What is Lower Middle Market Private Equity?​

Private equity investing spans a wide range of company sizes, investment strategies, and risk profiles. Recently, there has been immense growth in the lower middle market private equity investing sector by both investors and entrepreneurs. As such, it is important for both investors and business owners to familiarize themselves with how this type of investing operates to fully understand its potential value, as well as future growth potential.  

Using Nexus Expert Research’s analysis and insights into the private equity market, investors can make educated, evidence-based decisions regarding their investments. 

Defining Lower Middle Market Private Equity 

Lower middle market private equity generally refers to investments made in small, privately-operated companies by private equity firms after they have transitioned from the start-up phase until they expand into larger institutional enterprises. While definitions for this market vary from firm to firm, most companies represented within this category will have revenue between $1 million and $40 million annually.  

Lower middle market PE invests in companies with a well-established line of products or service offerings, have a consistent customer base, and provide investors with many ways to enhance their operations and grow. 

How Lower Middle Market PE Differs from Other Private Equity Segments 

Rather than focusing specifically on Multinational Corporations (MNCs) like Large-Cap Private Equity, Lower-Middle Market Investments place more importance on hands-on involvement, value creation, and working directly with the management team to boost efficiency, grow, and build a more professionalized operation.  

Lower-middle market private equity also has a significantly different return profile and less risk as compared to venture capital, as they invest in more established, proven companies instead of startups.  

Key Characteristics of Lower Middle Market Private Equity Firms 

Lower middle market private equity firms typically pursue platform investments that allow the acquisition of additional companies, add-on acquisitions, or the growth of a business organically. Furthermore, lower middle market private equity firms possess the capability to provide smaller businesses with operational experience, strategic direction, and financing options. 

Common characteristics include: 

• Operationally involved 

• Long-term strategies for value creation 

• Focus on niche industries and/or regional markets 

These attributes make lower middle market investments attractive to both investors and business owners who want to expand their business. 

Why Investors Focus on Lower Middle Market Investing 

Lower middle market investing has the potential for very high returns, which is why it is appealing to investors. There are many underutilized operational efficiencies among smaller businesses, as well as a lack of competition from large companies, and many opportunities for continued growth and expansion. Additionally, lower middle market transactions offer more favorable valuations compared to larger private equity markets.  

As a result of these various attributes, lower middle market private equity represents a very attractive area of investment within the overall landscape of private equity. 

Benefits for Business Owners 

Partnering with lower middle-market private equity firms provides business owners and founders with access to financial resources, as well as the necessary tools to implement professional management techniques and strategic planning. Business owners are able to maintain a significant ownership interest in their company while leveraging the knowledge and experience that the private equity company can offer to improve their operational performance, enhance their growth efforts, and establish long-term value for the business. 

This collaborative approach helps drive sustainable growth and prepares companies for future exits. 

Conclusion 

Lower middle-market private equity investments create a vital connection between the many small businesses that struggle to access the necessary capital and the many institutional investors who usually invest in only larger, well-established businesses. Providing many different tools for creating maximum value within an organization through operational improvements, strategic expansion, and precise execution on all fronts, lower-middle market private equity firms partner closely with business owners to strengthen their management teams and improve their operations while simultaneously identifying growth opportunities via various channels. By working together, they establish a solid foundation for continued, sustainable growth. 

Nexus Expert Research provides investors in the lower middle market with valuable insights that help them recognize potential investments, reduce their exposure to various types of risks associated with an investment, and base their investment decisions based on factual information.