Alternatives

Dealmakers Go Beyond the Mainstream

Michelle Handy

Senior Managing Director and Chief Investment Officer of Direct Lending, Napier Park Global Capital

Spreads in direct middle market loans compressed during the third quarter and leverage ticked higher as lenders competed for a limited supply of deals. Activity remained sluggish as pipelines continued to slowly rebuild from the dislocations surrounding the tariff announcements.

With leveraged buyouts still relatively constrained, add-on mergers and acquisitions (M&A) has been a more consistent source of demand for private credit lenders, accounting for nearly three-quarters of buyout transactions in the third quarter.1 In the lower middle market, in particular, we are seeing activity in 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 M&A mainstream.

It’s possible that the Fed’s recent rate cuts—with the potential for additional cuts before year end—may herald a change in M&A sentiment. If so, we believe that activity in the lower middle market is likely to accelerate before demand in the upper end. With relatively simple capital structures and limited leverage, smaller companies tend to be more sensitive to changes in the cost of capital and modest rate cuts can spur a pickup in dealmaking. That said, spread levels are unlikely to improve meaningfully even if volumes increase over the next few quarters, in our view, as it will take time for the market to reestablish supply/demand equilibrium.

1Source: PitchBook | LCD; data as of September 30, 2025.

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Important Risk Information

Alternative investments can be speculative and are not suitable for all investors. Investing in alternative investments is only intended for experienced and sophisticated investors who are willing and able to bear the high economic risks associated with such an investment. Investors should carefully review and consider potential risks before investing. Certain of these risks include:

  • Loss of all or a substantial portion of the investment;
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  • Volatility of returns;
  • Interest rate risk;
  • Restrictions on transferring interests in a private investment strategy;
  • Potential lack of diversification and resulting higher risk due to concentration within one of more sectors, industries, countries or regions;
  • Absence of information regarding valuations and pricing;
  • Complex tax structures and delays in tax reporting;
  • Less regulation and higher fees than mutual funds;
  • Use of leverage which magnifies the potential for gain or loss on amounts invested and is generally considered a speculative investment technique and increases the risks associated with investing in the strategy;
  • Carried interest which may cause the strategy to make more speculative, higher risk investments that would be the case in absence of such arrangements; and
  • Below investment-grade loans which may default and adversely affect returns.

Direct lending refers to a loan agreement negotiated between a borrower and single or small group of nonbank lenders. Direct lending can also be referred to as “private credit” or “private lending.”

Leveraged loans typically refer to floating-rate commercial loans provided by a group of lenders to a noninvestment grade borrower.

Private credit refers to a loan agreement between a borrower and single or small group of nonbank lenders. Private credit can also be referred to as “direct lending” or “private lending.”

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