What is Middle Market Private Equity?

By: Allvue Team

March 12, 2024

Investing in mid-sized companies is a lucrative endeavor—these companies are often poised to scale quickly, driven by innovation and strong leadership. For instance, more tech companies are emerging than one can count, and they all provide robust, disruptive solutions to pressing industry challenges.

Outside its fast growth, the middle market has remained resilient during economic adversity, with annual revenue growth reported at 12% in 2022. A combination of these factors makes middle-market private equity attractive to investors.

So, what is middle market private equity, and how does it work?

Defining middle market private equity

Middle market private equity refers to a segment of the market with companies whose revenues range anywhere from $10 million to $1 billion. The middle market takes up a fair share of the economy, with around 200,000 mid-market companies registered in the United States. 

Many mid-market companies rely on private equity investments to grow their assets and increase their value in the long term. For private equity investors, the middle market is attractive because it’s neither too large nor too small, enabling these companies to be flexible during periods of growth or uncertainty.

Furthermore, the middle market is fragmented, with an incredible diversity of companies offering a variety of products and services poised for rapid growth aligned with the market’s evolution. The majority of mid-market companies are nimble enough to pivot their operational strategies to profitable opportunities, using technology to drive sustainable growth.

Segments within the middle market

In the United States, the middle market can be categorized into three sub-markets:

  • Lower middle market (LMM) – Deal sizes in the LMM range from $25 to $100 million, with the greatest growth potential. Companies in the LMM rely the most on private equity capital and expertise to scale.
  • Core middle market (CMM) – Deal sizes in the CMM range from $100 to 500 million. Most CMM companies are at inflection points in their expansion, with an increased focus on long-term value creation.
  • Upper middle market (UMM) – Deal sizes in the UMM range from $500 to $1 billion. These companies tend to have heavy capital structures with limited growth opportunities and rely less on private equity because of diversification in various sectors of the economy.

The private equity investment process

Broadly speaking, the private equity investment process involves:

Deal sourcing and due diligence

The first and likely most important part of a private equity deal is finding the right opportunities to invest in. The specifics of deal sourcing will vary depending on investor preference and risk appetite. It can take a significant time investment for private equity investors to find lucrative companies whose assets are likely to grow quickly and multiply in value. 

Deal sourcing also involves a lot of relationship building with other investors and experts to determine if potential opportunities are worth investing in. For instance, a company’s balance sheet might look good but the company may still operate with various inefficiencies. Gathering all this information ahead of investing protects the private equity firm and its investors from surprises midway into the investment process.

Conducting due diligence also reduces the risk of investing in certain companies, especially those that may appear financially distressed. Thorough due diligence is of the utmost importance when investing in private companies because they aren’t legally required to disclose as much information about their operations as their publicly traded and listed counterparts.


If a potential investment opportunity pans out, a private equity firm must conduct a valuation analysis to determine the total value of the deal at hand. Whereas valuing public companies is as easy as computing the product of the stock price and existing shares, private company valuations are more complex.

Private companies are not required to publicly report their financials, meaning investors must dig deeper into publicly available information to obtain these details. Using comparable company analysis (CCA), private equity firms can research companies within similar industries as those in which they have sourced deals. Analyzing the comparable market share across several companies can provide a sense of the private company’s valuation.

Deal structuring

Upon determining that a private equity investment makes sense, fund managers can then structure the deal to include terms such as:

  • The purchase price of the asset or company
  • How many shares are being sold to the firm
  • The closing date of the deal
  • Asset ownership and transfers

Pending agreement to these terms from both the investing party and the company receiving capital investments, the deal is on its path to finalization.

Benefits of investing in middle market PE

There are several advantages to middle-market private equity investments:

High potential for returns 

Most mid-market companies are agile and innovative, creating vast opportunities for growth and expansion. With the right expertise and strategies, private equity investors can scale companies in the lower middle market and sell them off when their value has reached the upper middle market range. 

Since mid-market companies tend to perform well even in market downturns, investors are more likely to achieve higher returns than expected. For instance, middle market deals only dropped by 19% in 2022 compared to large cap deals, which dropped as low as 40% by volume. 

And investing in several high-performing companies within a fast-growing segment of the middle market, private equity firms can also compound their long-term returns.

Portfolio diversification

With a higher momentum on smaller mid-market private equity deals, it’s much easier for private equity fund managers to diversify the portfolio of companies in which they invest their capital. Smaller deals translate into lower capital requirements, which enables funds to distribute their capital across multiple promising ventures to scale them for fast growth and expansion into the upper middle market. 

Diversifying a private equity portfolio also spreads the risk across investments, which protects an investor’s capital from significant losses. Leveraging strategies like co-investment can also provide additional external capital to further lower the risk of losses incurred when investing in several mid-market companies.

Active management

Companies acquired in the lower and core middle-market segments are easier to actively manage following a private equity deal, opening possibilities for firms to add value to their assets. Coming into these deals with the right expertise can quickly boost the value of a mid-size company with disruptive products or services, allowing it to compete favorably in the market. 

The added benefit of active management is that private equity investors can use their expertise in market growth strategies to scale the companies in which they invest private capital. It’s much easier to pivot during times of uncertainty since the fund managers are directly involved in the hands-on strategic management of the mid-market companies.

Successful investment strategies

So, how can private equity firms excel when investing in the middle market?

Buy small, sell large

Smaller-sized deals in the middle market are not only lucrative because these companies are agile, nimble, and innovative. Private equity firms can buy these companies and create so much value to drive their growth to the upper middle market, eventually exiting when the companies are well-established. There’s less risk in doing so than buying larger companies, which have limited exit routes following capital injections. 

The buy small and sell large strategy works best with buyouts, where private equity firms can buy established mid-market companies that are already publicly listed, take them private, and restructure them to optimize for fast growth.

Invest in technology

The entire private equity deal lifecycle requires fast decisions on the investor side, meaning companies need the right data to make these decisions quickly. 

For instance, a private equity fund manager might identify a promising opportunity but will likely compete with several other investors who are also interested in that same opportunity. Chances are these competing investors are conducting due diligence before diving headlong into securing the deal. Moving fast on such deals is of the essence.

That’s where tech tools like business intelligence, investment research, and pipeline management come in to help these private equity firms make decisions much faster. Fund managers can keep track of all potential investors and keep the lines of communication open to prevent deals from falling through mid-cycle.

Technology-driven solutions will help drive the success of nearly every private equity strategy, whether it’s buyouts, growth equity, private credit, or distressed debt investing.

Lead in middle market private equity investment with Allvue

Middle-market private equity deals are critical to helping mid-sized companies scale their growth and expansion without capital limitations. Considering the resilience of the middle market in times of economic uncertainty, private equity fund managers can reap significant gains from investing in these opportunities, especially when leveraging the right technologies.

Allvue System’s alternative investment solutions are key to helping private equity investors reduce investment barriers, keep stakeholders informed throughout the deal lifecycle, and provide them with investment intelligence to source deals, manage investments, and raise capital. Remaining competitive as a mid-market investor requires speed and agility to find the right deals and close on them quickly.

Contact us to learn more about our solutions and schedule a demo.



Investopedia. How to Value Private Companies. https://www.investopedia.com/articles/fundamental-analysis/11/valuing-private-companies.asp

USPEC. Everything You Need To Know About Middle Market Private Equity. https://www.uspec.org/blog/everything-you-need-to-know-about-middle-market-private-equity

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