Last week we discussed the views of various private equity sponsors regarding the question of why the pipeline of middle market leveraged loans seems soft. Over the past several weeks, we’ve also had conversations with a number of key middle market debt arrangers and lenders. Their consensus mirrors that of the PE firms – deal activity reflects the kind of origination platform each player possesses.

For the top tier arrangers, deal flow seems to be down due to intense completion among these providers to underwrite lead transactions. With a paucity of new LBO activity in the first quarter, in order to lead a refinancing or recap a competitor has to take the deal away from the original lead arranger – a difficult proposition.

For middle market loan buyers relying on deal flow from the syndicated loan market, the environment is challenging. At the lower end of the broadly syndicated market (issuers with Ebitda around $100 million) and at the upper end of the syndicated middle market ($50-100 million Ebitda), these firms compete with CLOs, retail loan funds, high yield funds and other institutional investors who are hungry for paper.

The typical outcome today, particularly with the more sought-after credits (what else should you invest in?), is that most investors will receive a very small allocation for their commitment. In many cases, this means significantly less than $10 million. It’s hard to build a decent book of loans, one lender told us, on “one-sies” and “two-sies.”