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.

As cryptocurrency in general has earned broader approval among the investing public, a new narrative for the utility of bitcoin appears to have taken root: bitcoin as “digital gold” that can serve as a modern store of value and potential hedge against inflation and the debasement of fiat currency.

We have our reservations, notwithstanding the surreality of weighing the mostly theoretical benefits of a 17-year-old cryptocurrency against those benefits gold has historically offered for millennia.

While bitcoin’s supply constraints may support the concept of gold-like scarcity value, its trading history fails to make the case for it as an effective store of value. As shown below, its latest swoon—bitcoin is down more than 25% from its October 6 all-time high—is just one of several over the past five years, a period characteristically marked by sharp spikes and massive downturns, prolonged climbs and lengthy troughs.¹ With a standard deviation of returns more than four times greater than that of gold over the past five years, we believe this risk profile and price action amplify bitcoin’s appeal as a speculative vehicle and it weakens its claim as a reliable store of value.