Direct lenders finance 86% of LBOs as certainty of execution commands 75-100 basis point premium while cutting close times from 60 to 30 days.
Private credit financed 86% of LBO transactions in 2024, up from 65% in 2021, as sponsors prioritize speed and certainty over marginal pricing differences.¹ Blackstone’s analysis reveals that periods of dislocation — including regional bank stress and capital market volatility—only reinforced private credit’s value proposition of “speed of close, structural flexibility, certainty of terms and confidentiality.”²
The Speed Premium Quantified
Capstone Partners’ Summer 2025 leveraged finance report documents spread compression of 35 basis points in H1 2025, on top of 120 basis points in 2024.³ Despite this compression totaling 155 basis points, borrowers continue choosing private credit over cheaper bank financing. The premium for certainty now runs 75-100 basis points according to Secured Research analysis.
“Borrowers continued to value the speed, certainty and flexibility of private credit solutions,” Morgan Stanley observes, noting that sponsored middle market activity remained “relatively resilient” even during rate volatility.⁴ This resilience translates into concrete advantages:
- Commitment papers in 48-72 hours versus 2-3 weeks for banks
- Limited or no flex provisions versus 50-75 basis points of market flex
- Closing in 30 days versus 60-90 days for syndicated deals
- No rating agency requirements or public disclosure
Deal Flow Acceleration Expected
Morgan Stanley projects continued deal flow increases driven by $1.6 trillion in PE dry powder requiring deployment.⁵ McKinsey’s Vivek Mathew notes that with only 15% of middle market companies owned by private equity, “the quality of our investments can remain high” despite deployment pressure.⁶
Macquarie Capital’s Bill Eckmann observes: “There was a welcome uptick in global M&A activity towards the end of last year, reflecting growing confidence among dealmakers. Deal flow remains far from normalized levels but mounting pent-up demand and improving economic conditions should inject fresh impetus into the market this year.”⁷
Structural Advantages Drive Adoption
O’Melveny partners note that despite economic uncertainty, “deals will continue to get done in 2025, and we can expect increasing convergence and consolidation of terms, structures, and lenders among the private credit and bank markets.”⁸ This convergence doesn’t eliminate private credit’s structural advantages:
Confidentiality: No public filing requirements protect competitive information. For strategic buyers competing against PE, this enables aggressive bidding without alerting competitors.
Flexibility: Customized structures accommodate complex transactions. Delayed-draw terms, acquisition facilities, and PIK toggles provide operational flexibility banks cannot match.
Relationship Lending: Direct bilateral relationships enable quick amendments and waivers. One lender decision-maker versus syndicate complexity accelerates execution.
Geographic and Sector Expansion
Macquarie Capital reports its private credit book grew over 50% in the last three years, with particular strength in “software, tech-enabled business services, insurance services and infrastructure.”⁹ This sector focus aligns with PE preferences for predictable cash flow businesses.
The firm’s Tom Amster notes: “Private credit has become a critical and permanent solution, filling the gap that was left as the public market pulled back on lending to mid-market companies.”¹⁰ This permanence has created dedicated sector expertise that banks struggle to match.
Size Migration Upmarket
Blackstone reports the direct lending market now finances transactions over $5 billion, up from a $100 billion market focused on smaller middle market companies in 2006.¹¹ This size migration has important implications:
- Large-cap PE firms now have private credit options for jumbo deals
- Banks increasingly focus only on investment grade and syndicated markets
- The $50-500 million EBITDA segment has become private credit’s exclusive domain
PGIM notes that middle market companies with “limited capital-markets access” rely almost entirely on private credit, as banks have “retreated in the wake of the Global Financial Crisis.”¹²
Partnership Models Proliferate
The BlackRock-HPS combination creating a $220 billion private financing business represents the culmination of industry consolidation.¹³ But more interesting are bank-private credit partnerships:
- Citigroup’s $25 billion partnership with Apollo
- Wells Fargo’s $5 billion partnership with Centerbridge
- JPMorgan allowing select private credit funds to co-invest on deals
PwC’s Dan Sullivan observes: “The dam has really broken in working with the banking system.”¹⁴ These partnerships enable banks to maintain client relationships while earning fees without balance sheet usage.
Documentation Convergence With Distinctions
While documentation has converged between private credit and syndicated markets, important differences remain. Private credit maintains tighter controls around:
- Debt incurrence capacity (baskets 25-50% smaller)
- Dividend and leakage provisions (more restrictive thresholds)
- Call protection (typically 103/102/101 versus 101/100.5/par)
These provisions reflect private credit’s buy-and-hold model versus banks’ originate-to-distribute approach.
Return Profile Sustainability
Despite spread compression, private credit returns remain attractive. Moody’s projects private credit could tap “$3 trillion in assets moving off bank balance sheets in the next five years,” including asset-backed finance opportunities.¹⁵
Insurance company partnerships provide patient capital seeking yield. MetLife’s expansion into private debt with focus on asset-backed strategies and Guardian Life’s interest in “ABL, infrastructure and GP-LP fund finance” demonstrate institutional appetite.¹⁶
Market Dynamics Favor Continued Growth
Several factors support private credit’s continued M&A market share gains:
Regulatory Tailwinds: Bank capital requirements continue tightening, making leveraged lending less attractive. Basel IV implementation will further constrain bank appetite.
LP Pressure: Limited partners demand DPI (distributions to paid-in capital) after years of limited realizations. This pressure drives both buy-side and sell-side M&A activity.
Generational Transition: Baby boomer business owners approaching retirement create unprecedented succession opportunities. Private credit’s speed enables competitive bidding in auction processes.
Challenges and Evolution
Competition has intensified with new entrants. Barings’ Tyler Gately warns: “As a new entrant, the odds are stacked against you right now as your only option for deployment is in overly competitive auctions.”¹⁷
This competition drives innovation:
- NAV loans enabling GP portfolio management
- Preferred equity for situations requiring lower leverage
- Asset-based/cash flow hybrid structures for complex credits
The Ecosystem Impact
For PE Sponsors: Private credit has become the default financing source. Sponsors maintain 3-5 direct lender relationships, creating competition even for portfolio company financings. The ability to quickly execute transformational acquisitions provides competitive advantages in auction processes.
For Investment Bankers: Stapled financing packages from direct lenders simplify sale processes. Bankers can provide committed financing at bid submission, improving execution certainty. The trade-off: less fee income from syndication.
For Corporate Borrowers: Access to flexible capital without public disclosure enables strategic flexibility. Family-owned businesses can access institutional capital while maintaining privacy. The premium paid for this flexibility is increasingly viewed as worthwhile.
September 2025 Market Snapshot
As of September 2025, the middle market lending environment remains borrower-friendly:
- SOFR at ~4.3%, down 120 basis points from 2023 peak
- Spreads compressed 155 basis points from peak
- All-in yields of 8-9% for quality credits
- Leverage multiples of 5.5-6.5x for sponsor deals
This environment has catalyzed renewed M&A interest, though volume remains below 2021 peaks. The combination of available capital, attractive pricing, and execution certainty positions private credit to capture incremental market share as M&A activity accelerates.
For middle market participants, the message is clear: private credit has evolved from alternative to primary financing source. The speed premium reflects real value creation — the ability to execute quickly in competitive situations. As one PE partner noted: “The 100 basis points extra we pay in spread is worth it if we can close in 30 days instead of 90. In a competitive auction, that’s the difference between winning and losing.”
References:
¹ Blackstone, “Private Credit: From Mid-Market to Real Economy Financier,” January 28, 2025. https://www.blackstone.com/insights/article/private-credit-from-mid-market-to-real-economy-financier/
² Blackstone, January 2025
³ Capstone Partners, “Middle Market Leveraged Finance Report – Summer 2025.” https://www.capstonepartners.com/insights/middle-market-leveraged-finance-report/
⁴ Morgan Stanley, “Private Credit Outlook 2025.” https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/private-credit-outlook-2025-opportunity-growth.html
⁵ Morgan Stanley, 2025
⁶ McKinsey, “Vivek Mathew on the rise of private credit,” October 28, 2024. https://www.mckinsey.com/industries/private-capital/our-insights/the-rise-of-private-credit-and-its-future-potential
⁷ Macquarie Group, “Private credit market set for significant growth in 2025,” March 26, 2025. https://www.macquarie.com/us/en/insights/private-credit-market-set-for-significant-growth-in-2025.html
⁸ O’Melveny, “Lending & Secured Finance 2025: Private Credit and Middle Market Update.” https://www.omm.com/insights/alerts-publications/lending-secured-finance-2025-private-credit-and-middle-market-update-developments-and-trends/
⁹ Macquarie Group, March 2025
¹⁰ Macquarie Group, March 2025
¹¹ Blackstone, January 2025
¹² PGIM, “Middle Market Remains Private Credit Sweet Spot.” https://www.pgim.com/investments/article/middle-market-remains-private-credit-sweet-spot
¹³ PitchBook, “2025 US Private Credit Outlook,” December 17, 2024. https://pitchbook.com/news/articles/2025-us-private-credit-outlook-more-m-a-larger-lenders-bigger-market ¹⁴ PitchBook citing PwC, December 2024
¹⁵ Morningstar, “2025 US Private Credit Outlook,” December 27, 2024. https://www.morningstar.com/markets/2025-us-private-credit-outlook-more-ma-larger-lenders-bigger-market
¹⁶ Morningstar, December 2024
¹⁷ PitchBook, December 2024