After a period of record deployment, the private capital markets are recalibrating. The post-pandemic boom in dealmaking gave way to a more cautious phase marked by inflation volatility, central bank tightening, and heightened borrower stress. Now, with interest rate cuts slower and more selective than many anticipated, investors are re-entering the market, but with sharper pencils and a heightened focus on credit quality and structuring.
Rather than a broad-based recovery, we’re seeing a bifurcated market. On one end, resilient sectors such as infrastructure, energy transition, and specialized credit are attracting institutional and high-net-worth capital. On the other hand, asset classes like commercial real estate and venture-backed growth equity remain under pressure, weighed down by valuation resets and limited refinancing options.
Lower middle-market companies ─ those generating between $10 million and $50 million in EBITDA ─ continue to face a financing gap. Traditional banks, constrained by regulatory capital requirements and risk-weighted asset pressures, have retrenched from lending to non-investment-grade borrowers. This retreat has created fertile ground for private credit providers, particularly those able to deliver speed, certainty, and structural flexibility.
Direct lending remains the dominant strategy in private credit, but capital is increasingly being allocated to hybrid and bespoke structures, including asset-backed financing, structured equity, and rescue capital. Investors are also taking a closer look at downside protection, favoring managers with operational capabilities and track records of navigating complex situations.
Among the Canadian firms well-positioned in this environment is Third Eye Capital, a Toronto-based lender known for its focus on transition, distress, and special situations. CEO Arif Bhalwani has long advocated for underwriting discipline, downside control, and value extraction through structure, not just spread. That ethos has served the firm well through past cycles and is proving equally relevant today as lenders face rising default activity and more frequent covenant breaches.
Still, the path forward for private capital is not without complexity. While borrowing costs have fallen from their 2023 highs, the pace and predictability of interest rate cuts remain uncertain. Central banks have taken a more data-dependent approach, holding rates steady in recent months as inflation proves stickier than expected.
In this environment, execution and underwriting strength matter more than ever. Investors are gravitating toward firms with deep operational insight and the ability to navigate restructuring scenarios, not just provide capital. For firms like Third Eye Capital, which specialize in complex and transitional situations, this is a distinct competitive advantage. The firm’s experience across distressed, rescue, and asset-backed financing makes it uniquely equipped to assess risk and unlock value where others see volatility.
That selectivity is becoming increasingly important. Default rates in sub-investment-grade credit have climbed steadily over the past year, and even well-capitalized companies are facing covenant pressure due to slowing growth. While not systemic, the uptick in stress shows the need for lenders to dig deeper into business fundamentals and industry trends.
For investors, the challenge is no longer just finding deals, but finding the right deals. This hinges on sourcing networks, sector expertise, and the ability to structure financing that addresses borrower constraints while protecting investor downside. Allocations are shifting toward managers with a history of operating through volatility. Investors are also placing greater emphasis on transparency and access to bespoke opportunities that aren’t available through traditional credit funds.
In this recalibrated market, private credit is evolving into a core portfolio strategy that requires more selectivity, specialization, and strategic execution. Firms like Third Eye Capital, with their emphasis on downside control, are helping set the standard for what disciplined private lending looks like in a post-rate-hike world.