The U.S. middle market is awash in private credit, fueling dealmaking at a breakneck pace as 2025 unfolds. With economic volatility—driven by persistent high interest rates, fiscal uncertainty, and a flood of complex financing—comes a pressing need to stress-test debt capacity. This isn’t just a challenge for private equity (PE) and private credit (PC) players; it’s a call to action for the entire dealmaker ecosystem—investment bankers, legal advisors, specialty lenders, and turnaround experts—to navigate leverage limits and emerging risks. This article explores current trends, noteworthy U.S.-based deals, and advanced risk factors, offering a technical roadmap for the middle market in 2025.
Leverage Trends: Ecosystem-Wide Implications
Private credit’s dominance in the middle market is undeniable. According to PGIM, as of September 30, 2024, middle market first-lien debt averaged 4.5x leverage (debt to EBITDA), compared to 5.8x in the broadly syndicated loan market.^1^ But S&P Global Ratings reveals a stark reality: average leverage across its U.S. middle market credit estimate population hit 7x in 2024, with 20% of companies below 1x EBITDA interest coverage.^2^
This leverage creep affects everyone. Investment bankers structuring deals face tighter margins, legal advisors draft looser covenants to avoid defaults, and specialty lenders like ABL providers see heightened collateral scrutiny. S&P’s mild stress scenario—a 10% EBITDA drop and 50-basis-point rate hike—pushes over 25% of firms below 1x coverage, signaling distress that turnaround advisors must preempt.
For Dealmakers: Leverage flexibility is becoming a premium attribute for sponsors and their advisors. Portfolio companies need greater headroom to weather potential economic turbulence, requiring creative structuring that balances growth capital with sustainability.
Case Studies: Ecosystem Collaboration in Action
The refinancing of PetVet Care Centers, a Connecticut-based veterinary chain backed by KKR, exemplifies ecosystem synergy. In October 2023, KKR secured a $2.3 billion unitranche loan from a lender group led by Blue Owl Capital, with participation from Ares Management, Oaktree Capital Management, and Oak Hill Advisors.^3^ The deal included an interest margin of 6 percentage points over SOFR with a seven-year maturity, plus $400 million in preferred equity from third-party investors and $600 million of additional common equity from KKR.^4^ This comprehensive financing package demonstrates how private credit can deliver scaled solutions for complex transactions.
Another example is SRS Distribution, a Texas-based building materials distributor acquired by The Home Depot in March 2024 for $18.25 billion. This transaction, representing Home Depot’s largest acquisition, aimed to expand the company’s reach among professional contractors.^5^ The deal, which closed in June 2024, combined SRS’s extensive network of 760+ branches across 47 states with Home Depot’s 2,000+ stores, creating enhanced fulfillment and service options for professional customers.^6^ While not exclusively a private credit transaction, it demonstrates the growing trend of sophisticated financing structures supporting middle market acquisitions.
For Dealmakers: These case studies demonstrate that successful deals require coordination across multiple specialties. The ability to bridge structural gaps between traditional financing and private credit solutions is emerging as a core competitive advantage.
Advanced Risk Factors: The Dark Side of the PC Flood
The Federal Reserve pegs U.S. private credit at $1.7 trillion in 2024, outpacing leveraged loans ($1.4 trillion) and high-yield bonds ($1.3 trillion).^7^ This flood introduces advanced risks:
- Valuation Overreach: State Street warns that lax underwriting—driven by competition—has inflated asset valuations, risking write-downs in a downturn.^8^
- Covenant Erosion: The IMF notes that covenant-lite loans now dominate, exposing lenders to losses if defaults spike.^9^
- Liquidity Mismatch: Private credit’s illiquid nature clashes with PE’s need for quick exits, a gap investment bankers and legal advisors must bridge.
- Concentration Risk: Overexposure to sectors like healthcare (e.g., PetVet) or industrials (e.g., SRS) amplifies systemic risk. According to Secured Research’s analysis, “A sector shock in 2025 could cascade across portfolios, particularly in healthcare where private credit exposure has grown by 27% since 2022.”
The interconnected nature of these risks demands careful management. “I think one of the biggest risks right now is mistaking scale for stability,” observes Marius Silvasan, CEO of eCapital. “We’re seeing increased leverage, wider covenant cushions, and more complex funding structures, which can make it harder to react quickly when things shift. To manage that, lenders need strong fundamentals in underwriting, and just as importantly, the creativity to structure deals that flex with changing conditions while still protecting downside risk.”
Fiscal policy adds fuel to the fire. With the U.S. debt-to-GDP ratio at 123% in early 2025, market volatility could spike, tightening conditions for specialty lenders and turnaround teams.
For Dealmakers: The interconnected nature of these risks demands a coordinated approach. Investment bankers and legal advisors should be developing standardized stress tests for private credit packages, while specialty lenders introduce adaptive collateral monitoring systems.
Ecosystem Responses: Tools for Resilience
Each player adapts uniquely to these market conditions:
Private Equity & Credit Providers: Adjusting their playbooks for rate volatility. “Lower rates in 2025 could ignite M&A,” says PGIM’s analysis, with private credit financing 85% of 2024 leveraged buyouts.^1^
Investment Bankers: Innovating with unitranche structures—blending senior and junior debt—to cap leverage at 6x while maintaining flexibility.
Legal Advisors: Prioritizing flexible covenants with tiered testing triggers that prevent technical defaults while preserving lender protections.
Specialty Lenders: Deploying ABL to de-risk overleveraged deals, accepting lower advance rates on receivables to accommodate higher cash flow leverage.
Turnaround Experts: Adopting pre-emptive monitoring, creating early warning systems that identify stress 3-4 quarters before traditional covenant breaches.
According to Secured Research’s analysis, “A convergence is occurring where each ecosystem participant develops complementary capabilities rather than operating in silos. The most successful transactions of 2025 will feature this integrated approach.”
Morgan Stanley predicts a rise in payment-in-kind (PIK) interest to ease 2025 rate pressures, a tactic specialty lenders and IB firms can refine.^10^
Stress-Testing for 2025: A Collaborative Framework
The ecosystem must align on a multi-scenario approach:
- Base Case: Rates at 4.5%, 3% EBITDA growth—sustainable leverage at 5.5x (PGIM benchmark).
- Adverse Case: Rates at 5%, -10% EBITDA—25% of firms below 1x coverage (S&P Global).
- Severe Case: Rates at 5.5%, -20% EBITDA—distress doubling to 40% (IMF inference).
Turnaround advisors should model these outcomes, legal teams adjust terms, and IB firms recalibrate deal structures to mitigate risks like covenant erosion or liquidity gaps.
For Dealmakers: Developing standardized stress testing protocols that can be applied across the capital stack will differentiate top-performing firms in 2025. These frameworks should combine quantitative metrics with qualitative assessments of management resilience.
Conclusion: A Unified Front
Middle market leverage in 2025 is a tightrope walk. Buyout leverage sits at 4.1x in 2024, down from 4.7x in 2021, but advanced risks loom large.^11^ The ecosystem—PE, PC, IB, legal, specialty lenders, and turnaround advisors—must collaborate to balance opportunity and stability.
According to Secured Research’s latest analysis, “In 2025, the flood of private credit demands a disciplined, collective response. Firms that can coordinate across specialty boundaries will thrive amid volatility, while those maintaining traditional silos risk being overwhelmed by the complexity of modern capital structures.”
Footnotes
- PGIM, “Middle Market Remains Private Credit Sweet Spot,” October 2024, https://www.pgim.com/investments/article/middle-market-remains-private-credit-sweet-spot ↩ ↩^2^
- S&P Global, “Rising Global Defaults Will Test Private Credit Funds In 2024,” May 2024, https://www.spglobal.com/ratings/en/research/articles/240501-rising-global-defaults-will-test-private-credit-funds-in-2024-13089868 ↩
- Bloomberg, “KKR Nears $2.3 Billion Private Loan for PetVet Recapitalization,” October 2023, https://www.bloomberg.com/news/articles/2023-10-24/kkr-nears-2-3-billion-private-loan-for-petvet-recapitalization ↩
- PE Insights, “KKR Secures $2.3bn Unitranche Loan to Recapitalize PetVet,” October 2023, https://pe-insights.com/news/2023/10/25/kkr-secures-2-3bn-unitranche-loan-to-recapitalize-petvet/ ↩
- CNBC, “Home Depot acquiring SRS Distribution for $18.25 billion to grow pro sales,” March 2024, https://www.cnbc.com/2024/03/28/home-depot-acquiring-srs-distribution-for-18point25-billion-to-grow-pro-sales.html ↩
- PR Newswire, “The Home Depot Completes Acquisition of SRS Distribution,” June 2024, https://www.prnewswire.com/news-releases/the-home-depot-completes-acquisition-of-srs-distribution-302175601.html ↩
- Federal Reserve, “Private Credit: Characteristics and Risks,” February 2024, https://www.federalreserve.gov/econres/notes/feds-notes/private-credit-characteristics-and-risks-20240223.html ↩
- State Street Global Advisors, “2025 Credit Research Outlook,” January 2025 ↩ ↩^2^
- IMF, “Fast-Growing $2 Trillion Private Credit Market Warrants Closer Watch,” April 2024, https://www.imf.org/en/Blogs/Articles/2024/04/08/fast-growing-USD2-trillion-private-credit-market-warrants-closer-watch ↩
- Morgan Stanley, “Private Credit Outlook 2025,” December 2024 ↩
- McKinsey, “Global Private Markets Report 2025,” February 2025, https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report ↩
