Private capital unlocked
The core middle market:
A compelling case for private credit allocation
Private credit has become one of the fastest-growing segments of the alternative investment landscape, attracting record capital flows from institutional and individual investors alike. Yet an important distinction has been lost in the conversation — private credit is not monolithic. Where a manager operates matters enormously for risk, returns, and the structural protections that ultimately preserve investor capital.
This distinction is especially important given the negative headlines surrounding private credit today. Pockets of stress, including rising non-accruals and weakening loan structures, have emerged across the market, but these issues have been largely concentrated in the upper middle market, where managers facing intense competition have accepted higher leverage and relaxed lending standards. The core middle market, by contrast, operates by a fundamentally different set of rules.
Defining the core middle market
Private credit is broadly divided into three tiers based on borrower size, typically measured by EBITDA. The lower middle market encompasses companies with EBITDA below $15 million — often smaller, owner-operated businesses that present meaningful challenges including limited liquidity and greater customer concentration. The upper middle market comprises companies with EBITDA above $75 million, where private credit managers compete directly with the broadly syndicated loan market, often accepting looser covenants and higher leverage to win deals.
The core middle market sits squarely between these two segments, comprising companies with EBITDA of roughly $15 million to $75 million (Exhibit 1) and annual revenues between $100 million and $500 million. Critically, these companies sit below the threshold where the syndicated loan market becomes a viable financing option, which creates significant structural advantages for lenders.
Exhibit 1: Core middle market is focused companies with EBITDA between $15 to $75 Million
A large and largely untapped opportunity
The middle market opportunity set is substantial. There are approximately 300,000 U.S. midsize businesses generating $13 trillion in annual revenue.1 Over 65% of U.S. companies with revenues above $100 million remain privately held, and fewer than 5% of middle market companies are backed by private equity (Exhibit 2)2 — meaning the vast majority have historically relied on relationship-driven lenders to finance their growth.
Exhibit 2: The core middle market is a massive opportunity, with little institutional backing
Structural advantages
The core middle market offers four distinct structural advantages over other areas of private credit.
Lower leverage. Core middle market loans carry an average debt-to-EBITDA ratio of approximately 4.0–4.5x, compared to 5.0–6.0x in the upper middle market.3 In a stress scenario, that difference in a borrower's capacity to service debt can be meaningful.
Fewer defaults. Sponsor-backed middle market loans have defaulted at approximately 1.3% over the trailing twelve months, compared to 4.2% in the broadly syndicated loan market.4 This resilience reflects the service-oriented, defensive industry profiles of core middle market borrowers, as well as the active oversight and financial backing that private equity sponsors provide.
Stronger covenant protections. Among mega-cap deals, 51% are now covenant-lite, compared to 28% in the upper middle market and only 15% in the core middle market.5 Covenants give lenders an early warning system and the ability to intervene before losses become severe — a powerful tool for capital preservation.
Greater diversification. Portfolio overlap among upper middle market managers stands at approximately 60%, meaning investors may be more concentrated than they realize. In the core middle market, overlap drops to roughly 20%6 and has actually decreased in recent years (Exhibit 3), a natural product of the proprietary, relationship-driven nature of core middle market lending.
Exhibit 3: Portfolio overlap is greater in the upper vs. the core middle market
A track record built across market cycles
Over the past two decades, core middle market direct lending has produced only one down year — during the 2008 financial crisis — when the asset class returned approximately -6%, compared to -26% for high yield bonds and -29% for leveraged loans. The asset class has also demonstrated resilience through the 2018 trade war, the COVID pandemic, and the period of rapid Federal Reserve rate changes (Exhibit 4)7. An illiquidity premium of approximately 150 to 200 basis points over comparable public market alternatives provides additional income cushion through periods of volatility.
Exhibit 4: Middle market direct lending has attractive risk/return characteristics
A core allocation for core qualities
For investors building private credit allocations, the distinction between the core middle market and the upper middle market is not simply a matter of size. The structural protections are stronger, leverage is lower, the default history is better, and the diversification is more meaningful. Those characteristics — consistent income, capital preservation, and resilience across market cycles — describe an asset class that has earned its place not at the margins of a private markets portfolio, but at its core.
Footnotes:
1. JPMorgan, Next Street. The Middle Matters: Exploring the Diverse Middle Market Business Landscape, Dec. 31, 2023. 2. S&P Capital IQ as of March 31, 2026; PitchBook data and National Center for the Middle Market as of Sep. 30, 2025. 3. Lincoln International as of Dec. 31, 2025. 4. KBRA, as of May 26, 2026. 5. PitchBook LCD, Covenant Review, PGIM private capital. As of 3/31/2025. 6. Raymond James (4Q25 BDC Portfolio Overlap Report). 7. “Middle market direct lending” is represented by the Cliffwater Direct Lending Index. “Leveraged Loans” is represented by the Morningstar LSTA US Leveraged Loan 100 Index . “High Yield” is represented by the Bloomberg US Corporate High Yield Total Return Index. “Corporates” is represented by the Bloomberg US Corporate Bond Index. “Investment Grade Bonds” is represented by the Bloomberg US Aggregate Bond Index. “Treasuries” is represented by the Bloomberg US Treasury Index. Index data is presented for the period from 01 January 2016 through 31 December 2025.
