Q&A with Monroe Capital: How Will Tariffs Impact Private Credit?

In this blog, we have a Q&A with Monroe Capital, a direct lender with a 20-year track record, including experience investing in private credit through the Global Financial Crisis and Covid-19. They focus primarily on senior secured loans to lower middle market companies. Monroe Capital’s Income Plus fund (MCIP) is available on the Heron platform.

Before we get into private credit, how might tariffs impact the broader economy?

The wave of tariffs in early April marked the most significant U.S. trade policy shift in over half a century. The latest calculations suggest that these new measures represent a 22-point¹ increase in the effective U.S. tariff rate, equivalent to a loss of purchasing power of $4,900 per household, on average.² 

The result for markets? 

Recession odds are climbing, markets are reacting, and policy uncertainty is back in the spotlight. Even a 90-day pause in implementing additional tariffs has provided only a brief respite, doing little to quell these concerns.

J.P. Morgan’s models indicate that a sustained 20% tariff regime (with foreign retaliation) would shave roughly 2 percentage points off U.S. GDP and about 1 point off global GDP over the next year. 

Perhaps more importantly, business confidence is at risk. The abrupt policy shift increases uncertainty for corporate planning, which may delay investment and hiring decisions. It is also likely to lead to a slowdown in new M&A.

We are essentially watching a large, non-linear risk factor materialize, one that could act as the catalyst for an economic downturn that was only a 10–25% probability scenario a few months ago.

How do the tariffs impact private credit?

The tariff fallout isn’t just headline risk. A sustained slowdown is expected to compress profit margins, delay M&A activity, and constrain capital availability across the private credit spectrum. 

And while some borrowers—especially those tied to manufacturing or global supply chains—may face margin pressure or input cost shocks, others are less exposed. For example, lower middle market companies have less downside tariff exposure compared to sectors like manufacturing, electronics, and retail.

What makes the lower middle market stronger during tariffs?

In the lower middle market, portfolios are typically U.S.-centric, asset-light business models without direct exposure to extensive global supply chains. Lenders focused on this segment tend to invest in business models that rely less on physical goods and more on people, software, and services. 

The lower middle market is expected to be more resilient to the current environment for the following reasons:

• Minimal import dependence: Borrowers often don’t move goods across borders.
• Domestic revenues: These companies typically serve U.S. customers in U.S. dollars.
• Intangible-heavy operations: Enterprise software, compliance platforms, healthcare services, and B2B services companies don’t rely on global inputs or shipping lanes.

When tariffs are weaponized and global trade frays, the companies least dependent on containers are naturally better insulated. 

How has private credit performed in past market downturns?

Return seeking credit markets have faced two major tests in recent history: the Global Financial Crisis and the COVID-19 pandemic. 

In both cases, private credit—particularly senior secured, middle market lending—demonstrated real resilience:

• During the GFC, the S&P 500 declined ~57% and high-yield bonds fell ~30%. Direct lending strategies saw drawdowns of just 5-8% on average, with faster recoveries and materially lower volatility.
• In 2020, equity markets plunged over 30% in weeks. Yet, private credit portfolios generally fell less than 5% and were fully recovered within months.

This resilience stems from several enduring features of private credit: 

• Senior secured positioning
• Contractual income streams
• Lower debt/EBITDA leverage ratio at borrower level
• Illiquidity premiums that are only earned if you’re not forced to sell in a panic

Having managed through past downturns, how does Monroe Capital approach the current market?

There are three areas of focus that allow our firm to navigate risks and opportunities of the current volatile market:

1. Direct Portfolio Outreach – Benefitting from our position as the sole or lead lender for the vast majority of our portfolio, we are in direct dialogue with the management teams and owners of our portfolio companies. We aim to identify potential challenges and work collaboratively on solutions. While a lot can and will change in terms of the policy specifics, identifying exposure early can ensure that the right mitigation efforts are being pursued allowing us to get in front of any potential underperformance, liquidity challenges, or covenant breaches.
2. Uncertainty Creates Opportunity – While the uncertain macro environment can have a dampening effect on new M&A, the breadth and depth of the U.S. lower middle market provides ample investment opportunities in any market cycle. In 2020, despite the volatility and uncertainty stemming from the COVID-19 pandemic, U.S. private equity firms still acquired over 6,000 lower middle market companies, investing over $300 billion. Managers with the dry powder and underwriting and structuring discipline can often benefit from higher spreads, lower leverage, and strong downside protections in periods when peers are forced to shift their investment professional resources towards portfolio monitoring and workouts.
3. Credit First, Zero Loss – As one of the few direct lenders with a 20-year track record, including experience investing in private credit through the Great Financial Crisis, we know firsthand that first lien lenders cannot and should not make investments predicated on a particular economic outlook. There are many high-quality companies that can generate steady cash flow and support modest leverage through an economic cycle. While these deals may not offer the largest spreads available in the market, avoiding losses and getting paid back in full remains the key driver of manager differentiation.

Sources: 

¹ Fitch Ratings, Olu Sonola, Head of U.S. Economic Research

² The Yale Budget Lab

Disclosure:

The views expressed in this Q&A blog do not necessarily reflect those of Heron, its affiliates, or representatives. Heron does not endorse or guarantee the accuracy or reliability of any statements made.

This content is for informational purposes only and should not be considered financial, investment, or legal advice. Readers should conduct their own research and consult a financial advisor before making any investment decisions. Heron is not liable for any losses or damages resulting from reliance on this information.