I talk to 30 to 40 people a week. Capital providers, independent sponsors, lenders, investment bankers. Over the last couple of months, one theme has surfaced in conversation after conversation: many investors believe the next wave of M&A opportunities won't come from growth stories, but from distress.
The macro backdrop helps explain why. Higher interest rates, slower exit activity, and a wall of refinancings from 2021 and 2022 leveraged deals are beginning to pressure companies that were financed under much more forgiving conditions.
One asset-based lender I spoke with, who also does special situations financing, has been through 30 years of credit cycles. When I asked him what he sees coming, he did not sugarcoat it.
His point was direct: the large private credit firms deployed aggressively over the last few years with teams that have never lived through a downturn. He described lenders completing deals at speed with minimal covenants, underwriters who have never visited a borrower's facility, and credit committees making decisions over Zoom. He pointed to the Edge portfolio blowup as an early example of what happens when you lend without operational understanding. His view is that some of these firms would rather pick up interest and collect fees than force real change in a struggling credit, because acknowledging the problem means acknowledging the loss.
His comments echoed something I've been hearing from multiple market participants. The concern isn't that private credit is fundamentally broken, it's that the rapid deployment of capital during 2021 and 2022 may expose weaker underwriting as those loans approach refinancing.
What struck me was his observation about how these firms react when things go wrong. His assessment was blunt: “They do not have the experience, the covenants, or the willingness to intervene. And when you are managing hundreds of billions, a half-billion loss gets absorbed as a cost of doing business. But those losses ripple downward. They create distressed portfolios. They create forced sellers. And they create opportunity for anyone positioned to step in.”
Rainer Busch at Mercury Partners is positioning on the other side of that opportunity. Mercury buys PE secondaries, acquiring LP interests and minority stakes from funds that overpaid during the 2021 vintage and are now sitting on unrealized losses. He told me the market dynamics right now are the strongest he has seen for secondary buyers. Distributions are slow, NAVs are inflated, and LPs need liquidity. The sellers know they are selling at a discount. They just need the cash.
Taken in isolation, his comments might sound anecdotal. Hearing a similar message from investors focused on different parts of the market makes the pattern harder to ignore.
Another capital provider, who co-invests out of a $10 billion balance sheet, told me something similar. He said the independent sponsors he backs need to have a clear fund-raising vision. One-off deals are inefficient for his team. But the ones who understand the current dislocation and can buy right are exactly who he wants to partner with.
Here is what I take from all of this. Based on these conversations, the distress cycle no longer looks like a future risk. It appears to be beginning today. Portfolio companies that were financed with covenant-lite structures in 2021 and 2022 are hitting their refinancing walls now. Some lenders are already restructuring loans, extending maturities, or marking assets lower, while others are being forced to confront credits that looked much stronger in a zero-rate environment.
Whether this becomes a broad market problem remains to be seen. But if these conversations are any indication, turnaround firms, specialty ABL lenders, and secondary buyers appear well positioned if distressed activity accelerates.
If you’re an independent sponsor, this is your window. The best deals of the next 24 months will not come from bankers running competitive processes at 10x EBITDA. They will come from distressed portfolios, lender workouts, and secondary sales where the seller's pain is your pricing advantage.
If you’re a lender, the question is simple. Have you walked the floor of your borrower's facility? Do your covenants give you the ability to act before it is too late? If not, you are the portfolio someone else is going to buy at a discount.
Every credit cycle creates winners and forced sellers. The question isn't whether a dislocation will create opportunities. The question is who has the capital, operational experience, and patience to capitalize on them.
Which side are you on?
