Cloud 9fin Private Chat — Doing the safety dance in the lower middle market
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Feb 24, 2026 Reed Van Gorden, Head of Origination at Deerpath with ~10 years leading lower middle market deal teams, and Natalie Garcia, Head of Underwriting with a decade running a 15-person underwriting group, discuss the resilience of the lower middle market. They cover sponsor-driven term migration, underwriting discipline and covenants, origination advantages as a lead lender, and sector interest in IT services.
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Holding The Line On Core Protections
- Deerpath maintains covenanted loans with strong information rights, tight baskets, and limits on additional debt and collateral leakage.
- Sponsors sometimes bring grids or larger-market precedents downmarket, which Deerpath pushes back on to protect covenants.
Upmarket Terms Filtering Down
- Sponsors and their larger lenders sometimes push multiple additional debt layers and broader EBITDA add-backs into lower middle market deals.
- Deerpath sees requests for generous adjustments like run-rate adds, growth-hire add-backs, and longer look-forward periods.
Maintain Standards But Allow Tightly Capped Exceptions
- Keep underwriting standards fixed and only allow tightly capped, deal-specific exceptions when necessary to win a transaction.
- Use individual caps inside an overall cap for EBITDA adjustments like run-rate or ramp compensation.