Insight Broadening the opportunity set in upper middle market

For investors already allocating to private credit, the question is not simply whether to add exposure, but how to access a broader opportunity set within existing portfolios. European upper middle market companies, businesses with €50 million or more in EBITDA,¹ can obtain financing through both directly originated and broadly syndicated loans. As borrowers move between these markets, strategies restricted to one access point may miss opportunities available through the other.

This white paper, “The case for the European upper middle market”, examines the rationale for combining both markets within a borrower-focused approach to senior secured floating-rate credit.

Why the upper middle market matters

European upper middle market companies typically have established business models, substantial operating scale and more resilient cash flows than smaller borrowers. Invesco views these characteristics as important considerations when assessing debt-servicing capacity and downside risk.

However, company size is only one aspect of credit quality. Assessing an investment requires detailed analysis of the borrower’s business, sector, cash flows, leverage and loan documentation. Senior secured status provides a priority position in the capital structure, but does not guarantee repayment or prevent losses.

Two access points, one credit opportunity

Direct lending and broadly syndicated loans provide different routes to financing many of the same European upper middle market businesses. Rather than viewing them as entirely separate opportunities, Invesco assesses both through a common credit lens: the borrower’s ability to service senior secured floating-rate debt.

The two markets offer complementary characteristics:

• Direct lending: Directly negotiated loans may offer a spread premium in exchange for limited liquidity. The white paper identifies a potential premium of 100–300 basis points relative to syndicated loans, depending on market conditions.
• Broadly syndicated loans: Bank-arranged loans offer access to a broader secondary market, providing additional routes for deployment and portfolio management. Liquidity remains dependent on market conditions.

Combining both formats can give a manager greater flexibility to assess relative value and allocate capital as financing conditions change. It does not ensure full deployment, higher returns or liquidity in all environments.

Following borrowers across changing markets

The distinction between direct lending and syndicated loan markets has become less clear as direct lenders have financed increasingly large companies. Upper middle market borrowers now assess both options according to pricing, execution certainty, flexibility and their financing needs.

The white paper highlights how these preferences can shift. In 2022, weaker syndicated loan issuance and wider spreads coincided with increased direct lending activity. In 2024, stronger syndicated issuance and tighter spreads encouraged many borrowers to return to syndicated markets.

For investors, this supports evaluating the opportunity at the borrower level rather than solely by origination channel. Access to both markets can help a strategy remain responsive as deal flow and relative value change.

Implications for institutional portfolios

A combined approach to European upper middle market lending may complement existing credit allocations in several ways:

• Complementary income sources: Direct lending’s potential spread premium can sit alongside income from syndicated loans. Both involve credit risk, and the premium available varies with market conditions.
• Broader exposure: Lending across European companies, sectors and both financing formats may broaden an allocation concentrated in a single geography or lending channel. Diversification does not guarantee returns or protect against losses.
• Deployment and liquidity management: Access to primary and secondary syndicated markets can complement directly originated assets. Underlying loan liquidity should not be confused with an investor’s ability to redeem from a fund.

Floating-rate structures are also relevant when assessing the role of loans alongside fixed-rate credit. Their income adjusts with reference rates, meaning income can decline when rates fall, but the floating-rate nature protects against traditional duration risk when rates rise. The portfolio case therefore rests on credit selection, relative value and the structure of the investment not on an assumption of stable income or guaranteed downside protection.

Sourcing and underwriting remain central

The ability to invest across both markets must be supported by disciplined sourcing and due diligence. Invesco’s approach draws on long-standing relationships with private equity sponsors and European banks, alongside sector expertise and credit research.

Invesco’s European business has lent to these borrowers for approximately 20 years and deployed more than €24 billion into European upper middle market companies since 2018. Familiarity with borrowers across direct and syndicated financing provides a foundation for assessing creditworthiness and comparing opportunities across both markets.

For investors, the relevant consideration is how these capabilities translate into investment selection, ongoing credit monitoring and portfolio management.

Explore the full analysis

Read “The case for the European upper middle market” for Invesco’s perspective on borrower dynamics, the rationale for combining direct lending and syndicated loans, and the importance of sourcing and underwriting.

Related products/strategies

• Invesco European Upper Middle Market Income Fund Z-Acc Shares | Invesco UK
• Private Credit | Invesco UK