Specialty lending

What is specialty lending?

Specialty lending encompasses a range of financing options outside traditional corporate lending, focusing on both tangible and intangible assets to back loans.

Primary goal: Diversify investment portfolios and manage risk by securing loans against specific assets.

Portfolio role: Specialty lending in portfolios can enhance returns through higher yields while providing diversification by exposing investors to niche sectors and non-traditional borrowers. However, this segment requires robust collateral and active monitoring are necessary help manage risk, while the lender's expertise in niche markets adds strategic value.

Tangible asset-based lending primarily involves loans secured by real estate and physical assets like machinery and inventory, emphasizing the assets' liquidation value over the borrower's financial health.

For this reason, tangible assets can provide recession resistance if properly underwritten, as the lender's risk is linked to the asset's value rather than the borrower's performance. Success in tangible asset-based lending relies on the lender's ability to seize and sell the assets if the borrower defaults.

Intangible asset-based lending are loans secured by non-physical assets such as intellectual property, financial assets, and royalties. For instance, it could include lending against brand names or licensing agreements, where the value lies in future revenue streams rather than physical goods.

Intangible asset-based lending requires a deep understanding of the underlying asset's value and revenue potential, demanding expertise in fields like intellectual property law and financial asset management. This lending type allows for diversification beyond traditional corporate loans, tapping into revenue streams that are less directly tied to economic cycles.