In a panel moderated by 9fin’s own Shubham Saharan, talks centered around how some of the names in this segment are trying to unlock access to retail capital, akin to their peers at the upper end of the middle market. For those firms focused on lower middle market there are still barriers to accessing retail capital.

“It's very clear [who are] the winners right now. When it's the big firm that have a brand they can pump it out into the market. To their credit, they're raising a lot of money that way,” said Reed Van Gorden, head of originations at Deerpath Capital . “We're trying to figure it out, but we're not there yet.”

Anyone who is anyone has launched a BDC in the last two years to lure access retail capital, but some firms, such as Sixth Street and Apollo. are now graduating into ETFs. It is big asset managers leading the push into this new frontier and smaller firms are lagging behind.

But whether ETFs in private credit work will depend on liquidity at the asset level, Van Gorden said. ETFs become hard to integrate because they require more liquidity from underlying assets than more traditional vehicles and BDCs he added.

This equation becomes even trickier lower down in the market. And at least the larger managers have some cache to help them raise some capital.

But with the work upper middle market lenders have done to educate retail investors in recent years, smaller private credit firms should ultimately benefit and make the lower middle market offerings more appealing as a diversifier in portfolios, Terence Clerkin, a partner at PennantPark, said on the panel.

“From an RIA perspective, it's a great product to get your clients, especially when base rates are high,” Clerkin said of private credit as a retail investor investment. “I think that we're going to contribute to try to ride the coattails there.”

What’s up docs?

Another prevailing sentiment in private credit has been that documents are getting looser. There has been a pivot back to only a couple of covenants in deals in recent months as the broadly syndicated loan market has come roaring back.

Competition in the lower middle market is also amping up. For example, spreads are 50bps-75bps tighter than they were 12 months ago, Deerpath’s Van Gorden said.

Sponsors have been pushing hard on covenants in lower middle market deals with some existing on paper but not providing adequate protection for lenders. Van Gorden noted that in some deals an interest coverage covenant will be set at 9x or at a level that will never be triggered.

“If you actually looked under the hood, or went into the credit agreements, you would realize none of that stuff actually has any protection,” he said.

John Landis, a managing director in BMO’s sponsor finance business, said that one way to mitigate such pressure is try to lead deals. In this instance a lender is in a better position to negotiate the terms of the credit agreement and “make sure it meets our needs”.

“We like to put triggers in the structure so we know well in advance of a default, you know that there are issues, and we can bring the stakeholders to the table,” Landis said.

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