Published On: February 16, 2026 | Last Updated: February 16, 2026
Private credit has moved from the margins of the lending market to a central role in middle market financing. Over the past decade, the asset class has expanded rapidly as institutional capital sought alternatives to traditional bank lending. What was once viewed as a niche solution is now a primary source of growth capital, acquisition financing, and recapitalizations for many businesses.
This shift has accelerated in a higher interest rate environment. Rising base rates have increased borrowing costs, while tighter bank regulations and capital constraints have limited the ability of traditional lenders to support leveraged transactions. As banks step back, private credit providers have filled the gap with faster execution and more flexible structures.
However, the pace of growth raises important questions. Is private credit still a sustainable opportunity for middle market borrowers, or are higher costs, softer covenants, and refinancing risks beginning to build? This discussion takes a balanced view, examining both the advantages and the emerging risks shaping private credit in 2026, without treating the asset class as either a solution or a warning by default.
The Expansion of Private Credit
1. Retreat of Traditional Banks
Over the past decade, traditional banks have gradually reduced their exposure to leveraged middle market lending. Stricter regulatory oversight, higher capital requirements, and ongoing stress-testing obligations have made riskier loans more balance sheet intensive. As return on capital becomes a priority, banks increasingly favor lower-risk or investment-grade borrowers. This recalibration has not eliminated bank lending, but it has narrowed participation in complex or highly structured deals, creating space for private credit providers to expand.
2. Rise of Direct Lenders
As banks stepped back, direct lenders moved quickly to fill the financing gap. Private credit funds operate with streamlined approval processes and are not bound by the same regulatory capital constraints. This allows for faster execution and greater certainty in transactions. In addition, direct lenders offer flexible structuring, including unitranche facilities and tailored covenants. For middle market companies seeking customized solutions, this adaptability has made private credit an increasingly preferred funding source.
3. Institutional Capital Inflows
The expansion of private credit has been supported by substantial institutional capital inflows. Pension funds, insurance companies, and other yield-focused investors have increased allocations to private debt in pursuit of enhanced returns and portfolio diversification. Private credit’s floating-rate structure and income profile have remained attractive, even in changing rate environments. This steady capital supply has reinforced the asset class’s growth, transforming it from an alternative niche into a core component of modern corporate lending markets.
Why Is Private Credit Growing in Middle Market Companies?
1. Speed and Certainty of Execution
For middle market borrowers, timing can determine the success of an acquisition or strategic initiative. Private credit offers faster execution because decisions are typically centralized within a single institution or a small lending group. Unlike broadly syndicated loans, which depend on market appetite and investor participation, direct lending reduces syndication risk. Bilateral or club deals provide greater certainty of funding, allowing companies to move forward with transactions without prolonged market exposure.
2. Structuring Flexibility
Private credit is often preferred for its ability to tailor capital structures around a borrower’s operational realities. Unitranche facilities simplify layered debt structures into a single instrument, while payment-in-kind components can preserve short-term liquidity. In some cases, covenant-lite terms offer additional operational flexibility. This customization enables middle market companies to align financing with growth strategies, acquisition timelines, and cash flow cycles, rather than adapting their plans to rigid lending templates.
3. Larger Hold Sizes
Direct lenders frequently provide larger hold sizes compared to traditional bank participants, reducing the need for broad syndication. This capacity enables financing for sizable growth initiatives, acquisitions, and recapitalizations without assembling multiple lending parties. For middle market companies pursuing expansion, the ability to secure meaningful capital commitments from a concentrated lender base simplifies negotiations and enhances execution certainty, supporting strategic transactions with greater stability and clarity.
Emerging Risk Factors of Private Credit in 2026
While private credit continues to offer strategic advantages, 2026 presents a more complex risk environment. Rapid asset growth, competitive pressure, and a changing rate backdrop require a disciplined assessment of underlying vulnerabilities.
1. Higher Cost of Capital
The higher interest rate cycle has materially increased the all-in cost of borrowing. Although competitive dynamics have compressed spreads in certain segments, rising base rates continue to elevate total debt servicing costs. For floating-rate facilities, this directly impacts interest coverage ratios and free cash flow. Middle market borrowers with thinner margins may face pressure, particularly if revenue growth slows while financing costs remain elevated.
2. Covenant Softening
In recent years, competition among lenders has contributed to softer covenant structures. Fewer maintenance covenants and more borrower-friendly documentation can provide flexibility during stable periods. However, reduced early-warning mechanisms may delay intervention when performance deteriorates. This dynamic can shift risk within the capital structure or defer financial stress rather than resolving it. Over time, weaker covenant discipline may amplify downside scenarios in a broader economic slowdown.
3. Refinancing Risk Wall
A significant volume of private credit transactions originated between 2021 and 2023 will approach maturity in the coming years. Many of these deals were structured under different valuation assumptions and lower rate environments. As maturities cluster, borrowers may encounter tighter underwriting standards or higher refinancing costs. If earnings have not grown in line with expectations, valuation resets could complicate recapitalizations and increase leverage ratios at renewal.
4. Concentration and Liquidity Risk
Private credit funds often hold concentrated portfolios within similar industries or capital structures. In periods of economic stress, correlated exposures could amplify losses across funds. Unlike public bond markets, private credit lacks deep secondary market liquidity. This limits the ability to reposition risk quickly. While long-term capital supports stability, constrained liquidity may reduce flexibility if credit conditions deteriorate sharply.
How CFOs Should Approach Private Credit Financing
Private credit can provide strategic advantages, but disciplined evaluation is essential. CFOs must move beyond headline interest rates and assess the full structural implications of the facility. A thoughtful review of cost, flexibility, and long-term optionality can prevent future constraints.
True All-In Cost of Capital
The stated spread rarely reflects the complete cost of borrowing. CFOs should evaluate base rate exposure, upfront fees, OID, commitment fees, advisory costs, and potential PIK components. Floating-rate sensitivity analysis is critical in a volatile rate environment. Understanding the blended cost under different scenarios allows leadership to assess sustainability rather than focusing solely on initial pricing.
Flexibility vs Long-Term Restrictions
Structural flexibility can be attractive in the short term, but long-term restrictions may limit strategic options. CFOs should carefully review covenants, restricted payments baskets, debt incurrence limitations, and reporting requirements. The objective is to balance operational freedom with financial discipline, ensuring the facility supports growth without constraining future transactions or capital raises.
Prepayment Penalties
Many private credit facilities include call protection or prepayment premiums. While lenders seek return certainty, these provisions can reduce refinancing flexibility if market conditions improve. CFOs should model potential exit scenarios and quantify the cost of early repayment. Understanding these provisions helps avoid unexpected friction during refinancing or recapitalization events.
Intercreditor Complexity
In layered capital structures, intercreditor agreements can materially affect control rights and recovery outcomes. Priority of claims, standstill provisions, and enforcement mechanics should be evaluated carefully. Even in unitranche structures, internal arrangements between lenders may influence restructuring dynamics. Clear visibility into these terms strengthens risk management.
Exit Planning and Refinancing Strategy
Private credit should be evaluated within a broader capital lifecycle plan. CFOs must assess maturity profiles, anticipated liquidity events, and refinancing conditions well in advance. Scenario planning for different market environments ensures preparedness. A proactive refinancing strategy reduces exposure to maturity clustering and strengthens long-term financial resilience.
Strategic Considerations for Middle Market Companies
Private credit can be an effective growth enabler, but strategy must guide structure. Middle market companies should treat financing decisions as part of long-term capital planning rather than isolated transactions. Discipline in leverage, liquidity, and scenario analysis becomes increasingly important in a higher-rate and more competitive environment.
Align Financing with Growth Stage
Capital structure should reflect the company’s maturity, cash flow stability, and expansion trajectory. Early growth businesses may prioritize flexibility, while established operators may focus on cost efficiency and balance sheet optimization. Financing that supports acquisitions or expansion must be matched with realistic earnings visibility. Misalignment between growth assumptions and debt obligations can quickly strain operational performance.
Stress-Test Capital Structure
Companies should model downside scenarios before committing to new leverage. Sensitivity analysis around revenue contraction, margin compression, and rate increases helps determine whether interest coverage and covenant compliance remain sustainable. Stress testing is not a defensive exercise alone. It provides clarity on how resilient the capital structure is under volatility and whether additional buffers are required.
Avoid Over-Leverage During Expansion
Expansion periods often encourage higher borrowing based on projected growth. However, over-leverage can magnify risk if integration timelines extend or market conditions weaken. Sustainable leverage ratios should be grounded in recurring cash flow rather than optimistic forecasts. Maintaining prudent debt levels preserves optionality and reduces refinancing pressure during uncertain cycles.
Build Liquidity Buffers
Liquidity serves as a stabilizer during operational fluctuations or external shocks. Companies should maintain adequate cash reserves or revolving credit availability alongside term facilities. A deliberate liquidity buffer reduces reliance on reactive financing and strengthens negotiating power in future transactions. In uncertain markets, access to liquidity can be as valuable as growth capital itself.
Conclusion: Opportunity Requires Discipline
Private credit is neither inherently risky nor inherently safe. Its effectiveness depends on structure, pricing discipline, and long-term alignment with a company’s growth strategy. In 2026, it remains a meaningful opportunity for middle market borrowers, but rising costs, refinancing exposure, and structural complexity require careful evaluation. Speed and flexibility may open doors, yet sustainability ultimately determines success.
When supported by realistic projections and prudent leverage, private credit can fund acquisitions, expansion, and strategic transformation. However, borrowers should prioritize durable capital structures over short-term execution advantages.
As a dedicated facilitator of flexible financing solutions, EPOCH Financial supports middle market companies in evaluating and structuring capital with discipline and clarity. In a shifting credit environment, thoughtful capital structuring matters more than access alone.
