Doherty, CJ
Welcome to the Lending Lowdown. I'm CJ Doherty, Director of Analysis at LSEG LPC. I'm delighted to say that today is our thirty-fifth podcast in the series and we'll be delving into the US middle market direct lending landscape and gauging current market conditions.
My guest today is Tom Newberry, Chief Credit Officer and Executive Chairman of Direct Lending at Sound Point Capital Management. Thanks for joining me, Tom.
Tom Newberry
Thanks, CJ, and thanks for the opportunity.
Doherty, CJ
Great. And I normally like to start off with an introduction, so please tell our listeners about your role at Sound Point and your background.
Tom Newberry
Great. So, I act as one of the heads of the direct lending business here at Sound Point. Sound Point is an alternative credit manager. We have roughly $42 billion of assets under management across performing credits - that's CLOs.
Private credit, structured credit and real estate credit too. I also serve as the Chief Credit Officer across the Sound Point platform. So that means I serve on the investment committees for all of the corporate credit funds that we manage here, as well as various risk committees around the firm.
I have been in the mid-market direct lending space since 2012, when I established the private credit business at CVC Credit Partners. We moved the US direct lending platform to Sound Point back in 2021. Prior to that, I spent more than twenty-five years as a leverage finance banker.
Most recently, I was running the Leverage Finance Capital Markets business as well as the loan sales and trading businesses at Credit Suisse.
Doherty, CJ
Yeah. It's interesting that you have a background in both the syndicated market and more recently in direct lending. Can you talk a little bit about the shift that you've seen in the loan market over your career, you know, given that you've been at the center of both markets at different times?
Tom Newberry
Well, you know, I've been in the market for 40 years and over that time obviously a lot has changed, but maybe the less than the narrative would suggest. So, when I started the leveraged loan market, this is back in the 1980s, there was little or no institutional participation in the market at all. It was just basically banks that were underwriting transactions, and they would syndicate those deals to other banks.
The direct lending market, as we know it, barely existed and there was almost no institutional participation. Clearly, a big driver of change has been the fact that the banks have pulled back from the lending markets based primarily on capital requirements and on regulatory restrictions.
Over time, institutional lenders have filled the gaps. You know, early on you had a handful of players like GE Capital or the insurance companies. There were some other fund managers who got involved and in the 90s the loan mutual funds scaled up.
And that was followed by the advent of the CLOs and the explosion of the structured credit market, which made the leveraged loan market look a lot more like the high yield bond market.
In recent years, the advent of significant institutional capital flows into direct lending funds and the BDCs have led to a landscape where the private credit market rivals the broadly syndicated loan market, both in size and in capabilities.
Now we have direct lending funds competing with CLOs and underwriting banks for deal mandates both in the mid-market and in the large cap market.
You know, it's kind of important to note that the banks haven't gone away, but that their roles have changed over time. In a lot of ways, the market has come full circle.
You know, when I was at DLJ in the late 1990s, if we were committing to support a leveraged buyout for $1 billion or $2 billion or $3 billion, we'd ultimately end up calling a handful of fund managers and insurance companies. That was who could help you get the deal done, and we might end up with a book of 15 to 20, maybe 25 players in that transaction. This was before CLOs were such a huge factor in the market.
But if you roll the tape forward almost 30 years, in the last couple of weeks, I was noting that there was a $3 billion private credit deal that had been announced. It was led by a large direct lender. It was syndicated to 22 or 23 other direct lenders. So other than the fact that a large fund arranged the deal rather than a bank, it felt a bit like 1998 all over again.
Doherty, CJ
Yeah, indeed. And thanks for that background. Now let's dig into current market conditions on direct Lending transactions in the middle market. What are you seeing in terms of deal flow activity this quarter, you know, in terms of volume, quality and types of transactions?
Tom Newberry
Sure. So, the rollout of tariffs and the uncertainty that's been created really derailed what people had hoped was going to be a great year for M&A. Coming into the year, as you know, hopes were very high. Certainly, our hopes were high.
Depending on who you listen to, direct lending deal volumes were down somewhere between 10% and 40% in the first half of 2025. I would guess it was down about 25% or so. This obviously contrasts fairly dramatically with what everyone expected to be a banner year for acquisition activity.
We actually deployed more dollars in the first half of 2025 than we did over the same period in 2024 and are essentially ahead of our plan for the year. You know, we feel very fortunate for that, but I would guess that we're a bit of an outlier based on reading recent BDC earning reports.
Our deal flow has been more concentrated in tack on loans for existing borrowers and refinancings of existing deals rather than new buyout financings. But that being said, we have seen decent opportunities to finance new LBOs and acquisitions this year.
In a normal year, you know where there's not so much disruption or uncertainty, you might see 60% of the deal flow coming from new platforms or what we call new platforms, that's new LBOs for new sponsors and about 40% of the deal flow would come from incremental financings coming out of our portfolio.
This year, I would expect that we're going to see it the other way around 60-40 incrementals, 60-40 for new deals. I do think though I'm optimistic, I do think we're going to get a pickup in M&A. I mean, the reality is that the pressure is just too great to either grow through deploying dry powder.
Or in the case of PE to return capital to investors, I just think it's going to take more time. You know, as an example of some of that activity, we have several portfolio investments where the sponsors of those companies have put the companies up for sale.
They're running a full sale process and based on what we're hearing about those processes, I believe they're going to ultimately going to end up transacting.
Doherty, CJ
Okay. And given that private credit is an intensely competitive market, you know, given the amounts of capital raised in recent times and new entrants, what are you seeing in terms of pricing trends in the direct lending middle market this quarter? Is it continued tightening? Is there much variation by type of transaction and credit quality?
Tom Newberry
Sure. You know, look, I've been doing this for a long time and it's hard, I'm hard pressed to imagine the time when the market was not competitive.
But clearly the inflows that we've had in the market over the past couple of years have certainly intensified things and the weaker deal environment has not helped.
You know, this has been exacerbated by the influx of money from retail and wealth channels that has been well documented by journalists like yourself.
2024 was clearly a year where spreads compressed, and fees tightened. That has continued in 2025, but seemingly at a slower pace and generally we've actually seen pricing leveling off. So, for instance, the average pricing in our portfolios has been flat for the last couple of quarters. We haven't noticed an obvious deterioration in deal terms or in leverage levels, but I would just note sort of anecdotally I've seen people in a few recent transactions offering very aggressive terms on some smaller companies, sort of less than $10 million EBITDA companies, doesn't make a lot of sense to me.
That part of the market I think should be generating a premium. I would note pricing in the core of the mid-market which is where we operate this is companies with $20 million to say $50 million of EBITDA has generally been more stable and has held up better than what we've seen up market, you know in either the upper mid-market or the large cap direct lending markets. You know as you go up market, the broadly syndicated loan market and the high yield markets are in direct competition for deal flow.
And those markets have been really hot this year. The spread premium in that part of the market to the direct lending market, in that part of the direct lending market, I'm sorry, to the broadly syndicated loan market is historically tight. It's about 135 basis points today and documentation standards have also diminished and are based more on traditional liquid loan docs rather than what we think of as direct lending standards. So, we've tended to try and stick to our knitting in the mid-market. In the mid-market, there's generally been more price and structure discipline if you have a good sourcing engine and importantly if you don't run massive funds that have to deploy, there's good opportunities to put capital to work at attractive yields.
Doherty, CJ
Let's pivot to talk about fundraising now. What's the fundraising environment like at the moment? And also, it'd be good to touch on co-investments and to what extent, you know, is your firm taking advantage of co-investment opportunities with institutional investors?
Tom Newberry
Yeah. Again, you know, after doing this for many years, I can't honestly think of a time when the fundraising market was easy or not competitive. That said, over the past few years, the biggest firms certainly keep getting bigger and they continue to account for the lion's share, the fundraising pool.
Nonetheless, you know, against that backdrop, we have continued to have success in fundraising for a number of strategies at Sound Point, whether that's direct lending, we also have a capital solutions strategy, that's an asset-based lending strategy that just had a first closing on a significantly sized fund or our structured credit strategy.
As you might imagine, many of the investors have existing exposure to private credit. Usually, they've allocated to some of the biggest players in the market. And what we've done is, you know, is to contrast the type of lending that we do with what they're seeing from some of the bigger guys who've gathered up the largest percentage of the dollars out there and I think many investors are happy to have an alternative place to deploy capital or something that's slightly different than what they currently have in their portfolio. You mentioned co-investment. That's actually a pretty important part of our overall strategy in our various direct lending strategies, we've generated a great deal of co-investment over the years and we like to offer these investment opportunities to both existing LP's and potential LP's. A lot of investors in the private credit market are very happy to have co-investment flow.
And you know, at the end of the day, there's really no better way for an investor to get to know you and your team, how you target opportunities, how you underwrite and manage risk than by investing alongside you in a deal or in several transactions.
Many of our most significant investors got to know us in that manner and they're, you know, going to continue to be our partners in this strategy going forward.
Doherty, CJ
The current environment is marked by higher interest rates relative to a few years ago, tariffs, which you alluded to earlier, and some degree of policy uncertainty. So how are portfolio companies performing against the current economic backdrop?
Tom Newberry
Well, we made a conscious decision during Trump's first term to try and avoid companies with exposure to offshore sourcing and extended supply lines, particularly in Asia. It was pretty clear that trade barriers were going to be a recurring theme, and I guess that's been proven out. You know, COVID only reinforced our conviction that dependence on offshore sourcing could be surprisingly problematic.
As a result, I think we were able to avoid a number of potential mistakes related to those particular issues. You know, we certainly have some more challenged credits in our portfolio, but the number is not large and for better or worse, the companies in our portfolios that are underperforming generally have issues that are unrelated to increased rates or inflation or to tariffs.
You know, the problems where they exist tend to be more idiosyncratic. That said, higher interest rates and economic uncertainty, things like tariffs are definitely headwinds. And so, you know, in many cases or in some cases where the companies that have been challenged were executing on a turnaround plan. That turnaround plan might be delayed because of the uncertainty because of maybe tariff pressure, which means that you know in some of these cases that'll increase the holding period in these deals.
You know, I do think you know when speaking about the market more generally, I do think we will continue to see increases in default rates across the market though I don't expect them to be severe or systematically problematic.
We don't have much, you know, pick exposure in our portfolio. Almost all of our borrowers continue to pay cash. The hike in pick rates across the market and the amounts of non-accruals that you're seeing tell you that there are definitely problems percolating out there.
Doherty, CJ
And it's always good to try and look ahead with the last question. So, what is your outlook for middle market direct lending in the rest of the year? What should market participants be keeping an eye on?
Tom Newberry
Well, as I said before, we're optimistic. You know, I think given the continued uncertainty in the market, you know, a lot will depend on what the Fed does. A lot will depend on what's happening in the equity markets. But our general sense is that deal flow will pick up later in the year.
That's been the pattern historically for us. We usually have a bigger third and fourth quarter than we do a first and second quarter and we expect the same. I do expect the markets to continue to be competitive, but I would hope that the increase in deal flow is going to help to offset some of the pressures that we talked about earlier.
Doherty, CJ
Okay, good to see here some optimism there. And that's all we have time for. Tom, thank you very much for joining me. Appreciate you sharing your thoughts.
Tom Newberry
Thanks, CJ. It was nice to speak to you.
Doherty, CJ
And thank you all for tuning in. As always, I invite you to check out our private credit news, data and analysis at loanconnector.com. I'm CJ Doherty. Subscribe to the Lending Lowdown on your favorite podcast platform.
