Demand is increasing for “diversifying private credit,” as investors look beyond traditional US middle‑market direct lending. While direct lending remains the largest part of the market, it is increasingly viewed as more beta‑driven, prompting interest in alpha‑generating strategies. These include opportunistic credit, asset‑backed finance and niche areas such as life sciences and recurring‑revenue (ARR) deals, alongside growing investor interest in new geographies including Europe and Japan.

In the upper middle market, where deal sizes compete with the BSL market, private credit now closely resembles public credit in terms of pricing and documentation. In the traditional middle market, however, historically low M&A activity combined with large inflows into evergreen private credit funds has intensified competition, compressing risk premiums and reducing deal differentiation — attractive for investors today, but a potential source of risk looking ahead.

Innovation in private credit is increasingly focused on opportunistic and hybrid strategies that sit between direct lending and equity. These flexible capital solutions allow managers to structure bespoke transactions for private companies that do not want to sell or go public, with cost of capital only one of several considerations. By providing capital across the structure and acting as a long‑term partner, opportunistic credit can offer a meaningful premium, reflecting both higher risk and strong demand from investors and borrowers.

Special situations are defined less by control or distress and more by flexible, bespoke capital solutions. These opportunities often arise when companies need additional runway, support value creation, or improve outcomes following an underwhelming sale or valuation process. In many cases, management teams want hybrid capital and an experienced partner to help execute growth or M&A strategies without over‑levering the business, highlighting that special situations frequently involve solving “good problems,” not distressed ones.

Special situations capital is typically deployed for non‑change‑of‑control purposes, with entry points determined strategically rather than through a single structure. Operating across public and private markets, the firm assesses opportunities in both primary and secondary markets, including liability management transactions led by either new investors or existing lenders. Being flexible and agnostic on structure helps broaden the opportunity set and allows capital to be deployed where risk‑adjusted returns are most compelling.

The current environment is attractive for special situations investing, driven by capital structures from the 2020–2021 LBO cycle that were built for a much lower interest‑rate environment. With rates remaining high, many companies are now facing pressure from weaker free cash flow, liquidity constraints or leverage challenges. Special situations and hybrid capital can help companies bridge this period through deleveraging or added flexibility, making today’s rate backdrop a key driver of opportunity.