdf – Ginnie Mae’s April 2020 report provides an overview of the US housing market, indicating a total value of $30.9 trillion in Q4 2019. The report details the composition of the mortgage market, with agency MBS at 61.6%, private-label securities at 4.0%, unsecuritized first liens at 30.0%, and second liens comprising 4.5% of the total mortgage debt outstanding, highlighting the significant role of second liens in the housing finance system.
- https://www.ginniemae.gov/data_and_reports/reporting/Documents/global_market_analysis_apr20.pdf – Ginnie Mae’s April 2020 report provides insights into the US housing market, indicating a total value of $30.9 trillion in Q4 2019. The report details the composition of the mortgage market, with agency MBS at 61.6%, private-label securities at 4.0%, unsecuritized first liens at 30.0%, and second liens comprising 4.5% of the total mortgage debt outstanding, underscoring the significant role of second liens in the housing finance system.
Noah Fact Check Pro
The draft above was created using the information available at the time the story first
emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.
Freshness check
Score:
8
Notes:
The narrative was published on December 12, 2025, and does not appear to be recycled content. The report references a white paper from Davidson Kempner, indicating original research. No earlier versions with differing figures or quotes were found. The inclusion of updated data suggests a higher freshness score. No discrepancies were noted.
Quotes check
Score:
9
Notes:
The report includes direct quotes from Davidson Kempner’s white paper. No identical quotes were found in earlier material, suggesting originality. Variations in wording were noted, but no significant differences were found.
Source reliability
Score:
7
Notes:
The narrative originates from Alternative Credit Investor, a specialised publication in the field. While not as widely recognised as major outlets, it is a reputable source within its niche. The report references a white paper from Davidson Kempner, a well-established investment firm, lending credibility to the content.
Plausability check
Score:
8
Notes:
The claims about the growth potential of the US second-lien mortgage market and the comparison with direct corporate lending are plausible and align with industry trends. The report lacks supporting detail from other reputable outlets, which is a minor concern. The language and tone are consistent with the region and topic. No excessive or off-topic detail was noted.
Overall assessment
Verdict (FAIL, OPEN, PASS): PASS
Confidence (LOW, MEDIUM, HIGH): HIGH
Summary:
The narrative presents original content with up-to-date information and credible sources. No significant issues were identified in freshness, quotes, source reliability, or plausibility.