Len Tannenbaum, the man who built Fifth Street Asset Management into a $5B behemoth before selling it to Oaktree, is getting back in the game. The founder of Tannenbaum Capital Group is planning a new business development company alongside his son Adam, targeting the sprawling $1.8 trillion private credit market at a moment when cracks are starting to show.

The timing is not accidental. Spreads are widening, leverage is climbing, and an increasingly popular loan structure called payment-in-kind, or PIK, is raising eyebrows across the industry.

A family affair in a stressed market

The new BDC will focus on lower-middle-market companies, specifically businesses generating between $5 million and $25 million in EBITDA. That’s the financial sweet spot where companies are big enough to need serious capital but small enough that the mega-funds often overlook them.

The specific fund size, launch timeline, and structural details haven’t been disclosed. But Tannenbaum’s track record gives some indication of scale. He previously grew Fifth Street Asset Management to roughly $5 billion in assets under management before Oaktree Capital acquired it in 2017. His current vehicle, Tannenbaum Capital Group, manages around $1 billion.

That billion dollars isn’t sitting idle, either. TCG has committed nearly $1 billion to real estate lending through its publicly traded entity, Sunrise Realty Trust, which trades on NASDAQ under the ticker SUNS. That capital deployment has occurred since early 2024.

The PIK problem

The market has ballooned to approximately $1.8 trillion, and with that growth has come a set of practices that would make a traditional banker nervous.

Chief among Tannenbaum’s concerns is the proliferation of PIK loans. These are loans where the borrower doesn’t actually pay cash interest. Instead, the interest gets added to the principal balance. Tannenbaum has estimated that PIK loans may now represent 12-15% of the entire private credit market. That figure is higher than some other industry assessments.

When borrowers defer cash interest payments, the lender’s portfolio looks healthy on paper because income is still being booked. But the actual cash isn’t flowing in. If the borrower eventually can’t repay the now-larger principal, the lender is left holding a bigger loss than they would have faced with a traditional loan that defaulted earlier.

Why lower-middle-market lending matters now

The lower-middle-market segment that Tannenbaum is targeting has historically been one of the more resilient corners of private credit. Deals tend to be smaller, relationships matter more, and lenders typically have greater influence over loan covenants and terms.

Tannenbaum’s bet is essentially that the lower-middle-market offers better risk-adjusted returns precisely because it’s less crowded. The due diligence is harder, the deals require more hands-on work, and the check sizes don’t move the needle for a fund managing $50 billion.

If PIK loans genuinely represent 12-15% of the market, a meaningful portion of reported returns across the industry may be overstating the actual cash generation of portfolios. That matters for anyone invested in BDCs, private credit ETFs, or interval funds that have flooded the retail market in recent years.