SOFR, WACC, and what private mid-market deals should reprice to — Q2 2026.

01 The rate compression that actually happened

The most important single number for private mid-market deal underwriting in Q2 2026 is the Federal Funds Effective Rate at 3.63% in May 2026, down from a flat 5.33% across Q1 2024 — a 170 basis-point compression. SOFR — the relevant base rate for the vast majority of mid-market unitranche and broadly syndicated paper — has tracked the same path, sitting at 3.64% in April 2026 versus a Q1 2024 average of 5.32%. The first 25 bps cut landed in September 2024; another 75 bps came across Q4 2024; the Fed paused through most of 2025; and a second easing wave of ~70 bps came across Q4 2025 into Q1 2026.

The 10-year Treasury — the discount-stack anchor for cost of equity — has moved less. April 2026 monthly average sits at 4.32%, only modestly off the 4.06% Q1 2024 starting level and well below the 4.63% Q1 2025 peak. The curve has steepened: the SOFR-minus-10Y gap moved from -126 bps in Q1 2024 (deeply inverted) to roughly -70 bps in Q2 2026. That steepening matters because it is what releases the term-premium that supports long-duration valuation work; an inverted curve is structurally hostile to private-equity holding-period IRR math, and the partial un-inversion is one of the cleanest tailwinds underneath the 2026 deal environment.

Credit spreads have moved in the direction the rate path implies, but with less drama. The BofA US High Yield OAS sits at 293 bps in April 2026, against a Q1 2024 average of ~325 bps and a mid-cycle long-run average closer to 400 bps. The BofA US Investment Grade Corporate OAS sits at 82 bps versus 100 bps in Q1 2024. The April 2025 tariff-volatility window saw HY OAS spike to 403 bps for one month before retracing; that episode reset the perception of fragility in the credit market but did not durably widen the index. Net of the rate move and the spread move, the all-in cost for upper-tier mid-market HY paper has compressed roughly 200 bps from Q1 2024 to Q2 2026.

02 What the listed peer cohort tells us about cost of capital

The cleanest way to triangulate where private mid-market WACC should sit is to back out the implied WACC of the listed mid-cap cohort sponsors are benchmarking against, sector by sector. For Q2 2026 I built the cohort from six tickers I have used in prior posts and engagements: YETI (consumer durables), ELF (beauty), RHP (hospitality REIT, useful as a hotel-platform proxy), IDXX (mid-cap healthcare), HAL (energy services) and TXRH (restaurants). Each is sized between $1.5B and $20B equity market cap — large enough to have clean public filings, small enough for the size-premium math to behave like a true mid-market read.

Cost of debt comes straight off SEC EDGAR. Ryman Hospitality reported $211.4M of interest expense in fiscal 2023 against roughly $3.2B average long-term debt — a 7.0-7.5% blended effective rate at the peak. YETI runs ~$3-4M interest on $75-100M average balance — a 4-5% rate, reflecting a clean revolver and minimal term debt. IDXX runs $41.6M on ~$625M LT debt — a 6.6% effective rate, reflecting mostly fixed-rate notes priced before the cut cycle. Halliburton sits around 5% blended on $7.5B of debt. The dispersion across the cohort is exactly what you would expect: investment-grade industrials inside 5%, leveraged hospitality and consumer-durable platforms in the 6-8% band, with the heaviest-debt names exposed to the Q1 2024 peak.

Cost of equity is built using the standard CAPM-plus-size-premium stack. For Q1 2024: risk-free rate 4.16% (10Y UST), equity risk premium 5.50% (Damodaran implied), levered beta 1.10 for the consumer/industrial average, decile-10 size premium 4.84% (Kroll 2024 Cost of Capital Navigator), and a 3.00% specific-company / illiquidity premium for the sub-$500M EV translation. That builds to a cost of equity of 18.05%. For Q2 2026: risk-free rate 4.23%, ERP 5.20% (compressed alongside the rate cut as forward earnings yields tightened), beta unchanged, size premium 4.65% (2025 Navigator update), and a 3.00% specific premium. That builds to 17.60%. The cost of equity has compressed only 45 bps over the same window where short rates moved 170 bps.

Computed at a 30% debt / 70% equity capital structure — the right benchmark for the listed cohort, which carries less leverage than a sponsor LBO — sector-level WACC has compressed 60-75 bps in every name. Ryman moved from 12.1% to 11.3% — the biggest absolute drop, driven by its heavy debt balance and full SOFR exposure. IDXX moved from 11.8% to 11.2% — the smallest, given its mostly fixed-rate paper. YETI, ELF, HAL and TXRH each landed in the middle band. The headline read is straightforward: a 60-75 bps WACC drop is the right number to anchor private mid-market repricing math against.

03 The private mid-market WACC build, peak versus current

The listed-peer compression is the floor. The private mid-market WACC sits 200-400 bps higher than that floor at any point in the cycle, with the gap driven by the layered private credit spread, the size and illiquidity premia, and the higher equity contribution sponsors use to underwrite to LP target returns. The honest question is whether that gap has moved cleanly with the listed cohort or whether private underwriting has held the spread wide.

The Q1 2024 build

For a typical sub-$50M EBITDA sponsor LBO underwritten in Q1 2024, the cost-of-debt stack ran SOFR (5.32%) plus 575 bps of unitranche spread, for an 11.07% pre-tax rate and 8.30% after-tax at a 25% effective tax assumption. Cost of equity ran 4.16% risk-free plus 1.10 × 5.50 ERP plus 4.84% size premium plus 3.00% specific premium, for an 18.05% number. Capital structure of 55% debt / 45% equity — about as far as the lending climate would push — produced a 12.69% WACC. That number was the working anchor for almost every sub-$50M EBITDA process we touched in early 2024, give or take a sector adjustment.

The Q2 2026 build

For the same target underwritten in Q2 2026, the cost-of-debt stack runs SOFR (3.64%) plus 525 bps — the unitranche spread itself has tightened ~50 bps as more private credit capital chases a smaller pool of deals, per Capstone and Lincoln data — for an 8.89% pre-tax rate and 6.67% after-tax. Cost of equity runs 4.23% risk-free plus 1.10 × 5.20 ERP plus 4.65% size premium plus 3.00% specific, for 17.60%. Capital structure has shifted modestly toward equity — 50% debt / 50% equity is a reasonable Q1-Q2 2026 read, reflecting the post-2022 sponsor preference for slightly more equity cushion. That produces an 12.14% WACC.

The headline 55 bps compression is real but understated relative to what the components are telling you. After-tax cost of debt has compressed 163 bps (8.30% → 6.67%). Cost of equity has compressed only 45 bps. The mix shift from 55/45 to 50/50 hands part of the debt-cost windfall back to the more expensive equity tranche. If you hold capital structure constant at 55/45, the WACC compression is roughly 110 bps — closer to the listed-cohort 60-75 bps but still wider because of the larger size and illiquidity premia. The takeaway: the private deal cost of capital has fallen, but only sponsors who can structure higher debt-to-equity — through private credit relationships or genuinely strong EBITDA quality — capture the full move.

04 What WACC compression should mean for deal multiples

WACC compression maps to deal-multiple expansion through standard DCF algebra. For a steady-state cash-flow profile with reinvestment rate of 30% and growth of 3%, the EV/EBITDA multiple scales with (1 − tax rate)(1 − reinvestment rate) / (WACC − g). Plugging the numbers: at a 12.69% WACC, the implied multiple is 0.75 × 0.70 / (0.1269 − 0.03) = 5.42x. At a 12.14% WACC, the same algebra gives 0.75 × 0.70 / (0.1214 − 0.03) = 5.74x. The implied uplift is 0.32 turns of EBITDA from the headline WACC compression alone.

In the 55/45-debt-mix-held-constant scenario where the WACC compression runs ~110 bps, the same math gives 5.42x to 6.06x — about 0.64 turns of uplift. The realistic range for what the rate environment alone should be supporting in repricing is 0.3 to 0.7 turns of EBITDA, depending on whether the sponsor captures the higher debt mix or gives part of it back to equity.

That math lines up with what we are seeing in 2026 process outcomes versus the prior cycle. Capstone's Q1 2026 Middle Market Leveraged Finance Update implies a similar 0.5-1.0 turn rate-driven uplift versus the early-2024 trough; the sister Q2 2026 DTC/CPG post on this site documented the same direction-of-travel inside the consumer-brand cohort. The number to write down for repricing decisions is: 0.3 to 0.7 turns of EBITDA in rate-driven valuation uplift, dispersed across category, leverage capacity, and the strength of EBITDA-quality work the seller brings to the process.

05 Where the gap between repriced and unrepriced sits

The honest read on what has actually moved versus what has not, across the engagements we have advised on in the last six months:

What has repriced cleanly

Unitranche pricing on upper-tier mid-market credits is the cleanest reprice. Spreads have tightened roughly 50 bps and base rates have moved 170 bps, leaving all-in senior cost of debt down ~200 bps from Q1 2024. Sponsor underwriting models I see now build to SOFR + 475-525 for $30M-$75M EBITDA targets with two or three lender relationships at the table — down from SOFR + 550-625 in early 2024. Total leverage capacity has moved from 4.0-4.5x net first lien to 4.5-5.5x. Both moves match the listed-cohort math.

What has half-repriced

Cost of equity is the partial laggard. The risk-free rate move has been mostly absorbed in the models, but the ERP compression (Damodaran implied has dropped ~30 bps over the window) has been slower to flow through to sponsor underwriting. Size premia have moved 19 bps in the 2025 Kroll Navigator update — most underwriting we see is still using the 2024 figures. The illiquidity / specific premium layer is essentially unchanged across most LP letters, which is the right behaviour for a structural input but means part of the ERP-driven Ke compression has not yet shown up in committee memos. Net of the four components, the cost-of-equity used in most active mid-market processes is sitting ~20-30 bps above what the public-market inputs imply.

What has not repriced at all

The equity contribution percentage is the line that has barely moved. Most committee memos still default to 45-50% equity contribution, which made sense in Q1 2024 when lending standards were tight but is partly leaving the debt-cost windfall on the table in Q2 2026. The deals we have seen win in competitive processes over the last two quarters have used aggressive 40-42% equity contribution backed by lender relationships willing to underwrite 5.5-6.0x total leverage. That structural choice — captured higher debt-to-equity at lower spreads — is what converts the listed-cohort 60-75 bps WACC compression into the 100-110 bps private-deal compression that the math otherwise supports.

06 How to use this in underwriting

Three operating moves come out of the Q2 2026 read for anyone underwriting private mid-market deals, sequenced by the question they answer.

1. 01
   For sponsors actively in market: Anchor the WACC build to public-cohort inputs first, then layer the size and illiquidity premia. The 60-75 bps listed-cohort compression is the floor; if your model has not moved at least 50 bps versus your Q1 2024 build, your committee is overstating the discount rate and underpricing the asset. The competitive risk is real — the sponsors who reprice cleanly are winning the competitive processes at the top of the multiple band.
2. 02
   For sellers planning a process: The rate environment supports 0.3-0.7 turns of EBITDA uplift versus the Q1 2024 trough, dispersed across category and EBITDA quality. The pre-process EBITDA-quality work — the QoE-readiness premium covered in the sister post on buy-side QoE for DTC/CPG — captures another 0.5-1.0 turns on top. For most sellers, the combined rate-plus-preparedness uplift is enough to justify pulling a 2027 process forward to 2026 if EBITDA quality is in place.
3. 03
   For buyers who are not sponsors: Strategic and family-office buyers underwriting against a hurdle-rate framework rather than a sponsor IRR target have a meaningfully different read. The 60-75 bps listed-cohort compression is the right anchor for a strategic; the 100-110 bps private-deal compression is the sponsor-specific add-on. Strategics with synergies and below-sponsor cost of capital can outbid sponsors in their highest-strategic-fit categories — the dynamic we covered in the Q2 2026 DTC/CPG read where strategics paid 8.6x median versus sponsor 10.4x. The gap is wider than usual; for the right asset, the strategic premium is structurally available.

The mechanical work to update an underwriting model takes about an afternoon: refresh the FRED inputs, pull the latest Kroll size-premium table, recompute the Damodaran implied ERP at the model date, and re-solve the WACC at both the current and held-constant capital structures. The decision-quality lift from that afternoon — particularly on the equity-contribution lever — is multiples of any single diligence workstream.

07 What we are watching into Q3 2026

Three signals matter into Q3 2026 for the rate-and-WACC framing. First, whether the Fed continues the cut path or settles at the current 3.50-3.75% target range — Capstone's Q1 2026 update flagged the pause-and-reassess stance as the most likely base case, and another 25-50 bps of cuts would push private mid-market WACC down a further 30-50 bps. Second, whether the HY OAS continues the post-tariff retracement back toward 250 bps or widens on the next risk-off episode — credit-spread direction is the second-largest input to the build. Third, whether private credit spreads continue to compress or whether the wave of fund formation that drove the 50 bps tightening flattens — Lincoln, Houlihan and KBRA Direct Lending Index data are the cleanest tells. Each signal moves the implied private WACC by another 30-60 bps; we publish this read quarterly and the Q3 2026 update is scheduled for August 2026.