Understanding Collateral Beyond Valuation
In private credit, the significance of collateral is well recognized. Investors expect seniority, security, and a clear claim on assets. Given this assignment of collateral, asset-backed lending is intended to create more consistent outcomes across market cycles.
Collateral is often described in simple terms. It exists, or it does not. It has a value, or it does not. However, effective underwriting requires a deeper assessment.
Understanding the nature of the collateral and how it behaves over time is critical. Whether an industry is specialized, whether assets are readily saleable, how value changes, how collateral can be controlled, and how it performs when conditions are less favorable all matter.
These distinctions matter most when outcomes diverge from expectations. In those situations, assumptions embedded in collateral structures are tested, and differences in control, access, and predictability become apparent.
Selecting the right collateral requires substantial experience. Understanding the nuances involved in this process often takes years, which is why it’s essential to have a skilled team and collaborate with external partners, such as appraisers and field examiners, who possess extensive knowledge in the field.
How collateral behaves over the life of a loan
Collateral is often evaluated based on value at a point in time. An asset is appraised, advance rates are applied, and a borrowing base is established. While necessary, this approach captures only part of the risk.
Some assets are more difficult to control, preserve, or manage than others. Assets that are highly mobile, time sensitive, or dependent on specific conditions can introduce additional considerations in stressed environments. Even when such assets carry measurable value, maintaining clarity and control may depend on factors outside a lender’s direct influence.
This does not suggest that these assets lack merit. Instead, they introduce forms of complexity that we intentionally evaluate within the context of our mandate, structure, and risk objectives. It does suggest that value alone is insufficient. For us, the ability to maintain control, preserve condition, and support a predictable outcome matters as much as headline valuation.
For us, collateral selection is less about an expectation of realization and more about ensuring clarity and control should circumstances ever require it.
Assets that depend on time, control, and conditions
Specific asset characteristics introduce additional considerations for lenders. Assets that deteriorate, become obsolete, or lose relevance over time may experience value changes that are difficult to manage. Assets that are widely dispersed or highly mobile can be more challenging to control. Assets whose value depends on licensing, regulatory frameworks, or jurisdictional conditions may require additional coordination over the life of a loan.
There are also assets whose value is closely tied to the continued operation of a business rather than the asset itself. In these cases, outcomes are driven primarily by operational performance rather than possession or legal rights.
Many of these assets can perform well when matched with the appropriate structure and risk tolerance. Evaluating where these considerations sit within a broader lending strategy is an integral part of our underwriting discipline.
Consider, for example, a business that relies on highly specialized, highly technical equipment. While the equipment may be unique and valuable to that business, its marketability in a liquidation may be limited due to the specialized nature of the operation.
Another consideration involves companies whose assets are affixed to customer property or are difficult to access. In industries such as mining or energy, assets may be located underground or fixed to wellheads. Marshalling such assets can be time-consuming, costly, and in some cases impractical until the underlying work is completed.
Assets that are more liquid, accessible, and marketable tend to introduce fewer assumptions in stressed scenarios.
The role of repeatability and alignment
Repeatable outcomes reduce reliance on optimistic assumptions. Collateral with established markets, consistent demand, and familiar administrative processes tends to behave more predictably across cycles.
Familiarity supports better decision-making over time. It allows us to assess risk more clearly, communicate expectations more effectively, and manage portfolios more consistently as market conditions evolve.
Our focus has been on deeply understanding collateral behavior rather than broadly. This means prioritizing assets whose value, control, and administrative characteristics foster long-term partnerships with borrowers while being mindful of where uncertainty exists.
Collateral is central to how underwriting decisions are made and how risk is managed over the life of a lending relationship.
