Middle market private equity (PE) is a dynamic piece of the investment landscape.
The sector generally focuses on companies valued between $50M and $1B, offering unique opportunities—and the potential for high returns—for investors and business owners across a broad range of industries.
Q2’2024, the strongest quarter for PE activity since 2022, saw 122 deals valuing some $196B in aggregate.
In this piece, we explore advantages, key players, emerging trends, risks, and strategies for success in the middle market PE space.
Advantages of Investing in Mid-Market Private Equity
Mid-market private equity focuses on companies typically valued between $50M and $1B.
This segment of the market combines the growth potential of smaller companies with the stability of more established businesses, offering a unique set of advantages for investors:
Attractive returns: Mid-market private equity funds have consistently outperformed their larger counterparts. Since 2000, mid-market buyout funds in the US delivered a median net internal rate of return (IRR) of 13.5%, compared to 12.7% for large buyouts.
Diversification: By investing in a range of mid-sized companies across various industries and geographies, investors can distribute risk and potentially enhance overall portfolio performance. A typical mid-market fund might invest in 10-15 companies across sectors like healthcare, technology, and consumer goods, providing a balanced exposure to different market dynamics.
Operational expertise: Many mid-market firms have specialized teams with deep industry knowledge and experience in improving business operations. For instance, Riverside Company, a leading mid-market firm, has a dedicated operations team that works closely with portfolio companies to implement best practices, optimize processes, and drive growth. This hands-on approach can lead to substantial improvements in company performance and, ultimately, investor returns.
Growth potential: Mid-market companies often have established business models but still have significant room for expansion, whether through geographic expansion, new product development, or strategic acquisitions. For example, when mid-market firm Thoma Bravo acquired Elemica, a supply chain software company, in 2016, they helped the company expand its product offerings and enter new markets, leading to a significant increase in revenue and profitability before its sale in 2019.
Key Players in the Mid-Market Private Equity Industry
The mid-market private equity landscape is diverse. From specialized funds to divisions of larger firms and family offices, these entities play crucial roles in shaping the industry.
Below, we explore some of the key players across different categories in the private equity market.
Dedicated Middle Market Funds
Audax Group
Founded in 1999, Audax Group has established itself as a leading middle market investment firm.
With over $39B in assets under management as of 2024, Audax focuses on leveraged buyouts, mezzanine debt, and senior debt, primarily in North America.
The firm's "buy and build" strategy has been particularly impactful, helping portfolio companies execute over 1,000 add-on acquisitions since its inception.
The Riverside Company
Riverside is one of the oldest and most established middle market private equity firms, investing since 1988.
With a global presence and over $13B in assets under management, Riverside specializes in companies at the smaller end of the middle market. Its expertise in helping small businesses scale has made the firm a go-to partner for entrepreneurs looking to take their companies to the next level.
HGGC
Since its founding in 2007, HGGC has quickly become a significant player in the middle market space.
With approximately $6.9B of cumulative capital commitments, HGGC focuses on partnerships with founders, management teams, and sponsors. Its "Advantaged Investing" model, which emphasizes operational expertise and strategic insights, has helped the firm create value across various sectors, particularly in technology and business services.
Larger Firms with Middle Market Teams
Blackstone Tactical Opportunities
As part of the world's largest alternative asset manager, Blackstone's Tactical Opportunities group focuses on middle market investments across asset classes and geographies. With the backing of Blackstone's vast resources, this team can pursue complex, time-sensitive opportunities that might be out of reach for smaller firms.
The team has $36B under management as of 2024 across 177 investments.
KKR Middle Market
Global investment firm KKR has a dedicated middle market private equity team that focuses on control and minority investments in North America. Leveraging KKR's brand and operational expertise, this team targets companies with enterprise values between $500M and $2B. Its ability to apply large-cap private equity best practices to middle market companies has been a key differentiator in the space.
Carlyle Global Credit
Carlyle Group, another global alternative asset manager, operates its middle market strategy through its Global Credit platform. This team focuses on providing liquid and private credit as well as real assets strategies to middle market companies across various sectors. It manages $190B in assets. With Carlyle's global network and resources, they've been able to drive significant growth in their portfolio companies, often helping them expand internationally.
Family Offices
Pritzker Private Capital
Pritzker Private Capital, founded by the Pritzker family, takes a long-term approach to middle market investing. With a focus on manufactured products and service businesses, the firm partners with middle market companies to help them achieve sustained growth. Its patient capital and operational expertise have made the firm a preferred partner for family- and entrepreneur-owned businesses.
Huron Capital
Huron Capital was founded with significant backing from the Cotton family of Detroit. Since its inception in 1999, Huron has grown into a leading middle market private equity firm with a focus on control and non-control equity investments. Its operational approach and expertise in helping companies navigate generational transitions have made the firm a key player in the middle market space.
DFO Management
Established by Michael Dell, DFO Management is another example of a family office making waves in the mid-market.
DFO Management invests in both private and public companies, with a significant portion of its portfolio dedicated to mid-market private equity. The firm’s approach is characterized by deep due diligence and a long-term investment horizon, allowing it to nurture companies until they reach their full potential.
Top Mid-Market Private Equity Firms to Watch Out For
Thoma Bravo
With around $160B in assets under management as of June 30, 2024, Thoma Bravo is a powerhouse in mid-market technology investing. The firm focuses exclusively on software and technology-enabled services companies, employing a "buy and build" strategy that has proven highly successful. Thoma Bravo's notable achievements include the acquisition and subsequent growth of companies like Kofax and Qlik.
Warburg Pincus
Since it was founded in 1971, Warburg Pincus has grown to manage approximately $117B billion in assets as of August, 2024.
While the firm invests across stages and sectors, it has a strong presence in the mid-market space. Warburg Pincus is known for its global reach and long-term investment horizon, often holding investments for 5-10 years.
The firm has made significant impacts in sectors like financial services, healthcare, and technology, with notable investments including Ant Group and Crowdstrike.
Vista Equity Partners
Vista Equity Partners manages over $100B in assets, specializing in enterprise software, data, and technology-enabled businesses. The firm is active in the mid-market tech sector too, and is known for its operational expertise and ability to drive growth in software companies. Vista's success is evidenced by investments like Ping Identity and Datto, which saw significant growth under the firm's ownership before successful exits.
GTCR
Managing over $35B in assets, GTCR is a well-established player in the mid-market space, with a focus on industries such as healthcare, financial services, and technology. The firm is known for its “Leaders Strategy™,” which involves partnering with experienced industry executives to identify and invest in high-growth companies.
GTCR’s investment in Maravai LifeSciences, which went public in 2020, is a testament to the firm’s ability to drive significant growth in its portfolio companies.
TA Associates
TA Associates operates a dedicated middle-market team that focuses on high-growth sectors such as technology, healthcare, and financial services. The firm has over $47.5B in assets under management.
TA Associates’ impact on the industry is profound, as it has consistently been able to scale mid-market companies into industry leaders. A notable achievement includes the investment in Nintex, a leading workflow automation software provider. TA Associates raised a new $16.5B middle-market buyout fund in 2023.
Advent International
With $94B in AUM, Advent International is one of the largest and most influential private equity firms globally — yet it maintains a robust middle-market investment strategy.
Advent’s mid-market focus is evident in sectors like retail, healthcare, and technology. Its investment in Laird Connectivity, a leader in wireless connectivity solutions, showcases the firm’s expertise in driving growth and innovation within mid-market companies.
Rockefeller Capital Management
Rockefeller Capital Management has evolved into a leading investment firm with a growing presence in mid-market private equity. The firm manages over $133B in assets and focuses on sectors like technology, healthcare, and financial services.
Its approach combines the Rockefeller family office's legacy of long-term stewardship with modern private equity strategies, making them a key player to watch in the mid-market space.
How to Identify Potential Investment Opportunities in the Middle Market
PE firms employ a variety of methods to uncover hidden gems and create value. Here are five key strategies that can help you do the same:
Sector specialization: Developing deep expertise in specific industries can provide a significant edge in identifying attractive investment opportunities. By focusing on particular sectors, investors can build a comprehensive understanding of market dynamics, competitive landscapes, and emerging trends. This specialized knowledge enables more accurate valuations and better-informed investment decisions.
Network building: Cultivating a robust network of industry professionals, advisors, and entrepreneurs is crucial for accessing quality deal flow. This network can include investment bankers, lawyers, accountants, and former executives who can provide valuable introductions and insights. Regular attendance at industry conferences, participation in trade associations, and maintaining relationships with business owners can also lead to proprietary deal opportunities.
Proprietary deal sourcing: Developing a systematic approach to proprietary deal sourcing can give firms a competitive advantage in the crowded middle market space. This might involve creating dedicated teams for outbound outreach, leveraging data analytics to identify potential targets, or developing relationships with intermediaries who can provide early access to deals. For example, you can use AI-powered platforms like Grata to identify companies that match your investment criteria, allowing you to approach business owners before companies are widely marketed for sale.
Operational due diligence: Conducting thorough operational due diligence involves a deep dive into a company's operations, management team, market position, and growth potential. By assessing operational inefficiencies and improvement opportunities, investors can identify companies where their expertise and resources can drive substantial growth. This approach often uncovers hidden values that may not be apparent from financial statements alone.
Financial analysis: Robust financial analysis remains a cornerstone of identifying promising investment opportunities. This involves scrutinizing financial statements, cash flow patterns, working capital requirements, and debt structures. Advanced financial modeling and scenario analysis can help investors understand a company's potential under different market conditions and strategic initiatives. Moreover, comparing financial metrics against industry benchmarks can highlight companies that are underperforming relative to peers, potentially presenting turnaround opportunities for skilled investors.
Strategies for Successful Middle Market Private Equity Investments
Success in middle-market private equity requires a strategic approach to value creation and growth. The following strategies have proven effective for many leading firms in maximizing returns and building sustainable businesses:
Developing a value creation plan: A comprehensive value creation plan should be developed early, ideally during the due diligence phase, and outline specific initiatives to drive growth and improve operations. It typically includes financial targets, operational improvements, market expansion strategies, and potential add-on acquisitions. For instance, when Thoma Bravo acquired Elemica in 2016, the firm immediately implemented a value creation plan that included expanding the company's product offerings and entering new markets, leading to significant revenue growth and a successful exit in 2019.
Aligning with management: Strong alignment between the private equity firm and the portfolio company's management team is crucial for successful execution of the value creation plan. This often involves refining the management incentive structure to ensure long-term commitment and performance. It may also include bringing in new talent to fill skill gaps or drive specific initiatives. To continue with the example above, Thoma Bravo kept Elemica’s CEO John Blyzinskyj in place, which paid off handsomely.
Implementing operational improvements: Middle market companies often have significant room for operational enhancements. This can involve streamlining processes, optimizing the supply chain, improving sales and marketing effectiveness, or upgrading IT systems. Private equity firms with strong operational expertise can drive substantial value through these improvements. The Riverside Company, for instance, has a dedicated operations team that works with portfolio companies to implement best practices and drive efficiencies, contributing to their track record of successful exits.
Pursuing growth initiatives: Accelerating growth is a key value driver in middle market investments. This can involve organic growth strategies such as new product development, geographic expansion, or entering new customer segments. It may also include inorganic growth through strategic add-on acquisitions. HGGC's investment in Nutraceutical International Corporation exemplifies this approach. After acquiring the company in 2017, HGGC pursued an aggressive growth strategy that included exiting retail operations, simplifying manufacturing footprint, divesting idle assets, and improving supply chain.
Planning for exits: Successful middle market investments require a clear exit strategy from the outset. This involves identifying potential buyers early, whether they be strategic acquirers, larger private equity firms, or public market investors through an IPO. Throughout the investment period, firms should be preparing the company for exit by enhancing its attractiveness to potential buyers. This might include strengthening the management team, improving financial reporting, or achieving critical scale.
Challenges and Risks Associated with Middle Market Private Equity
Middle-market private equity comes with its own set of challenges and risks. Investors and firms operating in this space must be aware of and prepared to navigate these potential pitfalls to achieve success. Here are some of the key risks and challenges:
Illiquidity: One of the most significant risks in middle-market private equity is illiquidity. Unlike public market investments, private equity investments typically have long holding periods, often ranging from 5 to 7 years or more. This lack of liquidity can tie up capital for extended periods, potentially limiting an investor's flexibility to respond to changing market conditions or personal financial needs.
Valuation complexities: Accurately valuing middle market companies can be challenging due to the lack of public market comparables and the often complex nature of these businesses. This can lead to disagreements between buyers and sellers, potentially complicating both entry and exit transactions. Moreover, inaccurate valuations can result in overpaying for acquisitions or undervaluing companies at exit, directly impacting investment returns.
Operational risks: Middle market companies often have less developed management structures and operational processes compared to larger corporations. This can present significant risks and challenges for private equity firms looking to implement value-creation strategies. Operational improvements may take longer than expected or fail to deliver anticipated results, impacting overall investment performance. For example, when KKR acquired Samson Resources for $7.2B in 2011, it encountered unexpected operational challenges in managing the company's oil and gas assets, ultimately leading to Samson's bankruptcy in 2015.
Regulatory considerations: The regulatory landscape for private equity continues to evolve, with increased scrutiny from bodies like the SEC. Middle market firms must navigate complex regulatory requirements, including reporting obligations, compliance with anti-money laundering laws, and adherence to ESG standards. Failure to comply with these regulations can result in significant fines, reputational damage, and even forced divestitures.
Economic and market risks: Middle market companies can be more vulnerable to economic downturns and market shifts than their larger counterparts. They may have less diversified revenue streams or be more dependent on specific customers or suppliers. This vulnerability can translate into increased risk for private equity investors, particularly during periods of economic uncertainty.
Competition: The middle market private equity space has become increasingly crowded in recent years, with more firms vying for attractive deals. This heightened competition can drive up acquisition prices, potentially eroding future returns. It also puts pressure on firms to differentiate themselves and add value beyond just providing capital.
Opportunities in the Middle Market Private Equity Sector
The middle market private equity also presents new opportunities for investors who can anticipate and capitalize on emerging trends. Here are five key areas of opportunity that are shaping the future of middle market private equity:
Digital transformation: The acceleration of digital technologies across industries presents a significant opportunity for middle market private equity firms. Many mid-sized companies are still in the early stages of their digital journey, creating potential for value creation through technology-driven improvements. Private equity firms can leverage their expertise and resources to help portfolio companies implement advanced technologies like artificial intelligence or cloud computing.
ESG considerations: Environmental, Social, and Governance (ESG) factors are becoming increasingly important in the private equity landscape. Middle market firms have an opportunity to create value by improving ESG performance in their portfolio companies. This can involve implementing sustainable practices, enhancing diversity and inclusion initiatives, or improving corporate governance structures.
Industry consolidation: Many middle market sectors are ripe for consolidation, presenting opportunities for private equity firms to create value through strategic add-on acquisitions. By combining multiple smaller companies in fragmented industries, firms can achieve economies of scale, expand market share, and enhance operational efficiencies. For example, Audax Group's investment in Innovative Chemical Products (ICP Group) involved a series of strategic acquisitions that transformed the company from a regional player into a national leader in specialty coatings, adhesives, and sealants.
Global expansion: As middle market companies increasingly look to expand internationally, private equity firms with global expertise and networks are well-positioned to drive value. This opportunity involves helping portfolio companies enter new markets, establish international partnerships, or acquire overseas competitors. KKR's investment in Calsonic Kansei, a Japanese auto parts maker, exemplifies this trend. After acquiring the company in 2017, KKR facilitated its merger with Magneti Marelli, creating a global automotive supplier with a stronger international presence and enhanced competitiveness.
Specialized sector funds: The increasing complexity of certain industries has created opportunities for specialized middle market funds that focus on specific sectors. These funds can leverage deep industry expertise to identify attractive investment opportunities and drive value creation. Healthcare, technology, and energy transition are particularly promising areas for specialized funds. For instance, Linden Capital Partners, a middle market private equity firm focused exclusively on healthcare and life sciences, has been able to generate strong returns by leveraging its deep sector knowledge. Their investment in Collagen Matrix, a developer and manufacturer of collagen-based medical products, shows how specialized expertise can drive value in complex, regulated industries.
Benefit From the Emerging Mid-Market Opportunities
Middle market private equity remains a dynamic segment of the investment landscape. It offers unique advantages for investors, including attractive returns, diversification opportunities, and significant growth potential.
But it also comes with challenges such as illiquidity, valuation complexities, and operational risks. As the sector evolves, firms that can navigate these complexities while capitalizing on emerging opportunities will be well-positioned for success in the dynamic world of middle market private equity.
FAQs
What is considered the middle market?
The middle market typically refers to companies with annual revenues between $10M and $1B. In terms of deal size, middle market private equity transactions generally range from $50M to $500M in enterprise value.
How much do middle market PE firms pay?
Compensation in middle market PE firms varies widely based on role, experience, and firm performance. Generally, associates might earn $150,000-$300,000 annually, while partners can earn several million dollars. Higher-level positions, like vice presidents and partners, can earn significantly more, with total compensation often exceeding $500,000. However, these figures can fluctuate significantly based on the firm's size and success.
What is the difference between middle market and bulge bracket private equity?
Middle market private equity firms focus on investing in mid-sized companies, usually with revenues between $10M and $1B. In contrast, bulge bracket private equity firms target much larger deals, often involving multibillion-dollar companies, and typically have more extensive resources and global reach.
What are the 4 main areas within private equity?
The four main areas within private equity are venture capital, growth equity, buyouts, and distressed or special situations investing. Each area focuses on different stages of a company’s lifecycle and investment strategy, from early-stage startups to mature businesses needing turnaround strategies.
How big is a middle market PE firm?
Middle market private equity firms typically manage assets ranging from $1B to $10B. These firms focus on investing in mid-sized companies, offering a balance between smaller, niche investments and large-scale, global buyouts. But there are some firms whose assets under management are well over $10B.
How much do mid market PE firms earn in London?
In London, mid-market private equity professionals can earn substantial salaries, with associates typically making between £80,000 and £150,000 per year, including bonuses. Senior roles, such as vice presidents and principals, can earn well above £200,000 annually, depending on the firm and performance.
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