Half of the new PE funds target the lower middle market

Operators and investors,

Half of the first-time private equity funds that closed in 2025 focused on the lower middle market or the SME segment, and the migration is expected to continue through 2026 (With Intelligence's Private Equity Outlook). More than 30 first-time funds across buyouts, growth equity, and secondaries held final closes in 2025, raising close to $20B between them in one of the hardest fundraising markets in a decade.

Fund sizes at established managers keep growing, which pushes their minimum check sizes up and empties the field below $250M enterprise value, while allocators wary of crowded large-cap auctions are explicitly backing managers who hunt where competition is thinner and exit paths are more numerous. A new manager pitching differentiated sourcing in the lower middle market has a better story than one pitching a smaller version of an incumbent's fund.

The buyer pool for founder-owned companies is widening

The demand shift meets a supply wave. The generational transition out of founder-owned businesses keeps building, with the majority of family business owners planning no handover to their children, and a $5M-$50M revenue company that had 2 or 3 credible buyers 5 years ago now sees first-time funds, independent sponsors, search funds, and established LMM firms in the same process. From advisory work on both sides of these transactions, the change is visible in who shows up to a founder's first call, and in what they compete on: the winning bidders in this segment increasingly sell an operating plan rather than the highest headline number.

This issue covers 4 topics:

This issue is written for LMM investors, first-time fund teams, and the founders weighing a process, drawing on the professionalization work we run inside founder-owned companies post-close.

Half of a generation of new managers choosing the same segment is allocator preference showing through, because a first fund gets raised on the strategy LPs will fund rather than the strategy the GP dreamed up. I read this chart as a leading indicator for founder-owned deal competition in 2027-2028: the capital closed in 2025 deploys over the next 3 years, and all of it hunts in the same EV range.

1. Why new managers start below the middle market

The lower middle market is where a first fund's constraints become advantages. Deal sizes fit a $100M-$300M vehicle, sourcing is relationship-driven rather than auction-driven, entry multiples sit meaningfully below the middle market, and add-ons remain the dominant deal type across PE at 73%-80% of activity, which lets a small platform compound through acquisitions priced below its own multiple.

Exit optionality carries as much weight with allocators. A $150M EV company exits to a strategic, a larger sponsor, a continuation vehicle, or occasionally management, while larger assets increasingly wait on reopening equity markets. In a market where DPI has been the scarcest commodity, the segment with the most exit paths attracts the capital, and With Intelligence's data shows allocators reinforcing exactly that preference for middle and lower-middle-market managers.

2. What the widening pool changes for founders

More buyers competing for founder-owned assets changes the transaction in 3 observable ways:

For a founder considering a process in the next 2 years, the readiness work is the highest-return project in the company. The same reporting, data, and process work that raises the multiple also shortens the process and reduces the retrade risk after LOI.

The established LMM specialists have been saying a version of this for years. Andrew Trigg, managing partner at Graycliff Partners, noted through the last downturn that founder-owned businesses kept coming to market and that "there is continued opportunity for lower middle-market buyouts" (2024), and the firms built specifically around founder transitions, Trivest, New Heritage Capital, Align Capital Partners, and New Harbor Capital among them, kept raising through the toughest fundraising market in a decade. The emerging managers named in the With Intelligence data, Awani Capital in essential industrial services and Sigla in Benelux and Nordic business services, are entering exactly this lane.

Fewer funds closing overall while add-ons hold at three quarters of deal activity tells you what the surviving capital does: it buys platforms low, bolts on smaller companies priced lower still, and earns the spread through integration. That model works exactly as well as the operating capability behind it, which is the gap the next section covers.

3. The operating gap first-time funds carry

A first-time fund typically runs 2 to 4 investment professionals and no operating bench, and its first platform is usually a founder-built company whose systems stop at the founder's span of attention. The fund's model assumes professionalization, the finance function, the commercial engine, the reporting cadence, and the team underneath all get built during the hold, and the deal team that underwrote that work rarely has the hands to do it.

That gap defines how the segment actually operates. The work arrives through fractional executives, embedded operating units, and advisory retainers rather than full-time hires the P&L cannot carry, a pattern I covered in the fractional operators edition in June. Our own engagements in this segment concentrate on exactly this stand-up work: FP&A and reporting where none existed, a RevOps layer over a founder-era CRM, and the web and data infrastructure that makes the company legible to the next buyer's diligence. The funds that budget this capability into the deal model at underwriting hit their first-platform plans; the ones that treat it as a year 2 decision compress their own hold timeline.

4. What sponsors and operators should do

For established LMM sponsors, the entry of 15-plus new managers a year into the segment is margin pressure on sourcing and a reason to tighten the operating playbook, because operating capability is the differentiator new entrants cannot replicate quickly. For first-time funds, the honest move is to contract the operating capacity before the first close rather than after the first misses, and to size it into the management fee math from the start.

For operators inside founder-owned companies, the widening buyer pool is career-relevant: the professionalization projects that make a company saleable, owning the reporting stand-up, the systems migration, the commercial data model, are the highest-visibility work in the building for the next 3 years.

This week, whichever seat you hold, run a 30-minute readiness review against one question set:

Score each one red, yellow, or green; assumed capacity on question 3 is the most common miss in the segment.

Mario

🎯 Vertical focus beats horizontal reach. A services portco across six verticals earned 68% of gross profit from healthcare on 41% of revenue, because compliance expertise commands price. Spinning off the other five took EBITDA margin from 14% to 23% in 18 months. Transformation is subtraction.

🤖 Both AI outcomes show up in the same portfolio. Across 20+ mid-market and PE-backed companies, one study's wins and another's misses appear side by side, and Mario now runs 20% of his own week through a Hive of 12 full-time agents on the Claude SDK. The operator's read on AI adoption.

🧾 Run the buyer's diligence on yourself first. 12 to 18 months before an exit, the same review a buyer's advisor runs surfaces concentration, churn, and pricing gaps while there is still time to fix or frame them. One 28% account cut the price by 15% for want of a mitigation story.

📉 The deck says $4.2M pipeline; the CRM says $6.1M. Duplicate accounts, stale opportunities, and blank attribution reprice or kill deals at confirmatory diligence, and Gartner puts the cost of poor data at $12.9M a year. Audit the system of record before the numbers become someone else's problem.

Private credit keeps taking share from the banks. Apollo's lending volumes topped $300bn, a structural shift in how mid-market and large corporates access capital that reshapes cost of capital, lender competition, covenant terms, and refinancing strategy for any operator planning a raise.

Cyber risk now lands directly on production and revenue. A ransomware attack halted Coca-Cola's Fairlife dairy production, turning an IT issue into a supply-chain and brand event and moving incident-response readiness and vendor resilience up the priority list for every portfolio company with physical operations.

Reimbursement policy can reset a business model overnight. CMS's proposed 2027 Physician Fee Schedule would curb reimbursement for third-party remote patient monitoring, a direct revenue and compliance risk for RPM vendors, digital health operators, and provider groups that should feed 2027 planning now.

AI copyright liability now has a price tag. A court approved Anthropic's landmark $1.5B copyright settlement, a legal-risk signal for anyone deploying or building generative AI that raises the bar on vendor indemnities, data provenance, and litigation budgeting, even as the broader training-data question stays open.

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For PE partners and operators seeking alpha

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🚀 1:1 Advisory retainers. Supporting operating partners, private equity funds, family offices, and mid-market executives in different capacities, from value creation through due diligence to portfolio digital GTM management in my async advisory programs via Growth Shuttle.

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