Leveraged buyouts were once a precision tool, effective when used selectively and with discipline. Today, leverage has become a default setting.

Not to over indulge in contrastive negatives, but debt isn’t just part of the strategy, in many cases, it is the strategy. If more investors get experience not using leverage, the cloak of normalization can be lifted before it’s too late. Wait too long, the wake up may be harsh.

Where are troubles emerging? While not the same as leverage for buyouts, the way private credit has moved from the margins to the center of dealmaking is connected. By most industry accounts and publicly available data, private credit now funds a significant share of leveraged buyouts, particularly in the middle market. What was once an alternative to banks has become a core source of financing for sponsor‑led transactions.

I’m not a private credit specialist (though I can introduce you to my nephew who is), and I won’t pretend to be one. We do, however, do a lot of work across industries, and with differing investment management firm strategies. So this is what we’ve seen. And I’d argue you don’t need to model loan structures to notice the broader implications. When the same ecosystem increasingly supplies both equity and debt, risk becomes more concentrated, even if it’s not immediately visible.

That arrangement can work for a long time. Until it doesn’t.

Boom and then...

If critics are right and today’s private credit boom eventually runs into stress, the answer won’t come from inventing new structures that try to make expensive capital feel cheap again. It will come from rediscovering something far more durable, value creation that doesn’t rely on leverage doing most of the work.

And this isn’t an argument against leverage itself. Used thoughtfully, leverage lowers the cost of capital, enables acquisitions, and can accelerate growth. But the industry has drifted to a point where leverage often functions less as a tool and more as an assumption. And when assumptions change—as they inevitably do, systems built on them are tested.

Private equity investors are beginning to confront an uncomfortable question, how much of the past decade’s performance reflected genuine operational improvement, and how much was driven by financial structures made possible by years of abundant, inexpensive capital?

As interest rates have reset, that question has become harder to avoid. Dealmakers and lenders alike have noted tighter interest coverage, more challenging refinancings, and less flexibility in capital structures that once appeared resilient. Returns that felt routine in a low‑rate environment are proving harder to reproduce.

A capital‑allocation story

Debt‑heavy private capital didn’t emerge in isolation. It evolved alongside incentives that emphasized scale, speed, and near‑term outcomes. When leverage amplified success, it looked like innovation. When it amplifies vulnerability, it reveals how dependent many outcomes were on structure rather than substance.

That’s why private capital without leverage can seem unconventional today, even though it’s not new.

Buying and holding companies with little or no debt forces investors to return to fundamentals, customers, cash flow, and long‑term growth. Without leverage doing the heavy lifting, performance has to come from the business itself. Financial engineering can’t substitute for execution.

In an unlevered model, returns are driven largely by profits. The pressure to mark assets up aggressively or rush toward exits diminishes. Companies are sold when it makes strategic sense, not because covenants, refinancing calendars, or fund timelines demand it. Investors can afford patience because cash isn’t diverted to servicing debt.

Sales still happen. But they happen for reasons rooted in the business, when scale, complexity, or market position suggests a different owner, not because leverage forces the decision.

It’s often said that debt enforces discipline. There’s truth in that. Lenders impose scrutiny, and underwriting can provide an external check. But discipline doesn’t have to come exclusively from leverage. It can come from alignment between investors and operators.

Unlevered investors have to be explicit about how value will be created. When that exercise is taken seriously, it becomes clear that some deals are not just compatible with an unlevered approach, they’re better suited to it. Those opportunities often sit outside the traditional leveraged buyout mold.

Boring businesses

Small and medium‑sized businesses are a good example. By government and industry estimates, they make up nearly all U.S. companies, employ roughly half the private sector workforce, and account for a substantial share of economic output. Many are founder or family‑owned, profitable, and deeply connected to their communities. Maybe the margins are thin, but they’re also constant and so thin, that others don’t see a point in crowding in.

Traditional leveraged buyout models frequently struggle to accommodate them. Growth takes time. Owners don’t want their legacy dismantled or their culture traded for short‑term margin expansion. Many want to remain involved, keep building, and preserve what they’ve created.

Are they looking for an exit strategy? Not quite. What they’re looking for is a partner.

That’s where patient, unlevered private capital can be most effective. When founders and families retain meaningful ownership and the balance sheet isn’t burdened by debt, incentives align quickly. The focus shifts from managing leverage to strengthening operations, investing in people, systems, and products that support sustainable growth.

Risk doesn’t disappear. That’s investing. But it’s a different kind of risk, transparent, operational, and tied to real economic outcomes rather than interest‑rate paths or refinancing assumptions.

The payoff looks different too. Instead of returns dominated by multiple expansion and leverage, gains come from businesses that generate durable earnings and are genuinely stronger when capital eventually rotates.

As markets adapt to a higher cost of capital, investors face a choice. They can keep searching for ways to recreate the conditions of the past decade, new instruments, new structures, and new forms of leverage. Or they can step back and ask a simpler question, are returns coming from the business, or from the balance sheet?

The private credit boom may not end in crisis. But it should mark a moment of reflection. The next chapter of private capital doesn’t need to reject leverage entirely, it just needs to stop relying on it as the primary engine of returns.

That idea shouldn’t sound radical.

The most resilient returns have always come from building better businesses, not from borrowing more against them.