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The Middle Market’s Main Character Moment
Dane Adelman & Eric Wolf
April 22, 2025 • Reading Time: 5 minutes
After a transformative 2024, private credit investors are gearing up for a promising yet unpredictable few years ahead. What’s in store for the lower middle market? Will deal volumes continue to climb? And how will economic pressures affect lending dynamics? AdCap has the answers, and we’re breaking it all down for you.
💡 In today’s edition:
Why 2025 is shaping up as a strong year for private credit
The rise of lower middle market direct lending: What’s driving the momentum?
Navigating the uncertainty: How managers are adjusting to economic challenges
Let’s dive in.
As private credit strategies gain traction, lower middle market direct lending is emerging as a sector that offers attractive returns with lower leverage. This growing sector provides consistent income, simpler debt structures, and tighter financial covenants compared to the upper middle market.
According to Eric Wolf, Co-Founder at AdCap Growth Partners:
“We believe the lower middle market continues to offer attractive returns with lower leverage profiles and stronger lender protections versus the upper middle market.”
This view highlights the growing preference for this market segment, which offers a favorable pricing premium and better risk-return profiles, making it a strong option for institutional investors.
2024 Deal Volume and Market Outlook
2024 saw a solid recovery in deal volumes, bouncing back from a sluggish 2023. The momentum is expected to continue:
"We saw deal volumes experience a broad recovery in 2024, and the expectation is that M&A volumes should be consistent or increase"
Eric Wolf, Co-Founder at AdCap Growth Partners
Still, with uncertainty around:
🌍 Economic growth
📈 Inflation
💸 Interest rates
🧨 Geopolitical events
...a disciplined approach remains critical. Wolf emphasized the importance of working with experienced managers who can evaluate individual credit opportunities while navigating these challenges.
Resilience Through Market Disruptions
The lower middle market has demonstrated resilience, even through challenges such as the COVID-19 pandemic, inflation spikes, and rising interest rates.
Though smaller borrowers are often viewed as riskier, they often come with:
🧱 More conservative capital structures
🤝 Smaller, tighter lender groups
Wolf also emphasized, “The lower middle market has been adept at managing through a range of market challenges, including material supply disruptions, labor challenges, and inflationary pressures.”
The Case for Direct Lending in Lower Middle Market
Direct lending as an asset class has gained broad acceptance. However, educating investors on the enhanced lender protections and favorable return profiles in the lower middle market is key to unlocking its potential. "As investors become familiar with the lower middle market’s attractive credit return profiles, we’re seeing an increase in allocations into this space,” Wolf noted.
What makes it appealing?
🧾 Lower leverage
🔐 Simpler cap stacks
💹 Higher recovery rates (pre- and post-pandemic)
Manager Selection and Credit Discipline
Wolf stressed the importance of understanding how managers:
🕵️ Source transactions
🛡️ Manage credit risk
🧠 Build portfolios
“Managers providing a clear understanding of how credit risk is managed with lower middle market borrowers is a critical aspect of demonstrating the value proposition,” he explained.
Looking Ahead: Optimism for 2025 and 2026
Looking ahead, Wolf expects continued positive momentum for the lower middle market. With M&A activity anticipated to strengthen and refinancing activity remaining robust, the market looks promising. “We expect to see private equity firms take advantage of stronger market conditions in 2025 to exit a higher number of portfolio investments,” Wolf noted.
As we continue into 2025, market constituents are optimistic that the volume trends from late 2024 will persist, creating further opportunities for lower middle market direct lending.