Borrowers keep pricing power while sponsors wait out the valuation gap

Middle-market private credit enters the fall with an unusual split. Borrowers expect to push prices higher. Sponsors are ready to buy, but not on today's valuations. That division runs through Insurance AUM Journal's Mid-Year 2026 Credit Market Outlook Survey, the fifth edition of its twice-a-year read on U.S. middle-market borrowers and private equity sponsors, compiled with Antares' market coverage.

Borrowers expect revenue growth in 2026 and an even stronger result from EBITDA and margin expansion. Sales volume remains their most-cited challenge, but pricing power is holding: more respondents are raising prices, and fewer of them call pricing a top challenge. The direction matters to insurers because middle-market loans repriced in the higher-rate cycle. Retained pricing power is what protects coupons if base rates fall.

Artificial intelligence has reached the operating agenda without becoming a headcount story. Most borrowers point to cost reduction as AI's clearest payoff, and their hiring plans agree. Roughly 55% expect headcount to rise. Another 36% expect it to stay flat. The report frames AI as an underwriting question. "Geopolitical risk and oil price volatility remain important macro considerations," the survey states. "AI is different, creating greater dispersion between winners and losers and placing an even greater premium on disciplined underwriting of borrowers with durable value propositions and sustainable pricing power."

Geopolitical risk has returned to the top two borrower challenges after slipping at the prior reading. Expanding market share, consumer confidence, and tariffs or supply-chain worries each drew a third of respondents.

Sponsors are close to a deal, just not to a price. Acquisition appetite is high, and sell-side appetite has improved meaningfully. The valuation gap between buyers and sellers, plus a thin supply of quality deals, continues to hold activity back. The disparity has kept completed sponsor deals scarce, and the survey responses do not suggest a near-term change. Exit activity remains muted. Limited-partner pressure to return capital has eased only modestly. The report notes "an encouraging pickup in our new deal screening activity of late." That kind of pipeline tends to become closings once sellers move.

Sector preferences put industrials at the clear top, spanning engineering, TICC, fire/life/safety, environmental, aerospace and defense, and infrastructure. Healthcare ranks second, and financial services is gaining momentum.

Sponsors are increasingly leading AI implementation inside their portfolio companies, and they rank AI disruption as the second-biggest risk. Geopolitical risk is back at number one, cited by half of sponsor respondents. For a lender, that is a reminder to check concentration and covenant headroom. Sentiment on the macro outlook is more dispersed than at year-end, though generally positive. Half expect modest to strong U.S. growth of 2-3% or better.

For insurers putting general-account money into middle-market private credit, those two sides make a useful tension. The borrower side supports the case for floating-rate coupons: earnings growth, pricing power, and AI-driven cost savings all underwrite well. The sponsor side suggests new originations may stay thinner than appetite implies, at least until sellers concede on value. New deal screening is the leading indicator; today's underwriting volume tends to become tomorrow's closings.

There is a fund-level consequence as well. Insurers that reach middle-market credit through private credit funds face a sponsor world where pressure for distributions has eased only slightly. Exits remain muted, so capital stays locked in older vintages. New fund commitments will be judged partly by a manager's ability to keep the book turning in a market that is not closing fast.

The report's warning is the sentence about dispersion. AI is doing two things at once in the middle market: cutting costs for borrowers that use it well, and threatening the business models of those that do not. The same technology that cuts a borrower's costs can also be the disruptor that takes its share. Insurers underwriting sponsor-backed loans need to know which side of that divide a portfolio company sits on before the term sheet is signed.

This is not a forecast. It is a snapshot of a market where borrowers feel strong, sponsors feel stuck, and AI has made underwriting more selective. For an insurance credit desk, the report's own language supplies the working test: durable value propositions. The rest is negotiation.