Grays Peak $500M GovCon Fund Signals ABL Shift

Grays Peak Capital, a New York-based global investment firm, has launched its second private credit fund, Grays Peak Private Credit II (GPPC GovCon), with a target size of $500 million.

This fund is specifically designed to provide strategic capital for government and defense-related companies and aims to address mission-critical lending needs in North America. The fund has already secured commitments from investors who participated in Fund I, as well as multiple strategic asset manager groups.

Fund Strategy and Focus

GPPC Fund II will focus on short-duration, senior secured lending to government contractors and other high-quality, mission-critical counterparties. The lending approach will emphasize strong collateral coverage and leverage Grays Peak's proprietary data science and AI-driven analytics platform for underwriting, risk management, and real-time monitoring across its portfolio.

Target Market and Impact

The fund plans to deploy up to $500 million annually into government and military middle-market companies, joint ventures, and value-add opportunities. Its structure is designed to provide current income with quarterly distributions and enhanced liquidity options for investors. Grays Peak has experience in this sector, having completed around 40 credit investments and deployed over $250 million in government programs and contracts to date, returning over $50 million to investors in the last year.

Statement from Grays Peak

Founder and CEO Scott Stevens stated that the fund's strategy is positioned to solve working capital needs for high-quality government contractors, with a focus on robust risk management and highly differentiated private credit solutions for investors.

This launch reflects continued investor interest in alternative, credit-based investments tied to government and defense sectors, leveraging technology for rigorous underwriting and portfolio management.

<sub>Sources:
- Unanet: 2025 GovCon outlook: Recap of 2024 and trends to expect
- Procurement Sciences: The Top 10 GovCon Solutions Available in 2025
- Baker Tilly: Transformative ways AI is helping government contractors
- PR Newswire: Grays Peak Capital Launches $500 Million Private Credit Fund II Expanding Government and Defense Mission Critical Lending</sub>

What this fund launch tells us about the alternative lending market?

The launch of Grays Peak Capital’s $500 million GovCon private credit fund is amplifying competition and capital flows in alternative lending, especially for business lenders focused on working capital and collateral-backed deals.

Institutional money is targeting government contracting (“GovCon”), signaling that this vertical now offers attractive returns with manageable risk—making it competitive.

Intensifying Competition

• The influx of large funds translates to more lenders pursuing government contractors, including ABL shops and factoring companies even if GovCon isn’t their main area.

• Major players like Grays Peak deploying half a billion annually means smaller lenders will increasingly compete with institutional underwriting and potentially lower-cost capital.

• Increased federal spending benefited fewer recipients in 2024, and competition continues to rise, with consolidation and bigger funds outmuscling independents for prime deals.

Sectors Attracting Institutional Capital

• Defense, infrastructure modernization, disaster relief, and digital transformation are attracting the most institutional capital, especially as government spending prioritizes cybersecurity, AI-enabled products, and supply chain resiliency.

• Small business set-asides remain robust, but middle market and prime contractors are the main targets for large capital allocations.

Lender Positioning and Technology Uptake

• Lenders are integrating AI and data science not just for efficiency but to gain competitive underwriting edge, automate compliance checks, and rapidly validate deals.

• Cutting-edge platforms now use AI-powered risk evaluation, real-time monitoring, and automated document analysis for faster decision-making, predicting win probability and flagging risk—raising underwriting standards.

• Adoption of such technology is leveling the playing field for smaller firms; even limited AI-powered compliance and proposal tools can improve competitiveness against institutional systems.

Saturation, Pricing, and Competitive Strategy

• Government contractors are seeing increasing offers—raising some concerns about oversaturation and potential downward pressure on pricing or spreads for working capital products.

• To compete, smaller lenders can:

  • Focus on speed, flexibility, and personal relationships, which large funds sometimes sacrifice for scale.

  • Specialize in underserved niches (small business set-asides, specialty certifications, rapid bridge funding).

  • Leverage nimble AI or best-of-breed third-party GovCon tech tools for targeted opportunity identification and smarter proposal management.

• The expanding role of technology and sophisticated platforms means underwriting must keep pace, and competitive edges are now built on both data leverage and deep government contract expertise.

The bottom line: institutional capital is flooding GovCon lending, driving pricing competition and requiring smaller lenders to adapt or specialize, with technology—especially AI—now essential to keep up in speed, risk management, and targeting the right opportunities.

1-Minute Video: AI Adoption Path for Alternative Lenders Insights

AI in alternative lending isn't about replacing underwriters

it's about unleashing them from data entry prison so they can do what they do best: make smart credit decisions and build merchant relationships. The lenders who figure this out first will dominate the next 3-5 years

Suggested AI Adoption Path for Alternative Lenders:

Phase 1: Low-Hanging Fruit

- Implement document OCR and auto-classification
- Deploy AI for bank statement analysis
- Automate routine payment reminders

Phase 2: Human-AI Collaboration

- AI pre-populates credit models; humans review and approve
- AI handles tier-1 merchant questions; humans handle tier-2+
- AI flags high-risk accounts; humans design workout strategies

Phase 3: Advanced Intelligence

- Predictive default models guide proactive interventions
- AI-optimized pricing based on real-time risk assessment
- Automated portfolio stress testing and capital forecasting

Critical Success Factor: At every phase, the human remains the decision-maker. AI provides speed and scale; humans provide judgment, empathy, and accountability.

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