The collateral changed. The workout playbook did not.
46% of US private credit issuance last year went to technology, healthcare and business services against 12% to industrials. Yet while these loans are valued against customers, code and people rather than plant, inventory and receivables, the workout playbook still assumes there is something to be seized, held or waited out.
Value moved off the balance sheet
The companies private credit finances today are not the companies the credit playbook was built around. Intangible assets, which is to say the customer relationships, the code, the data, the brand and the people, are about 92% of the market value of the S&P 500. In 1975 they were 17%. And the change is compositional rather than cyclical: intangibles rose from roughly 7% of total US investment in the 1950s to about 27% by 2019, while total investment held at about a quarter of GDP throughout. The economy did not invest less. It invested in things that cannot be repossessed.
Companies moved that way because the asset-light model is a better business. It needs less capital to start and less to grow, it carries lower fixed operating cost, it scales faster because the next unit costs almost nothing to make, it adapts more quickly when a market turns, and it earns a higher return on the capital it does use. Lenders followed for the same reasons, and the returns were real. None of that is the problem. The problem arrives only when a credit turns.
A playbook that assumes a floor
Credit to an asset-intensive company is secured against things you can count. An asset-based facility advances against a borrowing base, typically 70% to 80% of eligible receivables and 20% to 65% of eligible inventory, recalculated as the collateral moves and tested by periodic field examination. If the business fails, the lender can seize the collateral and sell it. That alternative is what puts a floor under the recovery, and it is what makes patience rational. The asset sits on the floor while you negotiate.
Asset-light credit has no such alternative. It is underwritten on cash flow, on recurring revenue or on enterprise value, which is to say on a forecast. There is no borrowing base, no advance rate, no appraisal and nothing to repossess. Security gives you a legal claim on something that may not exist by the time you act on it.
The market moved into that exposure deliberately, and a securities regulator has said so plainly. IOSCO records that leveraged lending has shifted “from traditional industrial sectors to technology, software and healthcare, providing higher returns but lower tangible collateral,” and that covenant-lite facilities grew from about 32% of the US leveraged loan index in 2013 to almost 90% by the end of 2023. Higher return, less collateral and less early warning, all at once.
Plant, property, equipment, inventory and receivables
Recurring revenue produced by customer relationships, code and people
Durable. It depreciates gradually
Organic and volatile. It can evaporate
Orderly. It holds its price while you negotiate
Compounding. Customers churn, employees leave, revenue runs off in real time
Residual value you can seize, hold and sell
A legal claim on something that may not exist when you act on it
Liquidate the collateral. There is a floor
Sell the business as a going concern, and only while it is still going
Unprecedented exit logjam
A lender whose collateral is a business rather than a machine has one real path to a recovery: someone else buys the business. There are currently more than 33,000 unsold sponsor-backed companies worldwide, more than double what there was 10 years ago. The 13,509 unsold companies in the US are more than eight years of inventory at the current clearing rate.
And every channel has narrowed at once: seventy sponsor-backed US IPOs since 2022 against 424 in the five years before, sponsor-to-sponsor demand largely dried up, and strategic buyers are selective and slow.
No one expects the queue to clear soon. The question inside every credit book is the same: which names get out, how long does it take, and at what mark.
The cost of delay
The visible artifact of the wait is the amendment. Across private credit, maturities are extended, covenants reset, cash interest converted to PIK, each amendment buying time in exchange for a larger claim on a company that is not growing into it. Waiting feels free because its price arrives later. It is not free. Customers renew more carefully each quarter a stressed name stays stressed, key people leave, and the buyer universe thins. That is the cost of delay, and it compounds.
The trap inside it: the fastest route to market (launching now, as-is) is often the slowest path to cash. Time-to-market and time-to-cash are different clocks, and only one of them pays.
Find it early, then underwrite the recovery
Take the collateral away and something else has to carry the recovery: preparation and speed.
Preparation starts well before anyone calls it a workout. In an asset-light business the measures that predict a recovery are operating measures rather than financial covenants: how the revenue base renews, where the customers concentrate, what the product costs to run, and who is leaving. Those move quarters before a covenant does. The portfolio watch reads them across your book on the reporting you already hold, and the first read takes one name and says what recovery range the credit supports.
Then the recovery is underwritten the way the loan was. Exit underwriting answers what the company is worth, who actually buys it, what has to be fixed first and how long that takes, and it ends in a decision: sell as-is, or work the fix list first and go to market against a better bid. Where you ask for it and the company fits our criteria, our own bid at the supported price arrives with the report.
Together those two steps do one thing: they find the defects a buyer’s diligence would find, price them in enterprise-value terms, and fix them before a process starts rather than argue about them after one fails.
One credible process
A credit-stressed company gets one credible trip to market, and its owners get one exit from it. Processes are visible: bankers talk, buyers compare notes, employees read the room. Fail once and every later attempt starts from the broken-process discount: the price the market charges a company that has been shopped. That is the one-exit problem, and it inverts the usual logic of timing. The expensive process is not the late one. It is the unprepared one. For a lender it reads the same way in different units: a failed process is a failed recovery, and the mark that follows it is permanent.
Preparation is the shortcut.
The case worked end to end
Software is where this shows first, because that is where the exposure is concentrated. Our white paper works that case from the lender’s seat: the valuation reset from 18x revenue to 3x, the ARR loans converting to EBITDA covenants two to four years after closing, and the amendment wave now running through software credits.