Looking Past the Headlines to the Middle Market

In the latest edition of Andalusian: Accruing Interest, Senior Managing Director, Christopher Kill , shares his insights on some of the trends and momentum we’ve recently seen in the private credit industry, and why these developments inform his view that Andalusian Credit Partners ’ focus on both sponsored and non-sponsored opportunities within the middle market is an effective value proposition to investors and borrowers alike.

Private credit continues to grab headlines across the financial media landscape. One such story over the past few months has revolved around the efforts of the largest players in the industry to find ways to satisfy their AUM growth. Interestingly, rapid AUM growth among larger private credit platforms has created a need for these firms to increase their origination capacity in order to continue to deploy capital and grow into the record amounts of cash they’ve raised.

Recent strategic agreements that seek to solve for this issue include the $25 billion partnership between Apollo and Citibank[1] and the $5 billion partnership between Centerbridge and Wells Fargo[2]. Both tie-ups highlight how asset managers have AUM growth expectations that can only be fed by tapping new origination sources and by writing ever bigger checks for deals. On the other side of the trade, these partnerships provide a way for banks to retain their relationships with corporate clients – and the fee streams that come with these relationships – while enabling them to manage their regulatory capital requirements. Another approach firms have taken to accelerate their growth ambitions within private credit has been through the purchase of established platforms, like BlackRock’s recently announced $12 billion acquisition of HPS[3]. This transaction will give BlackRock $148 billion of credit-focused assets, which it will use to create a $240 billion private credit franchise.

Whether it’s through bank partnerships or M&A activity, these initiatives will help asset managers continue to scale and compete for financing companies that have historically tapped the broadly syndicated loan (“BSL”) market. For context, PitchBook noted the median loan size for BSLs has grown to $850M+[4] as of November 2024, which is more than double the median BSL a decade ago. The pushing up of BSLs highlights the trend of private credit managers increasingly encroaching on banks’ territory and focusing on financing upper middle market companies (think >$50M of EBITDA), because the middle market deal size (<$50M of EBITDA) moves the needle less for them than in the past.? ?

The middle market is our sweet spot at Andalusian Credit Partners. There are 200,000+ companies in the middle market, which provides a large addressable universe of companies in need of flexible debt solutions. Moreover, we do not compete with the BSL market or, increasingly, larger private credit platforms to finance these borrowers. So, while the direct lending market appears crowded, and there has been significant activity and fundraising in the space, much of this activity has occurred outside of the middle market. We believe there is a dearth of true middle market lenders, like Andalusian, and a persistent need for capital from these types of borrowers.

Additionally, we focus on sponsored and non-sponsored deals, which allows us to widen our origination funnel and be selective across investment opportunities. The non-sponsored market, in particular, is attractive as it enables us to access underserved borrowers and potentially earn a premium spread on our loans. Through internal and external sourcing, along with our robust due diligence and underwriting processes, we are able to secure appropriate terms for investment. We see significant upside in balancing between both sponsored and non-sponsored deal opportunities. We'll dive deeper into this thesis in our upcoming white paper on non-sponsored lending.

Our team may have joined Andalusian from larger managers, but when we look past the headlines and to the future, we believe that non-sponsored and sponsored opportunities in the middle market provide the best opportunity to continue to invest with discipline on behalf of our clients. ?

[1] Bloomberg, Citi, Apollo Join Forces in $25 Billion Private Credit Push

[2] Bloomberg, Wells Fargo and Centerbridge Launch $5 Billion Private-Credit Fund

[3] Bloomberg, BlackRock Buys Credit Firm HPS in $12 Billion All-Stock Deal

[4] Pitchbook, With rise of private credit, BSL market becomes land of larger borrowers