Can Smaller Deals Yield Better Value?

Credit markets finished a strong 2025 in generally positive fashion despite tight spreads, all-in yield compression and heightened risk—idiosyncratic, macroeconomic and geopolitical. New-issue spreads across middle market direct lending contracted over the course of the year, and spreads in the lower middle market fell to a historical low of 513 basis points.¹

In today’s environment of rate cutting or declining base rates, investors need to recalibrate and focus again on spread. As returns on direct loans migrate down with base rates, spreads can become the dominant component of yield, determining and driving the stability of returns for investors. If a lender is able to originate loans with wider spreads without taking on unwanted credit risk, even in a declining rate environment, acceptable return levels compared to the broader market can be maintained for investors.

We are seeing higher spread per turn of leverage in the lower middle market for companies with earnings before interest, taxes, depreciation and amortization below $20 million², which reinforces our focus on private equity rollups of basic, cash-flowing businesses with pricing power and inelastic demand—such as HVAC, plumbing, elevator servicing and landscaping. For private equity buyers, these smaller businesses offer an opportunity to professionalize, scale and consolidate within sectors of the US economy that have long remained outside the mergers and acquisitions mainstream.