Institutional capital that previously favored direct lending to middle-market sponsors is rotating into shorter-duration SMB and revenue-based product as spreads compress in the larger market.
The direct lending market that grew from roughly $400 billion in 2020 to nearly $2 trillion in 2025 is showing classic late-cycle compression. Unitranche spreads on sponsor-backed middle-market deals have tightened 75 to 125 bps over the past four quarters as competition for assets intensified.
That spread compression is reshaping institutional allocation. Several family offices and credit-focused funds we work with have begun allocating to shorter-duration SMB credit — typically through participation in syndicated MCA and revenue-based product — where 18 to 22 percent unlevered yields remain achievable on diversified pools.
More capital chasing the same number of qualified merchants is good news for borrowers. Expect pricing competition to intensify through the second half of 2026, particularly on tickets above $250,000 and on renewals.
The catch: institutional capital is selective. Allocators want clean files, transparent reporting, and lenders with documented servicing infrastructure. Borrowers who present well will see the benefit; borrowers who do not will continue to pay the legacy retail rate.
Sponsor-backed unitranche spreads compressed to SOFR + 475 in mid-2026, the tightest of the cycle. Lenders are competing on covenant relief and delayed-draw flexibility rather than coupon.
Average buy rates across A-paper merchants tightened 9 bps month-over-month as risk-on capital rotated back into short-duration revenue-based product.
Twelve-month default rates on 2026 originations are tracking 80 bps below the 2023 vintage at the same seasoning point, with the largest improvement in services and B2B.
