The Dodgeball Market
Why initial conditions dominate.
We are at the tail end of the “Everything Bubble.”
It was built on economic stability, low inflation, and massive monetary stimulus. When markets are overvalued and “adjusted” numbers flatter reality, fragility creeps in. In 2025 we started to see some anxiety about private credit.
Our base case is a long grind through private market marks and valuations, with occasional discontinuities when confidence weakens or structures break down.
Our definition of a bear market is simple: things you want to have happen no longer happen. That is what we mean by the Dodgeball Market where surprises are skewed to the downside and investors need to learn to "dodge, dip, duck, dive and...dodge".
In credit, the original sin sits in the initial conditions. The last decade rewarded speed and deployment and scale. It also rewarded a drift away from old-school credit underwriting, helped along by a self-reinforcing relationship between private credit and private equity.
That drift shows up in three places we keep coming back to. Watered down or non-existent covenants that delay intervention until late in the day. Leverage masked by “adjusted EBITDA” that makes companies look more profitable than they are. Documentation that permits value leakage and collateral dilution. Facilities that look senior secured on day one can migrate into holdco risk before the first covenants start to bite.
This is the context for our partnership with DunPort and why we published our Lower Mid-Market White Paper.
When we say “Lower Mid-Market” (LMM), we loan sizes of €/£10m to €/£100m. The point is not company size on its own. The point is the quality of the loan. The structural point matters more than the headline spread. In the LMM, we still expect maintenance covenants, real deleveraging profiles, and structures that force lender conversations early.
The White Paper lays out two pieces of math that frame the opportunity.
First, the default fallacy. We cite S&P/LCD data showing loans under $100m have a roughly three-times lower default rate than loans above $100m. We also cite research indicating leverage is materially more relevant to default risk than borrower size.
Second, the equity cushion. In a typical upper mid-market deal, by the time the leverage covenant finally bites, there may be little equity value left to protect alignment. In the LMM, because leverage is lower and covenants are tighter, there can be meaningful equity value still in the business when the covenant bites. That difference changes behaviour. It brings sponsors and management to the table earlier, while there is still time and optionality.
Structure drives outcomes. Covenants are the early warning system of the credit investor. In the LMM, that system is still intact.
Read the Full White Paper: “Private Credit: A Case for the Lower Middle-Market”
At Vertis we are building the leading financing platform for Europe's lower mid-market. We are doing this across cash-flow lending via our strategic partnership with DunPort as well as asset-backed lending via Vertis Capital Solutions. Next month we will dig into the growing opportunity set we see for downside protected lending opportunities in the European ABF market.
Published by the Investment Team at Vertis.