Private credit is crowded — but disciplined capital still knows where to look
As more lenders move into private credit, the lower mid-market focused on financing small and medium sized businesses is standing out for a simple reason: it still rewards discipline. In a market increasingly focused on scale, selectivity may matter more.
Private credit is no longer a quiet corner of the market. It is bigger, busier and more competitive than it was a few years ago. More capital is chasing deals, lenders are under pressure to deploy, and pricing has tightened accordingly.
That might sound like a warning sign. But it is also a useful dividing line. Because in a crowded market, the winners are not necessarily those with the most capital. They are the ones still lending with the most discipline.That is why the lower mid-market stands out. Our Direct Lending Annual Report 2025 points to a part of the market where competition is lower, structure still matters and selectivity remains a real competitive advantage – it is often the deals you don’t do that define your performance in debt financing. There are three clear takeaways.
1. The market is getting more crowded — but the pressure is not the same everywhere
European direct lending remained strong in 2025. Market transactions rose 17 per cent to 570, even as private equity M&A activity increased by a more modest 3 per cent by value. Much of that growth was driven by refinancings, add-ons and recapitalisations, alongside more lenders pushing into the same parts of the market.
With an active broadly syndicated loan market and reduced M&A volumes, lenders traditionally focused on larger transactions kept moving down into adjacent market segments to find deployment. That pushed pricing tighter. Across the wider market, average direct lending spreads compressed by around 100 basis points versus 2021.
But not every segment has been squeezed in the same way. In our own portfolio, spread compression was around 50% lower. It suggests the lower mid-market is still more insulated than the upper mid-market, where competition has become much more intense.
2. In this market, selectivity matters as much as scale
When markets get crowded, discipline is usually the first thing tested. Everyone talks about credit quality. The harder part is maintaining it when the pressure to put money to work is rising.
That is where the lower mid-market still offers an edge, leaving room for lenders with the networks, relationships and underwriting expertise to operate in that space properly.
In 2025, we reviewed around 550 investment opportunities and deployed €1.1bn across 54 investments. But the more important number is leverage. Average net leverage across our 2025 investment activity was 3.5x, versus a market average of 4.9x cited in the report. That difference provides a material safety cushion delivering higher risk-adjusted returns.
In other words, this is not just about doing deals. It is about still being able to choose the right ones from the volume end of the market.
3. The long-term case remains strong — but 2026 will reward discipline, not overconfidence
The structural backdrop for direct lending remains supportive. In 2025, we secured more than €2bn of capital partnerships and commitments across our European direct lending platform, including the close of Private Debt Fund II, the launch of Senior Debt Fund I and substantial client partnerships. That reflects continued investor demand for strategies built on consistency through the cycle.
Looking ahead, refinancing activity, portfolio optimisation and selective growth capital should continue to support deal flow. Regulatory developments such as Basel 3.1, Solvency II recalibration and broader EU reforms are also likely to reinforce banks’ retrenchment from certain lending activities, strengthening the role of direct lending in European business finance.
But none of that makes this a market for complacency. Geopolitical uncertainty remains high. Competition is not going away. And in a market like this, the temptation to compromise on structure or terms is there – where you position has never been as important.
That is why the lower mid-market matters. It remains one of the few parts of private credit where lenders can still combine pricing, protection and selectivity. The breadth of companies and sectors within the segment also continues to offer important diversification benefits for investors. In a crowded market, that is not a side point. It is central to the opportunity.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Investec or its affiliates. This content is provided for general information only and should not be regarded as financial, legal, or professional advice.