Asset-light companies are reshaping private credit as lenders embrace intellectual property collateral, despite valuation challenges, legal risks, and concerns about AI-driven obsolescence.
Asset lighting companies are changing the world of private equity.
Unlike businesses that can rely on a large basket of assets such as inventory, equipment, and real estate as collateral for a direct private loan, these companies often use some of the less expensive and hard-to-value intellectual property (IP) as collateral.
“The economy is increasingly being built around asset-based finance [ABF] strategies, but it is too early for ABF to expand into private markets,” said Brian Armstrong, managing director, US Direct Lending at Benefit Street Partners.
Private credit assets under management are expected to exceed $2 trillion this year, according to Moody’s 2026 Global Private Credit Outlook, published in January, which predicts it will reach $4 trillion by 2030. “Although very difficult to track, ABF has the potential to eclipse the size of traditional corporate lending.”
Securing IP is not new; exclusive dealer J. Crew has used a mix of IP and other assets as collateral for more than $540 million in promissory notes over the past decade. The difficulty in using IP as collateral was finding the right amount of assets such as datasets, proprietary software platforms, and portfolios of patents and trademarks.
Methods for doing so include discounted asset cash flow analysis, comparable transaction valuation, and estimating asset replacement or remanufacturing costs. Often, businesses rely on an independent third-party valuation firm such as Alvarez & Marsal, Holihan Lokey, or Kroll.
One of the main concerns of ABF lenders, however, is the transfer of IP to the pledged goods basket.
“In most deals, the covenants allow the borrowers to determine in their commercial judgment what the value of the asset is,” said Jake Mincemoyer, partner and global head of Debt Finance at law firm A&O Shearman. “That is what has caused the lenders to be very worried, given the few cases where the borrowers have taken advantage of that and taken valuable assets from the collateral package and put it elsewhere.
A prime example is the IP transfer result of J. 2017 Crew in a new, unrestricted subsidiary, which was released from the parent company’s restrictive covenants and debt restrictions and was able to raise additional capital by pledging the same IP. What has come to be known as the “J. Crew Maneuver” led to the inclusion of a “J. Crew Blocker” provision in credit agreements that prevents borrowers from transferring physical assets to unrestricted subsidiaries.
That protection hasn’t stopped borrowers from making exceptions to the theme, however. In February, Xerox transferred IP assets tied to existing debt to a joint venture in which it owns 49% of the shares and raised an additional $450 million. That minority share prevents the partnership from being considered a subsidiary in debt documents, according to Ropes & Gray’s Distressed Debt Legal Insight, published in March.
“Borrowers have found more creative ways to work within their credit documents, prompting lenders to be more careful and consider tightening any unintended flexibility,” said Benefit Street’s Armstrong.
The Transatlantic Divide
As with real estate, the availability of ABF while pledging IP as collateral depends on location. North America is almost five years ahead of Europe due to EU legislation regarding the management of intellectual property and its use as collateral.
For example, under the European Parliament and Council Directive/24/EC, the original software developer, whether he is an employee or a consultant, owns the copyright to his code, unless his contract states otherwise. But proving the availability of software code can be difficult, especially if it contains open source content and third-party APIs.
“The market is not yet fully ready to take on all the software financing, given the uncertainty around ownership,” said Steffen Schellschmidt, a Munich-based partner and private debt specialist at law firm Clifford Chance. “You have to do a thorough and expensive investigation into this.”
This has led many European private lenders to focus more on registered IP such as patents and trademarks, which are easily identifiable.
Second, and unlike in the US, EU law does not allow the inclusion of IP software in a floating charge, Schellschmidt notes: “Therefore, once the security has been perfected under European law, the goods can still be transferred, but their value decreases as they remain below the existing promise.” That creates a funding gap for businesses that fall between early stage startups and large, successful companies in pharmaceuticals and other knowledge-based industries.
“That’s why we don’t have a Silicon Valley,” argued Schellschmidt.
The EU is working to close the fiscal gap. As part of the Strategic Plan 2030, the European Intellectual Property Office (EUIPO) and the European Commission brought together policy makers, IP offices, financial institutions, business leaders, and subject matter experts in the IP-Backed Finance Steering Group and the Technical Working Group on IP Valuation at the end of last year.
The Technical Working Group is mandated to develop an IP Finance Roadmap “to help businesses across Europe, especially start-ups, scaleups, and SMEs, access finance based on the value of their intellectual property.” The Steering Group will then review the roadmap and shape the EU’s strategic approach to IP valuation and funding, according to EUIPO statements.
AI Accelerates IP Obsolescence
AI affects ABF, especially for businesses that plan to pledge business software as collateral.
“Whether an asset is tangible or intangible, it will depreciate over time. Nothing holds its full value forever,” said Mark McMahon, managing director and global practice leader at Alvarez & Marsal Valuation Services. “If it’s a mine, it’s called degradation. If it’s a hard asset, it’s depreciating. If it’s software or some other type of IP, it’s obsolescence.”
AI engines that code for computers, such as Anthropic’s Claude Sonnet and Microsoft’s GitHub Copilot, only shorten the window to obsolescence of existing software stacks and lower the value of software as collateral as market competition heats up due to lower entry barriers.
“The risk associated with long-term software capital flows may not be what you estimated they were even half a year ago,” notes McMahon.
However, AI should not be considered the death knell of software as collateral, says A&O Shearman’s Mancemoyer.
“In the same way that people have figured out how to come up with all kinds of great and useful software programs that they can package as SaaS businesses and be productive in the economy, I have to think that AI tools will allow for huge advances in even big new businesses and new tools as people use them,” he said. “Does that mean the question is, Are three or four people using very powerful AI tools going to take over everything? There’s a risk of that. Do I think that’s really going to happen? Maybe not.”
That said, the increasing speed of software development should lead to effective collateral management. As Benefit Street’s Armstrong advises: “If your IP collateral may be directly affected by AI, you should regularly review and revise that collateral to ensure your loan continues to be covered.”
Apart from these methods, the willingness of ABF lenders to accept different types of IP as collateral is increasing. “Over the past five to ten years, I’ve seen a huge increase in financing where lenders are free to lend on intangible assets,” said Mancemoyer.
