The business of private credit: Private credit’s coming home story

The financial professional take on “The Lead” newsletter series is dedicated to help financial professionals stay informed about developments, and movements in private capital investing.

Bottom-line upfront

1. Core middle market lending’s discipline, forged in the Global Financial Crisis (GFC), has anchored the asset class by trading momentum for stability through tariffs, geopolitical risk and technology disruption.
2. Sponsors’ extended selection process, spending months or years picking the right businesses before lenders see them, creates a structural advantage where hand-picked lenders already know the playbook when problems surface.
3. The unconquered territory of United States (US) middle market companies remains vast for investors with long investment horizons.

For financial professionals evaluating private credit allocations for clients, the core middle market’s 40-year history of navigating market cycles provides relevant context for assessing the asset class.

Core middle market lending brings discipline to capital markets

Much attention has been paid to the suitability of Matt Damon in the lead role as the wily Odysseus in this summer’s Christopher Nolan blockbuster. Less well known was the challenge of shooting with noisy IMAX cameras. “We learned how to put them on helicopters or airplanes or take them underwater,” Nolan told an interviewer. “But what we never learned how to do was shoot an intimate conversation.”

Our newsletter has long featured ways core middle market lending, the Steadicam of capital markets, also quiets the noise of tariffs, geopolitics, artificial intelligence (AI) and retail redemptions. Forged in the GFC, the asset class survived by trading momentum for discipline. Private credit investments are illiquid, requiring investors to commit capital for extended periods with limited ability to access it before the investment term ends.

Sponsors and lenders plan for problems in advance

Sponsors played a critical role, spending months, sometimes years, picking the right businesses to grow before lenders ever see them. As we’ve detailed in this series, when problems surface, hand-picked lenders already know the playbook to use. Like a good movie script, action scenes are planned well in advance. When the camera rolls, everyone already knows their parts and how everything fits together.

Repayment expectations reflect the asset class’s risk profile

That discipline matters for private credit because investors have little upside. They expect at a minimum to get repaid interest, principal and fees. As we’ve said before, your horse doesn’t have to win, place or show, it just has to finish the race.

Resilience in middle market businesses does not mean being bulletproof. No single term, covenant or equity cushion makes a portfolio immune to a downturn. Risks appear differently: a security firm loses its best salesperson; a storm wipes out a facility. Experienced managers anticipate the worst outcomes, watching for early warning signs.

The core middle market’s structural advantages

The core middle market sits in a sweet spot. Its inhabitants are large enough to have professional management teams and scale to consolidate a niche sector. They are small enough to be nimble, operate below the radar of public competitors and require tighter terms and covenants.

Vast unconquered territory

Like Odysseus, unrecognized in his own kingdom, these companies are hiding in plain sight. With private equity owning less than 5% of the 200,000 U.S. companies with revenues between $10 million and $1 billion, unconquered territory is vast.

Over 20 years ago Apollo 13 was the first Hollywood picture converted to IMAX. It too was a coming home story, with perils that echoed Homer’s journey. The core middle market has successfully negotiated the market’s twists and turns for 40 years. We look forward to seeing the sequels.