Private Credit: In Middle Market Direct Lending, Cash Is King

Across the more than 2,400 unique global middle market sponsor-backed borrowers assessed for the last 12 months (LTM) ended March 31, 2026, KBRA notes that the median EBITDA of the population increased at a 27% compound annual growth rate (CAGR) over the last two years, while the median cash flow from operations (CFO) only increased 8%. Over the same period, median CFO-to-EBITDA conversion decreased to 21% from 33%.¹ We believe the divergence in these growth rates is the central portfolio signal in this dataset.

The portfolio data points to three related conclusions. First, earnings growth is no longer translating into proportional liquidity for many companies. Second, after meeting interest obligations, many borrowers have limited internally generated cash available for capex, deleveraging, or liquidity rebuilding, even where EBITDA-based metrics still appear adequate. Third, weak cash generation is heavily represented in stressed and defaulting…