Middle Market Private Equity: The Most Accessible Exit Opportunity?

It’s challenging to discuss middle market private equity because no one agrees on the precise definition of “middle market.”

Does it refer to the size of a PE firm’s most recent fund?

The total amount of capital the firm has raised?

The average size of its most recent funds?

Or does it refer to the firm’s average deal size or portfolio company?

It’s a bit like porn: difficult to define, but you know it when you see it.

Unlike with the top investment banks, the lines are much blurrier here, and entire categories of firms lack good, simple descriptions.

But I’m going to attempt an explanation anyway, and we’ll see how closely it resembles porn by the end:

Definitions: What is Middle Market Private Equity?

I believe it’s best to base the “middle market” definition on a firm’s average deal size because fund size or total capital raised doesn’t necessarily tell you how big each deal is.

So, our definition will be:

Middle Market Private Equity Definition: Middle market private equity firms typically acquire companies for purchase prices between $50 and $500 million and use leverage in deals but tend to focus more on growth and operational improvements.

Some sources expand this definition and state the “middle market” includes deals for as little as $25 million and as much as $1 billion.

Meanwhile, others say that there’s also a “large” category for deals between $500 million and $5 billion.

We could go back and forth on the definitions all day, but almost everyone would call a deal in the low hundreds of millions “middle market.”

If we assume that the average deal size is $300 million, funded with 50% Debt / 50% Equity, and that the average fund has between 10 and 20 active portfolio companies, the average middle-market fund should have capital in the low billions (e.g., $1-3 billion, perhaps up to $5 billion).

Besides the average deal size and fund size, middle market private equity firms have the following characteristics in common:

• Geography: Most deals and portfolio companies tend to be “relatively local” – for example, a middle market firm in Chicago will probably focus on deals in the Midwest of the U.S.
• Asset Classes: Most middle market private equity firms are less diversified than the mega-funds. They may operate in 1-2 areas, such as private equity and credit, but they’ll rarely operate across, say, both of those plus real estate and infrastructure.
• Deal Types: These firms use leverage in deals, but they’re usually looking for returns sources beyond simple leverage as well: bolt-on acquisitions, margin expansion, revenue growth from new markets and new products, and so on.
• Company Types: MM PE firms tend to invest in more private and family-owned businesses simply because there are more companies in those categories once you go below a deal size of $500 million.
• Recruiting: Middle market private equity firms tend to be more accessible if you haven’t worked at a bulge bracket or elite boutique bank, but it depends on how you define “middle market” (see below).

Audax’s profile on its website sums up middle market private equity quite well:

It’s easy to ignore MM PE firms because they seem less glamorous than the private equity mega-funds, but that would be a mistake because they account for a huge volume of deal activity.

For example, in Europe, ~40% of capital raised by PE firms each year goes into the middle market, and in the U.K., the middle market often accounts for ~50% of individual deals and ~30-40% of deal volume in GBP:

In the U.S., middle market PE deals often represent ~50-60% of all individual deals and over 50% of total fundraising.

Upper vs. Lower Middle Market Private Equity Firms

Some sources split this market into the “lower middle market” (LMM) and the “upper middle market” (UMM), or they add a category such as the “core middle market” (CMM).

PitchBook defines these categories as:

• LMM: $25 to $100 million deal size
• CMM: $100 to $500 million deal size
• UMM: $500 million to $1 billion deal size

But you’ll see different criteria in different regions, often with lower numbers in Europe (e.g., €250 – €500 million for UMM).

While the deal size and types differ, these distinctions matter mostly for recruiting and career purposes.

Specifically, the “UMM” PE firms may operate more like mega-funds when it comes to recruiting, so you’ll see more on-cycle processes, timed modeling tests, and early start dates.

They may also be closer to the larger PE firms in terms of work hours (longer) and advancement up the ladder (more bureaucracy).

The Comparison with Mega-Funds

Most people would say that the private equity mega-funds do deals with an average size of $1 billion+ and have individual funds that are ~$10-15 billion+ in size.

Based on that, the most commonly cited names in this category are Blackstone, KKR, Carlyle, Apollo, and TPG.

Other names could potentially be on this list as well: CVC, Apax, and EQT in Europe; Ares, Warburg Pincus, Advent, and Silver Lake in the U.S.; and Brookfield in Canada.

But the definition of “mega-fund” is a separate question that I’m not addressing here (maybe in a future article).

Besides the bigger deals and higher capital bases (AUM in the tens or hundreds of billions and recent fund sizes of $10-15 billion+), the main differences are:

• Diversification: The mega-funds tend to be highly diversified, with activity across all geographies and in other asset classes, such as credit, real estate, and infrastructure. Private equity may not even be their core focus.
• Deals: Deals tend to involve heavy amounts of financial engineering (i.e., leverage and fancier capital structures) because there are fewer growth opportunities with large, mature companies.
• Recruiting: Interviews follow the fast and stressful on-cycle process at all these firms, but you might occasionally see off-cycle spots open up. If you’re not in one of the top groups at a BB or EB bank, your chances are not great.
• Careers: Advancement can be very slow because there are so many people in the mid-to-top levels of the hierarchy, and no one wants to leave early and give up their carried interest. You have to grind it out for a long time to move up, and you will be working investment banking hours (or worse!) for much of that time.

The Top Middle Market Private Equity Firms

There are so many middle market private equity firms that it’s difficult to rank them or even select the top few because it depends on how you define “top”: AUM? Average annualized returns? Number of deals or portfolio companies?

But you came here for a list, so here goes.

In the U.S., examples of middle market private equity firms include Audax, Genstar, American Securities, Madison Dearborn Partners (MDP), Court Square, Friedman Fleischer & Lowe (FFL), HGGC, Stone Point Capital, New Mountain Capital, HIG, MidOcean, Lindsay Goldberg, Aurora Capital, Brentwood Associates, GTCR, Abry Partners, CI Capital, Aquiline, Riverside, and Vector Capital.

You could argue for including firms like Summit, General Atlantic, and TA Associates in this list, but I would put them in the “growth equity” category and also say they might be a bit too large to qualify as “middle market.”

Note also that the mega-funds do a fair number of smaller deals as well, which is why you’ll see the likes of KKR and Blackstone in deal activity rankings here.

And then there are the Canadian pension funds, sovereign wealth funds, and other institutions that often participate in the middle market, but I consider them separate from these dedicated firms.

How to Recruit at Middle Market Private Equity Firms

There’s a good interview about how one reader went from a boutique/middle market bank to a MM PE firm, so please refer to that for the details.

One word of caution is that although recruiting is more “off-cycle” at these firms, not all firms in this category run their processes this way.

You will encounter more headhunters and on-cycle processes at the “upper middle market” firms, though the timing is usually a bit slower.

Recruiting tends to be slower and involves more critical thinking, such as open-ended take-home case studies, at the LMM firms.

We have published many articles about private equity recruiting, interviews, case studies, and even how to get into PE from consulting, so take a look at those for more.

Why Work in Middle Market Private Equity?

The biggest advantages of MM PE firms are:

• Autonomy: There’s less hierarchy, so you’ll have more responsibility on deals and with portfolio companies. And you’ll get to think about each deal since you’re doing a bit more than crunching numbers.
• Work Hours / Lifestyle: You’ll work less than you would at an EB/BB bank or a large PE firm; the average week might be 60-70 hours, depending on your level.
• Advancement: It’s a bit easier to advance, especially to the mid-levels, because there aren’t quite as many people aiming for the top.
• Potential for Higher Returns: Depending on your data source and the period, you could argue that these smaller firms have delivered higher annualized returns than large firms or the industry as a whole – but this one is controversial and doesn’t make a big difference until you reach the senior levels.
• Accessibility: And if you’ve worked at a middle market bank, an industry-specific boutique, or even in a “lesser” group at one of the BB/EB firms, you have a higher chance of winning offers at MM PE firms.

Why Not Work at a Middle Market Private Equity Firm?

The biggest disadvantages are:

• Compensation: You will earn less than at the large firms; it could be a 20-50% discount depending on your fund’s size and performance.
• Brand Name / Reputation: If you want to move elsewhere, you’ll be at a disadvantage because these firms are less widely known than the mega-funds. But this point matters most for moves within the finance industry; outside that, all PE firms have less brand-name recognition than banks.
• Deal Complexity / Technical Skills: You will probably not gain as many “reps” with deal execution and financial modeling as you would at the larger firms because there will be fewer deals, and the deals you execute will use simpler structures. But this could also be a positive if you do not like the technical side.

A Day in the Life

Both accounts from the PE Analyst and PE Associate articles are based on middle market firms, so you can refer to those.

The biggest differences vs. larger firms are more process and deal-sourcing work and less pure Excel and financial analysis.

Compared with smaller firms – say, ones with $500 million or less under management – you’ll spend more time on deals and portfolio companies and less time on all the other tasks required to keep the firm running.

Final Thoughts

Despite what you may read online, most people at bulge bracket banks do not get into private equity mega-funds.

The math doesn’t work: each large PE firm might hire a few dozen new Associates per year, but each large bank has hundreds of IB Analysts.

So, most of these Analysts stay in banking or go to smaller PE firms, hedge funds, VC firms, normal companies, or business school.

(And yes, this changes a bit if you add large-but-not-official-mega-fund firms to the list, but not enough to change the conclusions.)

And that’s why middle market private equity firms are so important: you’re much more likely to end up at one regardless of the bank you work at.

But since these firms vary so much, they’re also hard to categorize.

So, if you’re considering your options and speaking with different teams and firms, go with your gut.

You may not be able to explain precisely why one group was a better fit than the others, but just like the MM PE category itself, you’ll know it when you see it.

For Further Learning

You might also be interested in reading Middle Market Investment Banks: Solid Entry Point, or “Plan B” or How to Get into Private Equity from a Middle-Market or Boutique Bank.

Or, take a look at Industrials Private Equity: The Best Place for Old-School Deals at Reasonable Multiples?.