The Old Order
For decades, banks dominated middle-market lending. They underwrote loans, held them on balance sheet, and managed credit exposure. That model began to falter after the 2008 financial crisis. Regulatory pressure, stricter capital rules, and shrinking risk appetite forced banks to pull back.
Into that void stepped private credit funds. Firms such as TCW Private Credit and others offered tailored, direct loans to mid-sized companies. What began as a niche financing option quickly became the primary source of debt capital for private equity sponsors.
Why Private Credit Stepped Up
- Regulation: Basel rules and post-crisis oversight pushed banks out of large segments of mid-market lending.
- Flexibility: Funds could customize covenants, amortization, and structures around unique borrower needs.
- Speed: Investment committees were leaner, enabling quicker approvals than traditional banks.
Above anything, what sealed the shift wasn’t t speed but rather execution. While banks relied on broad syndications and conservative credit committees, private credit managers built lean processes around financial models that could be adapted for each sponsor deal. Instead of a templated investment banking deck driving the terms, direct lenders could price risk with more discretion.
The Risk Shift
Unlike banks that typically syndicate loans widely, private credit funds keep risk in-house. If a borrower defaults, the consequences fall directly on managers and their limited partners. This concentrated exposure has raised the importance of rigorous credit analysis, from cash flow coverage ratios to covenant protections and stress testing.
The reliance on detailed financial models – sensitivity analyses, downside cases, recovery assumptions – has become a defining feature of this market. Investors and LPs alike expect documentation that goes beyond polished pitch decks and gets into how risks play out across multiple cycles.
Middle-Market Control
Private credit has become the dominant player in leveraged finance for mid-sized companies. Sponsors seeking financing for buyouts, carve-outs, or spin-offs usually call direct lenders before banks. The numbers confirm it: direct lending volumes have overtaken syndicated loan issuance in the middle market.
The transaction process reflects that reality. Instead of pitching lenders through standard investment banking pitch decks, sponsors now often go straight to credit funds with model-driven requests: here’s the EBITDA bridge, here’s the refinancing structure, here’s the leverage profile. That direct engagement has shifted the balance of power.
Compensation and Incentives
Where risk shifts, economics follow. Private credit pay has risen sharply, in some cases overtaking traditional investment banking roles. Compensation packages in London and New York rival those offered in private equity, reflecting how central direct lending has become to dealmaking.
The skill set driving those packages? Not presentation skills alone, but the ability to break down complex financial models under pressure, challenge assumptions, and push back on sponsor-friendly structures.
Case Studies in Risk
Credit assessments in this space are not theoretical. Lenders regularly face live situations such as distressed carve-outs, covenant resets, or liquidity squeezes. These decisions shape returns for both managers and investors, while limited partner advisory committees push for greater transparency in how risks are priced.
In practice, that means late-night revisions to financial models when a borrower’s cash flow dips, or quick-turn review of a sponsor’s investment banking presentation to identify where projections lean more on optimism than on fundamentals.
What Lies Ahead
Private credit’s influence shows no signs of slowing. Growth areas likely include:
- Special situations and opportunistic lending
- Real estate debt strategies converging with corporate credit
- Hybrid approaches that blend elements of project finance with private credit structures
As competition intensifies, the edge won’t be who has the best branding or the flashiest pitch deck. It will be which funds can build the most disciplined DCF and LBO models, price risk better, and act faster when sponsors need capital.
