Private Credit Has Changed How Mid-Market Deals Get Done

The new address for mid-market capital

For decades, middle-market acquisitions followed a familiar script. Buyers negotiated a purchase price, banks competed for the senior debt, and lenders underwrote conservatively around historical performance. That script no longer describes most of the market.

Private credit has moved from an alternative financing source to the primary source of debt capital for transactions below $1 billion. According to Bain & Company's Private Equity Outlook 2026: Gaining Traction, part of the firm's 2026 Global Private Equity Report, private credit remains the lender of choice for sub-$1 billion deals even as the syndicated loan market has reopened for larger, higher-quality borrowers. Most executives recognize this shift at the headline level. Far fewer understand what changes on the ground once private credit is the money sitting across the table.

Why Private Credit Took Over

Banks did not simply step aside. Regulatory capital requirements, heightened scrutiny following past banking disruptions, and a renewed focus on balance-sheet risk opened space that private lenders filled quickly, backed by institutional investors searching for yield who committed hundreds of billions of dollars to private debt funds and needed deals to fund them.

The mandate difference explains the rest. Banks syndicate debt and enforce standardized underwriting built for capital preservation. Direct lenders hold loans on their own books rather than syndicating them, so their underwriting centers on cash flow durability rather than collateral value alone. That single distinction, one balance sheet making the call instead of many, shapes almost everything downstream, from how fast a deal moves to how its covenants get written.

The Deal Cycle Got Shorter

Speed is the most visible change, and it is not a minor convenience. Direct lenders compress the calendar because there is no syndicate to assemble, no rating agency review, no road show. In a competitive process, the buyer who can move from signed letter of intent to funded close in weeks rather than months wins deals that would otherwise slip away.

Certainty travels with the speed. Attorneys resolve documentation earlier with fewer parties at the table, management spends less time answering overlapping diligence requests, and sellers see fewer surprises late in negotiations. None of this guarantees a fast closing on its own. Quality of earnings still matters. But when financing decisions sit with one lender instead of a syndicate, execution becomes far more predictable, and predictability creates value before a dollar changes hands.

Covenant Flexibility Comes With Responsibility

One reason buyers favor private credit is flexibility, and the flexibility is real. Traditional bank loans rely on maintenance covenants, financial tests measured every ninety days against agreed benchmarks. Missing a debt-to-EBITDA threshold by a fraction of a point can trigger technical default and expensive waiver negotiations. Direct lenders increasingly favor incurrence covenants instead, which trigger only when a company takes a specific action such as issuing new debt or paying an equity dividend.

Research from McKinsey & Company's Private credit market enters a new phase shows covenant-lite structures reached 21 percent of direct lending transactions in 2025, up from just 4 percent in 2023. The core mid-market still runs largely on maintenance covenants, but documentation loosens fast upmarket or in a competitive process with several lenders bidding for a mandate. Equity cushions have grown alongside it, with sponsor equity checks in the 45 to 50 percent range now common where 35 percent was standard before rates rose.

I've watched companies learn, too late, that a high headline valuation built on flexible debt structures means very little if the underlying cash flow cannot comfortably service the interest during a rough quarter. Flexible covenants do not eliminate financial discipline. They simply move more of it onto management, and boards should expect stronger forecasting and clearer reporting from any leadership team operating under one of these structures.

Howard Marks, co-founder of Oaktree Capital Management, put it plainly in his November 20, 2001 memo to clients, You Can't Predict. You Can Prepare: "You can't predict. You can prepare." He was writing about markets generally, but the line applies with unusual precision to covenant negotiation. A borrower cannot forecast the next downturn. A borrower can decide, before signing, how much room a covenant structure leaves for one.

Pricing Means More Than The Rate

Most executives start in the same place, the borrowing rate. That question matters, but it rarely tells the full story. Private credit pricing is an entire economic package, upfront fees, exit fees, original issue discounts, and prepayment provisions layered on top of the headline spread. Two facilities carrying nearly identical rates can produce meaningfully different economics over the life of a deal.

Pricing has also proven more cyclical than borrowers expected. Lord Abbett's 2026 Midyear Investment Outlook: Private Credit's Lender-Friendly Reset found direct lending spreads widening by roughly 50 to 100 basis points since late 2025, alongside a return to stronger lender protections, after a stretch where heavy fundraising had left too much capital chasing too few deals. That reversal is the real lesson. Pricing here is a live signal of supply and deal flow, not a fixed input to plug into a model and forget. Average deal size in direct lending climbed to roughly $380 million in 2025, up from about $295 million the year before, even as debt-to-EBITDA multiples held close to 4.9 times, a level that has stayed steady through the swings.

How the two paths compare:

• Underwriting focus: banks weigh collateral and enterprise value first, while direct lenders weigh cash flow durability first

• Typical execution window: bank syndication often runs eight to twelve weeks, while uni-tranche direct lending has closed in a widely cited sixty-to-ninety-day range and frequently faster for well-prepared borrowers

• Typical covenant posture: banks lean toward strict quarterly maintenance tests, while direct lenders increasingly favor incurrence-based or single-covenant structures

• Capital structure: banks usually require standard amortization from year one, while direct lenders more often extend interest-only periods that free up cash for growth

The Buyer Across The Table Changed Too

When a private equity buyer finances a deal through a direct lender rather than a bank, diligence changes shape. Direct lenders underwrite the credit themselves, so they examine customer concentration, contract quality, and management depth with an intensity once reserved for the buyer's own team.

Jonathan Gray, President and Chief Operating Officer of Blackstone, told analysts on the firm's Q4 2025 earnings call on January 29, 2026, "IPO and M&A activity are accelerating, deal sizes are increasing, and sponsor activity is picking up." Sponsors moving faster on volume are, by necessity, moving faster on the credit decisions funding those deals, and sellers should expect the pace to show up in the diligence process itself.

For sellers, that means evaluating more than the headline number before signing a letter of intent. Worth asking directly: How committed is this financing source? Has the lender closed deals of similar size and complexity? A buyer's capital partner has become part of the diligence process, not an afterthought to it. The same logic runs in reverse for buyers, since a lending partner chosen on price alone can prove costly later if it lacks the industry knowledge or the speed to respond when conditions shift mid-diligence. That relationship shapes strategy well after closing, which makes it every bit as important as the loan itself.

Private Credit Is Not Immune To Cycles

The growth of private credit should not be mistaken for permanent shelter from economic pressure. Lender competition and abundant capital can both encourage aggressive underwriting in favorable markets, and every credit cycle eventually turns.

Sir John Templeton built one of the great investing careers of the twentieth century on the opposite instinct, buying when the rest of the market assumed a recovery would never come. Writing in his 1993 work 16 Rules for Investment Success, he warned that the investor who says "this time is different" while facing a repeat of an earlier situation has uttered one of the four most costly phrases in investing. Executives should expect tighter underwriting, closer scrutiny of debt-to-EBITDA ratios, and more selective capital whenever conditions soften. Strong businesses with credible leadership keep attracting financing. Marginal ones find that capital gets selective fast.

What Every Executive Should Ask Before The Next Deal

Private credit now touches acquisition strategy, shareholder value, refinancing decisions, and succession planning well beyond the finance function alone. Before the next transaction, put these questions to your leadership team directly:

• Does the financing strategy support the long-term business strategy, or was it chosen for speed alone?

• Has management evaluated more than one capital source rather than accepting the first proposal on the table?

• Does the team understand every economic component of the financing package, not just the headline rate?

• Would the current financial reporting withstand a direct lender's diligence today?

Charlie Munger, the late Vice Chair of Berkshire Hathaway, once told The Wall Street Journal, "Knowing what you don't know is more useful than being brilliant," a line Fortune later included among his defining leadership quotes. Executives who approach financing with that posture find the gaps in their own preparation before a lender does, while the gap is still cheap to close.

Private credit did not just replace a funding source. It changed the pace, the documentation, and the diligence standard for a generation of mid-market deals. The organizations that benefit most will not simply secure funding faster. They will understand how financing shapes valuation, negotiation, and governance long before a purchase agreement reaches the signature page.

When Growth Outpaces Internal Bandwidth

Mid-market and Fortune 1000 executives rarely face a financing decision in isolation. A private credit negotiation touches capital strategy, operational readiness, and leadership capacity all at once, and it tends to surface exactly when growth or a transition is already stretching the organization thin. Aspirations Consulting Group works with executives at that inflection point, bringing M&A advisory and financial strategy expertise to bear before deal terms are set. If your organization is weighing a transaction and wants a confidential conversation about what today's financing environment means for your situation, reach out through www.aspirations-group.com.

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Thanks for reading!

~ Jerry Justice

Living to Serve, Serving to Lead™