Private Credit and The Right Side of History: The Case for Non-Sponsored Lending

Private credit concentrates on large corporations in high-income places, leaving non-sponsored businesses, especially those in working-class communities, with structural disadvantages including limited availability of capital and artificially high interest rates. Investors overlooking these borrowers neglect a vital segment of the market to the detriment of working-class people and the American economy writ large. Unwittingly, some investors in working-class communities export their capital to rich places instead of investing in attractive opportunities in their backyard.

“Non-sponsored” refers to investments in private companies that are not backed by large institutional sponsors like private equity firms. These typically family-founded or entrepreneur-owned businesses are often overlooked by traditional investors who perceive them as riskier due to their lack of institutional support despite such businesses representing the majority of middle market companies that in aggregate employ 50 million Americans. Excluding non-sponsored companies from financial opportunities artificially raises the cost of capital for 80 percent of middle market companies, placing them at a competitive disadvantage during an economically challenging time marked by increased tariffs, reduced government spending and signs of inflation.

At Lafayette Square, we believe non-sponsored opportunities are crucial to a stable and prosperous economy while also representing a unique investment opportunity to support the working-class people and places that drive our nation forward.

Here are the top 10 reasons we believe non-sponsored businesses deserve full and fair consideration:

• Defaults. When predicting defaults, leverage and coverage matter more than size. Default rates do not depend on the size of the company or whether the deal has a private equity sponsor. Research shows leverage and debt coverage are 2-4x more relevant in predicting defaults than size of the company.[1]
• Recovery Rates. Non-sponsored deals typically have covenants, which S&P Global reports as experiencing higher recovery rates. First-lien term loans that were cov-lite averaged a 61% discounted recovery between 2010 and September 2023, nearly 11 percentage points below the average recovery of non-covenant-lite first-lien term loans. [2]
• Structure. Non-sponsored business investors can enjoy greater flexibility to customize terms and conditions, allowing for more tailored solutions that align with the specific needs of both the investor and the borrower.[3]
• Pricing. Without institutional sponsors driving the deal-making process, there is more room to negotiate terms, including pricing, interest rates, and fees, which ultimately leads to a higher risk-reward profile.[4]
• Supply. ~140,000 middle market companies make up the majority of the $1.7 trillion private market, yet big players in the credit space are only focused on companies upwards of $100 million EBITDA. The family-founded and entrepreneur-owned businesses in the $10 million to $50 million EBITDA range make up the lion’s share of the middle-market opportunity set, yet they are frequently overlooked.[5]
• Demand. Limited competition creates attractive opportunities. The largest players in private credit invest in the same transactions more than 87% of the time. These “crossholdings” reflect the crowding effect of too many players investing in too few opportunities, mainly sponsored. While the majority of private credit funding goes to sponsored deals, the non-sponsored segment remains largely untapped and capital starved. More than 6,800 portfolio companies in BDCs compared to 175,000 in the addressable market.[6]
• Inflation. Republicans and Democrats agree that we can’t fight inflation and have a successful economy without adamant support for small business. As the Fed balance sheet continues to shrink, the need for small businesses to thrive has never been greater. Where we direct our capital in this moment is critical.[7]
• Tariffs. We believe non-sponsored deals are a defensive strategy in a pro-tariff environment. The U.S. lower middle market has greater domestic orientation, relying on U.S.-based dollars and suppliers, particularly compared to large cap companies. Investing in smaller, non-sponsored companies is a promising opportunity in President Donald Trump’s pro-tariff administration.[8]
• The Trump Administration. Agencies like the Small Business Administration, which recently announced the Made in America Manufacturing Initiative, are cutting regulation and expanding access to capital for American manufacturers. Ultimately, Washington, D.C. is the low-cost manufacturer of capital for private credit.[9]
• Working-Class People and Places. A combination of capital, services and technology will support small businesses and their workers, driving productivity and performance across the economy.

Lafayette Square believes outperformance in private credit demands running towards Washington and investing in working-class people and places. In our capitalist system, Washington is the low-cost producer of capital and working-class places are the gateway to competitive risk-adjusted returns. We believe that non-sponsored employers rightfully should represent the highest priority for Washington. Working-class people and places will be remembered as the largest domestic investment opportunity of our lifetime. Bet on America.

Damien Dwin is President and CEO at Lafayette Square.

[1] Moody’s analytics. Based on private firm data, including 110,000 financial statements, 25,000 firms and 1,600 defaults collected over 25 years. Size of company is measured in total assets. April 2012.

[2] “Default, Transition, and Recovery: U.S. Recovery Study: Loan Recoveries Persist Below Their Trend,” S&P Global, Dec. 15, 2023.

[3] 2024 Annual US PE Middle Market Report, Pitchbook, 2024.

[4] 2024 Annual US PE Middle Market Report, Pitchbook, 2024.

[5] Preqin Global Report On Private Debt, December 2024.

[6] The 10 largest private and public BDC Portfolios based on FMV as of March 31, 2025 based on information for SEC company filings. BDC SEC portfolio company filings as of Q3 2024 and Dun and Bradstreet Data as of February 2025. Lafayette Square analysis of data of Private and Public BDCs from PitchBook – 2024 Q4.

[7] “Small and large businesses, banks, and technology companies, From Businesses and Banks to Colleges and Churches: Americans’ View of U.S. Institutions,” Pew Research Center, Feb. 1, 2024.

[8] “PwC’s US Tariff Industry Analysis: How Trump’s tariffs could impact US companies,” PwC, March 2025.

[9] “SBA Announces Made in Amerca Manufacturing Initiative,” Press Release, U.S. Small Business Administration, Mar. 10, 2025