Last week we kicked off our special series on middle market industries and why they should matter for private credit investors. This week we explore how experienced lenders established winning track records by learning from the lessons that previous economic cycles taught them, and how that shapes their ability to absorb risks from future macro events.

The roots of middle market direct lending came from traditional commercial bank lending in the 1970’s and 1980’s. Designed to serve regional companies that lacked size and scale to access the broadly syndicated loan or high yield markets, this arena was driven by relationships. Founder- and private equity-owned borrowers clubbed together like-minded lenders they trusted to provide their significant capital needs. 

These lenders often shared a similar approach to evaluating risk, informed by decades of experience with their clients. This began to change, however, as leveraged buyouts in the late 1980’s and early ‘90s pushed leverage higher. Non-bank lenders such as finance companies carved out specialty areas in healthcare, technology, consumer goods, and light manufacturing. They also worked closely with sponsors on niche middle market sectors (think car washes) ripe for consolidation.