A new credit revolution is taking shape in the middle market-deal business against the backdrop of global economic uncertainty, lack of traditional bank debt and equity market volatility. Today's unpredictable lending environment has created a new borrowing option for Main Street and private equity sponsors to consummate acquisitions and fulfill corporate growth plans despite the shadows cast by Europe's economic crisis.

New macroeconomic volatility, coupled with the retraction in U.S. bank lending, has tilted the odds in favor of the oft-ignored middle market as investor sentiment toward sponsoring megabillion-dollar buyouts has waned. Even large-cap private equity players are looking anew at investing in small to midsized companies alongside their middle-market brethren.

Financial sponsors know that while European Union countries wrestle with avoiding default, U.S. companies in the middle market and lower middle market will continue percolating.

Moreover, small and midsized businesses compose the majority of America's corporate landscape, from Los Angeles to New York. These companies are increasingly drawing greater attention from PE investment firms for several reasons: Investing in small to midsized companies requires less capital than large leveraged buyouts and provides greater flexibility when it comes time to exit an investment, and these deals aren't dependent on the high-yield market or the health of overall financial markets.

Simultaneous with the renewed interest in the middle market has been the falloff in credit supply from banks. It's hardly a secret among deal professionals that lenders are not aggressively pursuing making new loans for leveraged acquisitions (that is, lending at multiples of a company's cash flow), especially involving middle- to lower-middle-market-sized companies, or those that generate less than $50 million in Ebitda. Despite the dwindling supply of bank financing, a more user-friendly credit option has come into vogue in 2011 and helped private equity sponsors to execute new deals or deleverage balance sheets of portfolio companies.

Indeed, the lack of senior term debt supplied by banks has created the way for flexible credit structures to emerge. One-stop blended debt -- a combination of senior and mezzanine debt supplied by one lender -- is the newly attractive alternative. Known in credit market parlance as "unitranche debt," blended debt offers more favorable attributes for borrowers than the senior loans and subordinated debt supplied by multiple separate lenders in traditional buyouts.

Unitranche debt financing lets middle-market and lower-middle-market companies sidestep costly bank and subordinated debt for an innovative debt facility composed of a single blended interest rate that provides lower principal amortization and cash interest requirements while generating more free cash flow for portfolio companies to grow.

With access to one-stop financing, borrowers and private equity sponsors also do not need to worry about managing intercreditor issues since only one provider of capital with one set of covenants is in the picture. Blended debt also enables financial buyers to close transactions with greater certainty and more quickly since they don't have to negotiate with multiple banks and sub debt/mezzanine providers.

The emergence of unitranche financing comes at a time when the PE industry is well situated to execute new transactions. The current overhang of uninvested private equity fund capital or dry powder totals more than $400 billion. Because of current fund structures, this capital will need to be deployed soon if these firms want to take full advantage of realizing fees and carried interest before their fund terms expire. That need, in turn, has helped lead to an uptick in dealmaking this year.

We believe that unitranche will make up the vast majority of our new business in 2012 for the reasons previously mentioned and because lending terms are more appealing and attractively priced when compared with traditional multilender financing options. Maturing loans and term debt of private equity-owned companies will also need to be refinanced over the next several years.

PE investors will need to look beyond traditional financing to support their deals. The good news is that unitranche debt -- an attractive alternative delivering long-term profitability and tax advantages to borrowers -- is available for private equity transactions. The same can't be said about bank debt.

Ted L. Koenig is president and CEO of Monroe Capital LLC.