In the $850 billion private debt market, it’s the jumbo deals that tend to get the most attention. But the smaller transactions, to mid-size businesses that employ a large swath of Americans, make up most of the activity in the asset class.

Looking ahead at the remainder of 2020, the lower middle-market — broadly classified as financing to borrowers with less than $50 million in annual earnings — is likely to see a rise in activity, though far off the highs seen in earlier years due to the pandemic. Here, lenders that focus on smaller borrowers, weigh in on the dynamics they’re seeing, including higher yields and less competition.

Tas Hasan, partner at Deerpath Capital Management, which typically invests between $15 million and $50 million per deal:

“Our strategy has always been to do a larger volume of the same size transaction versus growing by doing a small number of larger deals in a very competitive space up-market. While there’s been a lot of growth in terms of players in the lower-middle market segment, you are not competing with 90 other lenders to do one $100 million loan.”

Brett Hickey, chief executive officer and founder of Star Mountain Capital, which makes investments ranging from $5 million to $50 million:

“We’ve been very active, across two primary camps of investing: one is helping existing portfolio companies acquire challenged competitors as well as helping structure, negotiate, finance and integrate multiple other strategic add-on acquisitions, in addition to investing debt and equity capital into new platform companies. I would say covenants and pricing for the non-sponsored lower middle market have remained strong — typically these business owners don’t want high amounts of leverage and they don’t mind giving protective covenants.”

Marc Cole, CEO of SG Credit Partners, which provides loans of about $1 million to $10 million:

“The economics have largely been sector driven. In software, where we’re highly active, we are seeing it be more competitive than pre-Covid lending. In broad based industries, within an asset-based lending umbrella, then we’re seeing more conservative terms across rates, collateral coverage and lending covenants that is a significant tightening over the pre-Covid credit bubble.”

Charlie Perer, head of originations at SG Credit, which provides loans of about $1 million to $10 million:

“We’re absolutely seeing a period of banks tightening. We’re busy for a few reasons: PPP has worn out, companies have to find a way of financing their working capital and borrowers in the lower end of the middle market aren’t really able to access private equity capital.”

Albert Periu, CEO and founder of San Francisco-based lower-middle market lender Neptune Financial Inc. (NepFin):

“One thing that we’re seeing more and more of is lenders partnering on deals. Lenders are reserving capital for loan losses, or they’re being more conservative and they want to diversify their risk. The uncertainty is still there, but we’re also seeing processes that we didn’t expect to be as competitive as they were. Overall, though, we’re still seeing spreads 50 to 100 basis points higher than before Covid.”

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