After Unitranche: How the Middle Market Capital Stack Is Being Pulled Apart from Inside

The numbers tell a story of compression. After peaking at 716 basis points in March 2023, global new-issue direct loan median spreads fell to 596 basis points at year-end 2024 and then to 544 basis points at year-end 2025, according to McKinsey’s Global Private Markets Report 2026.¹ Over the same period, covenant-lite transactions rose to 21 percent of all direct lending deals, up from just 4 percent in 2023 — a five-fold shift in two years.¹ Average LBO deal size for direct lending climbed 29 percent, reaching approximately $380 million by 2025 compared with roughly $295 million the prior year and $200 million in 2020.¹ The market is doing fewer and larger deals at tighter prices with weaker protections. That is not a stable equilibrium for a structure designed around the simplicity of a single instrument.

The unitranche — which collapsed the traditional bank-led senior-plus-mezzanine stack into a single facility governed by an internal agreement among lenders — was not an accident of innovation. It was an answer to a specific institutional question: how could a non-bank lender deliver the speed and certainty that sponsors demanded without the inter-tranche negotiation complexity of the prior era? The structure answered that question decisively. For much of the period from 2015 through 2023, it defined middle-market direct lending in the United States. But the conditions under which it won — a relatively narrow and homogeneous capital base, modest scale, and limited regulatory friction — no longer describe the asset class it now inhabits.

Private credit is now estimated at $3 trillion and is projected to reach approximately $5 trillion by 2029, according to Morgan Stanley Investment Management.² At that scale, the structural simplicity that made unitranche valuable begins to encounter constraints that did not bind at smaller size: capital efficiency requirements from insurance balance sheets, divergent return expectations across retail and institutional capital pools, and the re-emergence of asset-based finance as a competing allocation. What comes next is not a single replacement structure. It is a deliberate unbundling — a return to layered capital, with each layer engineered for the specific cost-of-capital and regulatory profile of the holder.

The Three Forces Pulling the Stack Apart

The first force is the rise of insurance-linked capital. Private-capital-backed insurers held assets totaling nearly $1.5 trillion in 2025, having scaled at rates exceeding 20 percent annually over the prior decade, according to McKinsey’s April 2026 analysis.³ Insurance balance sheets require capital-efficient, rated, longer-duration assets — a profile that an unrated unitranche held to maturity serves poorly. To capture insurance demand, managers are increasingly carving senior strips into rated feeders, often through private rating mechanisms developed by Kroll Bond Rating Agency and others specifically for this purpose. Goldman Sachs Asset Management’s 2025 Global Insurance Survey, representing $14 trillion in assets, found 40 percent of CIOs planning to increase allocations to investment-grade private credit and 36 percent planning to increase allocations to asset-backed finance.¹ The unitranche, inherently unrated and enterprise-value-secured, satisfies neither preference.

The second force is the re-emergence of asset-based finance in its own right. KKR estimates the global private ABF market at over $6.1 trillion — nearly twice its pre-financial-crisis peak of $3.1 trillion in 2006 — and projects that figure could reach $9.2 trillion by 2029, larger than today’s syndicated loan, high-yield bond, and direct lending markets combined.⁴ ABF grew because banks retreated from it after 2008 and have not returned at scale; the number of U.S. commercial banks has declined by roughly half since 2000.⁴ Where a unitranche treats collateral as enterprise value with a single lien, ABF prices each asset class on its own cash flows. Hybrid deal structures that pair an ABL revolver secured by accounts receivable and inventory with a cash-flow term loan from a direct lender offer borrowers better advance rates on working capital while giving the term lender a cleaner senior enterprise-value position.

The third force is spread compression itself. Lincoln International’s Q1 2025 Senior Debt Index found direct lending yields at 10.48 percent as of March 31, 2025, with covenant default rates rising to 2.9 percent — a second consecutive quarterly increase — and 11 percent of tracked loans now carrying some form of payment-in-kind interest, up from 7 percent in 2021.⁵ PIK accommodation at the current stage of the credit cycle is a structural signal: lenders are subsidizing borrower economics in ways that compound across vintages. The economic case for blending the capital stack — rather than pricing a single instrument to serve both senior and junior return requirements — strengthens as spreads narrow.

Three Architectures Emerging at the Margin

The first emerging architecture is the rated note feeder. The senior portion of a facility — typically 50 to 60 percent — is structured as a separately documented note, rated by Kroll or a private rating agency, and held by an insurance affiliate at investment-grade risk-based capital treatment. The remaining junior portion stays in the direct lender’s flagship drawdown fund at a higher spread. Borrower economics are largely unchanged; manager economics improve because the senior strip is funded at a materially lower blended cost. McKinsey’s GPMR 2026 confirms that insurance capital is already flowing into investment-grade private credit structures at scale, and that 58 percent of insurance CIOs surveyed by Goldman Sachs planned to increase private credit allocations.¹

The second architecture is the ABL overlay. Rather than absorbing working capital inside a unitranche, sponsors and direct lenders are carving a true asset-based revolver — secured by accounts receivable and inventory under a separate borrowing base — and pairing it with a cash-flow term loan. The intercreditor framework is more complex, but market participants report documentation timelines approaching competitive parity as the structure becomes standardized. KKR confirms that commercial receivables, equipment leases, and hybrid corporate facilities are growing precisely in segments where unitranche was previously the default solution.⁴

The third architecture is the segmented evergreen vehicle. McKinsey’s GPMR 2026 confirms that evergreen and open-end private credit AUM grew approximately 27 percent year over year in 2025, with BDCs, interval funds, and tender offer vehicles all scaling.¹ Retail and high-net-worth capital tolerates lower absolute yields in exchange for current income and periodic liquidity windows. Managers are structuring deals where the senior strip flows to semiliquid evergreen vehicles at modestly tighter spreads, while the junior piece is reserved for institutional capital with higher return targets. McKinsey also notes that BDC redemption requests nearly tripled quarter over quarter in Q4 2025 — underscoring that semiliquid vehicles must be matched to rated, senior, lower-volatility assets rather than full unitranche positions.¹

Positioning Across the Ecosystem

The platforms positioned to benefit are those with insurance affiliations or strategic insurance partnerships. McKinsey’s insurance analysis confirms that the convergence is entering a phase defined by integration and disciplined execution: private-capital-backed insurer assets reached nearly $1.5 trillion in 2025 after more than 20 percent annual growth.³ Mid-tier direct lenders without insurance access face a structural cost-of-capital disadvantage that compounds across deal cycles, because the blended funding cost available to affiliated managers is lower on the senior strip. The barbell prediction — largest platforms migrate up-market, specialized lower-middle-market lenders defend their niche — is consistent with McKinsey’s multiyear analysis; the unbundling of the capital stack sharpens the squeeze on the middle tier.

Specialty finance and ABF platforms benefit from the reintroduction of dedicated working capital lines into sponsored deals. The unitranche era effectively foreclosed that market for asset-based lenders who lacked a cash-flow term-loan capability; hybrid structures open it again. KKR’s ABF primer documents that origination in commercial finance, receivables, and equipment leases is growing specifically in areas where corporate borrowers previously used unitranche or syndicated facilities, driven by both corporate demand and the withdrawal of bank capacity.⁴

Investment banks and boutique advisers displaced by the unitranche era’s compression of advisory fee pools find a new function in helping sponsors optimize the layer architecture deal by deal: which strip goes to insurance, which to evergreen retail, which to institutional drawdown, and what intercreditor terms are market. That is structuring advisory work, not balance-sheet deployment, and it represents a meaningful fee category that did not exist at scale during the peak unitranche years.

Conclusion

Unitranche is not going away. For deals below $75 million in borrower EBITDA, for sponsors who prioritize speed and simplicity above all else, and for markets where the capital base remains predominantly institutional-drawdown, the structure will remain dominant for years. But the market conditions that drove its ascent — a narrow capital base, compressed scale, and limited regulatory friction — have changed structurally rather than cyclically. Spread compression to 544 basis points across a market that now features 21 percent covenant-lite documentation and growing PIK accommodation reflects a capital structure pricing the lender’s own capital inefficiently.¹ The unbundled stack — rated senior to insurance, cash-flow term to flagship fund, ABL revolver to specialty lender — prices each layer at the appropriate cost of capital for its holder. That is not disruption. It is the market correcting an efficiency gap that became visible only at scale. Dealmakers who continue to design financings as if the 2025 model will persist unchanged are optimizing for a market that is already moving.

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Footnotes

1. McKinsey & Company, *Global Private Markets Report 2026: Private Credit in 2025 — A Maturing Industry Navigates Change* (June 9, 2026)(Spreads: 716 bps peak March 2023, 596 bps year-end 2024, 544 bps year-end 2025; covenant-lite: 21% of 2025 direct lending deals vs. 4% in 2023; average LBO deal size: ~$380M in 2025, +29% vs. ~$295M in 2024; Goldman Sachs insurance survey: 40% of CIOs increasing IG private credit, 36% increasing ABF, $14T in assets surveyed, 58% increasing any private credit; evergreen/open-end AUM +27% YoY in 2025; BDC redemptions nearly tripled Q-over-Q in Q4 2025.)
2. Morgan Stanley Investment Management, *Private Credit Outlook: Estimated $5 Trillion Market by 2029* (October 3, 2025) (Private credit at $3 trillion start of 2025; projected ~$5 trillion by 2029; grew from ~$2 trillion in 2020; source footnoted by Morgan Stanley to PitchBook, as of May 2025.)
3. McKinsey & Company, *Beyond $1 Trillion: The Next Chapter for Insurance and Private Capital* (April 15, 2026) (Private-capital-backed insurer assets: nearly $1.5 trillion in 2025; asset growth rate exceeding 20% annually over prior decade; aggregate capital deployed: exceeded $100 billion in 2025, up from ~$11 billion in 2014.)
4. KKR, *Asset-Based Finance: Private Credit Hidden in Plain Sight* (July 2025) (Global private ABF market: over $6.1 trillion as of mid-2025, nearly twice pre-GFC peak of $3.1 trillion in 2006; 2029 estimate: $9.2 trillion; characterized as larger than syndicated loan, high-yield bond, and direct lending markets combined; source: Integer Advisors and KKR Credit research, data as of March 31, 2024; U.S. commercial banks approximately halved in number since 2000.)
5. Lincoln International, *Q1 2025 Lincoln Senior Debt Index* (May 2025) (LSDI all-loan yield: 10.48% as of March 31, 2025; covenant default rate: 2.9% in Q1 2025, up from 2.4% in Q4 2024, second consecutive quarterly increase; PIK: 11% of tracked loans carry some form of PIK in 2025, up from 7% in 2021, per Lincoln analysis cited in secondary reporting.)