Middle Market Private Equity : Is It the Easier Exit Option ?

Talking about middle market private equity can be quite a challenge because there’s no clear agreement on what exactly qualifies as middle market . Does it depend on the size of a PE firm’s recent fund ? The total capital they’ve raised ? The average size of their recent deals ? Or is it about the size of their portfolio companies ? Unlike the top investment banks things get blurry here and there’s a lack of straightforward descriptions for different categories of firms . But hey let’s give it a shot and see how it turns out .

Defining Middle Market Private Equity

In our opinion the best way to define “middle market” is by looking at a firm’s average deal size . Fund size or total capital raised might not give an accurate picture of the size of individual deals . So here’s my take on the definition :

Middle Market Private Equity Definition : Middle market private equity firms typically acquire companies for purchase prices ranging from $50 million to $500 million . They usually leverage deals but focus more on driving growth and improving operations . Some sources expand the definition to include deals as small as $25 million and as large as $1 billion . Others even argue that there’s a separate large category for deals between $500 million and $5 billion . But let’s not get too caught up in the back and forth . Almost everyone would consider a deal in the low hundreds of millions as middle market.

If we assume an average deal size of $300 million with 50% funded through debt and 50% through equity and an average fund having 10 to 20 active portfolio companies then the typical middle market fund would have capital in the low billions . Let’s say around $1 to 3 billion maybe even reaching up to $5 billion.

Characteristics of Middle Market Private Equity Firms

In addition to deal and fund sizes middle market private equity firms tend to share some common characteristics:

Geography

Most of their deals and portfolio companies are relatively local . For instance a middle market firm based in Chicago would likely focus on deals in the Midwest of the U.S.

Asset Classes

Unlike mega funds middle market firms are less diversified . They usually specialize in one or two areas such as private equity and credit rather than operating across multiple asset classes like real estate and infrastructure.

Deal Types While these firms do utilize leverage in their deals they also look for other sources of returns beyond simple financial engineering . They seek opportunities for bolt on acquisitions , margin expansion , revenue growth from new markets or products and more.

Company Types

Middle market private equity firms tend to invest more in private and family owned businesses . This is simply because there are a greater number of companies in these categories when deal sizes drop below $500 million.

Recruiting

Compared to bulge bracket or elite boutique banks middle market private equity firms can be more accessible for individuals who haven’t worked in those top tier institutions . However it’s important to note that the definition of middle market can still play a role in determining accessibility.

It’s easy to overlook middle market private equity firms because they may seem less glamorous than the mega funds . But that would be a mistake because they actually handle a significant volume of deal activity . In Europe for example approximately 40% of the capital raised by PE firms each year goes into the middle market . In the U.K. the middle market often accounts for around 50% of individual deals and 30 to 40% of deal volume in GBP.

Comparing with the Mega Funds

When we talk about private equity mega funds we’re referring to those that do deals with an average size of $1 billion or more and their individual funds are typically in the range of $10 to 15 billion or even higher . Some of the well known names in this category include Blackstone , KKR , Carlyle , Apollo and TPG .

Aside from the obvious differences in deal sizes and capital bases there are a few key distinctions between middle market private equity and mega funds:

Diversification

Mega funds tend to be highly diversified engaging in activities across various geographies and asset classes , such as credit , real estate and infrastructure . Private equity might not even be their primary focus.

Deals

Deals involving mega funds often entail more complex financial engineering due to the limited growth opportunities with large mature companies.

Recruiting

While interviews at mega funds follow a fast paced and high pressure on cycle process there might be occasional off cycle opportunities . However if you haven’t worked in a top group at a bulge bracket or elite boutique bank your chances might not be as great.

Careers Advancement within mega funds can be slow due to the sheer number of professionals in the mid to top levels of the hierarchy . Few are willing to leave early and give up their carried interest . So if you’re looking to move up the ranks be prepared to grind it out for a significant amount of time with investment banking hours becoming the norm.

Why Choose Middle Market Private Equity ?

Now let’s talk about the advantages of working in middle market private equity:

Autonomy

Middle market firms often offer more autonomy and responsibility at an earlier stage of your career . With fewer layers of hierarchy and a focus on growth and operational improvements junior professionals have more opportunities to make meaningful contributions and take ownership of their projects.

Work Life Balance

While private equity in general can demand a lot from your time middle market firms tend to provide a slightly better work life balance compared to mega funds . Smaller deal sizes and more focused operations might mean fewer sleepless nights and weekends spent at the office.

Career Progression

With a flatter organizational structure middle market private equity firms may offer faster career progression . You can gain exposure to a wider range of responsibilities and develop a well rounded skill set positioning yourself for future leadership roles.

Potential for Higher Returns

Middle market private equity deals often focus on growth and operational improvements which can lead to higher returns . These firms are more likely to invest in companies with untapped growth potential and employ strategies beyond simple leverage to create value.

Accessibility

Middle market private equity firms tend to be more accessible for individuals who haven’t worked at prestigious investment banks . While competition still exists the recruitment process may be less restricted allowing a broader pool of talent to break into the industry.

Why Not Choose a Middle Market Private Equity Firm ?

Of course it is also important to consider the potential drawbacks of working at a middle market private equity firm:

Compensation

While compensation in middle market private equity can still be lucrative it may not reach the same levels as in mega funds . Smaller fund sizes and deal volumes can result in relatively lower bonus payouts and carried interest.

Brand Reputation

Middle market firms may not have the same level of prestige and brand recognition as well known mega funds . The perceived value of a firm’s name may impact future career opportunities and networking potential.

Deal Complexity Skills

Although middle market deals are generally less complex than mega fund deals they still require a solid understanding of financial modeling , due diligence and valuation techniques . However the smaller deal teams and focused operations may limit exposure to a broader range of deal types and industries.

Final Thoughts

Contrary to what you might read online the reality is that most individuals from bulge bracket banks do not land positions in private equity mega funds . The competition is fierce and the number of available spots is limited . That’s why middle market private equity firms play such a vital role . They offer a more accessible entry point into the industry regardless of the bank you’ve worked at.

However due to the significant variation among middle market firms it’s challenging to categorize them neatly . So when considering your options and talking to different teams and firms trust your instincts . You might not be able to pinpoint exactly why one group feels like a better fit than the others but just like the middle market private equity category itself you’ll know it when you see it.

In conclusion middle market private equity presents a viable and accessible path for professionals looking to enter the industry . The unique characteristics , potential for growth and varied opportunities make it a compelling option for those seeking autonomy , faster career progression and the chance to make a significant impact . So if you’re ready to explore the world of middle market private equity buckle up and trust your instincts . You might just find the perfect fit for your career aspirations.