2026 Outlook: Diversification - The Antidote to 2025 Private Credit Jitters
By Rahman Vahabzadeh and Steve Ruby
As private markets move from novelty to necessity for high-net-worth investors, the prevailing question in 2026 is no longer whether to allocate to private credit, it’s how to do so with intention. In exploring this question, advisors are increasingly discovering the benefits of the core middle market.
The core middle market is typically comprised of companies with EBITDA of between $15 million and $100 million. The appeal of the segment to managers is that it combines depth of opportunity with financing terms that tend to be more conservative than large-cap private credit or broadly syndicated loans. These characteristics, from the perspective of advisors, help to make the core middle market a foundational building block for portfolio diversification.
An added draw for RIAs new to the segment is that certain tailwinds are forming that in 2026 should position the segment well for future growth. In a survey conducted by Audax Private Debt, more than 70% of private equity sponsors and limited partners (sample set of ~220 organizations) expect a moderate increase in middle-market M&A activity in 2026. That optimism aligns with more than $1.0 trillion in private equity dry powder and expectations for a more dovish fed that would likely catalyze M&A activity and help to feed the continued investor appetite for income-oriented assets.
Structure Matters
While an improving economic backdrop would support fixed income more broadly, the core middle market, in particular, can serve a ballast function to private credit allocations. This is due to the structural benefits that distinguish this segment of the market and underscores its role as a diversifier. Compared with upper-middle and large-cap private credit, core middle-market loans typically include stricter covenants, lower leverage, wider spreads, and higher yields. These structural advantages reinforce downside protection without sacrificing income.
Other protections, when coupled with manager discipline, also can aid in providing consistent credit quality. For instance, within Audax Private Debt’s direct lending platform, we’ve led or co-led roughly 90% of transactions closed through September 2025, and more than 90% of the portfolio carries maintenance covenants. Moreover, while there was a steady gravitation to “pay in kind” structures in the upper-middle and large-market last year, PIK loans, at least in our experience, remained the exception. This has helped preserve cash income, while ensuring expected outcomes remain aligned with our original underwriting.
Diversity Begets Diversification
Portfolio construction should reflect how investor access is evolving. As wealth platforms have scaled, private credit exposure has become concentrated at the top. The ten largest managers now control roughly two-thirds of evergreen AUM — a common proxy for private-wealth allocations.
That concentration, beyond creating overlapping portfolio exposures, also introduces unintended risks. By contrast, diversification is almost inherent to the core middle market, whose breadth, depth, and wide array of active sponsors naturally expand the opportunity set and universe of potential credits.
The outlook for 2026 should enhance these characteristics. The core middle market is positioned to be an engine of private credit deployment amid improving interest rate dynamics and vis-à-vis the large-cap segment, the core middle market should continue to benefit from generally wider spreads, stronger documentation, lower leverage, and a far more expansive universe of credits.
For advisors and their clients seeking diversification and downside protection, the core middle market may be the right place to meet the moment — a segment where true diversification still exists, and where access through experienced managers can help unlock the compelling opportunity set.
Rahman Vahabzadeh and Steve Ruby are Managing Directors and Co-Heads of Originated Debt at NY-based Audax Private Debt.
