Across market cycles, structured credit strategies that uniquely offer a hybrid of both debt and equity illustrate how full balance sheet solutions can offer the best of both worlds for lower middle-market portfolio companies and investors alike. Over the past decade, this has led to the growing appeal of structured credit solutions vis-à-vis other private markets strategies, which have seen their share of market disruptions.

In an increasingly competitive private credit market, and amid today’s complex lending environment, experienced lenders can different themselves by embracing a more active role with businesses—one that supports growth, value creation, and an eventual exit. 

Redefining the Traditional Lender Role

Traditionally, private credit providers rely on private equity sponsors for deal flow. Developing a trusting relationship with the sponsor is a large component of underwriting—the assumption being that the sponsor knows how to create value and, ultimately, how the loan will get repaid. In this setup, the sponsor is driving the bus, and lenders are comfortable taking a back seat.

Most lenders tend to be uncomfortable in non-sponsored transactions, which lack an institutional owner to provide a backstop, create a value creation strategy, and execute it. Being hands-on is difficult for most lenders, which is why many steer clear of non-sponsored deals altogether.

When lenders engage more actively, however, their role can look very different.

In these situations, structured capital investors serve both as the lender and, in effect, the equity sponsor. They work closely with management to provide strategic direction, financial discipline, and hands-on support, helping stabilize the business, drive performance, and protect downside risk.

What ultimately differentiates structured capital is that the engagement is not purely defensive. In addition to protecting the downside, structured capital almost always participates in the upside alongside management, aligning incentives around long-term value creation and reinforcing a true partnership—not just a relationship between creditor and borrower.

When private credit firms take this more active position, they can support acquisitions, help build out management teams, and implement governance and reporting best practices. These are often the foundational elements required to help a company scale and professionalize. 

A Shifting View of the Lender

In VSS Capital Partners’ experience, when founder-led and entrepreneurial businesses experience a structured capital provider with a more engaged model than a traditional lender, it tends to create a meaningful shift in expectations.

Strategic development is a part of the conversation from the very beginning of our engagement with portfolio companies. We spend time aligning on a shared strategic plan at the outset, so everyone understands the long-term objectives and how we plan to achieve them together.

Given that we often provide both debt and equity, and are frequently the sole institutional capital provider, we can take a holistic view of the business. This allows us to be flexible when circumstances change. While traditional lenders tend to focus narrowly on protecting their position, sometimes at the expense of long-term value creation, our structure allows us to prioritize the health of the business as a whole.

It is possible that aspects of the active lender model may become more mainstream in coming years, and we are seeing more structured capital providers enter the market, though relatively few focus on the lower-middle market. The fact is, most lenders are not equipped to operate this way. Their training, capital base, and risk frameworks prioritize capital preservation and seniority, not operational involvement.

For VSS, however, active partnership is core to our DNA.

While private equity sponsors have traditionally been involved in private credit transactions, VSS self-selects non-sponsored, founder-led businesses and entrepreneurial management teams that are looking for an engaged capital partner to help drive a larger outcome.  We typically take a minority ownership approach, allowing the founder to continue driving the bus.

Using our experience across both equity and structured capital (we’ve helped build more than 100 portfolio companies and supported 600 add-on acquisitions), we bring practical pattern recognition to management teams to help accelerate growth and avoid common pitfalls that may erode value.

By deliberately taking an active approach to the relationship, we can support building a stronger, more scalable business. Whether that means add-on acquisitions, business model changes, new market expansion, or new product and service development, as active lenders we can set the business up to become an attractive target for strategic or financial buyers five-to-seven years down the road.

In today’s market, “uncertainty” remains the defining risk. The global environment has become increasingly non-linear, with unexpected disruptions occurring more frequently. In that context, flexible capital and close alignment with management teams can provide a meaningful advantage for both investors and entrepreneurs alike.

David Fann is a partner at VSS Capital Partners. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.

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