Investment Outlook
Middle market buyout strategies offer a diverse range of opportunities and are often better protected from macroeconomic uncertainties. One reason: Over 90% of middle market buyout exits are sponsor-to-sponsor or strategic, which provides a more sustainable runway to generate returns as these types of deals are less complex and not as reliant on IPOs or debt financing.
Such strategies should have an opportunity to generate incremental returns due to an expected increase in M&A and exit activity. This optimistic outlook is further supported by a prudent use of leverage which is in-line with historic averages (Exhibit 1). We expect that should debt costs decline, managers will apply incremental leverage, the value of which can be passed on to equity holders.
The middle markets also offer more compelling entry points compared to larger transactions as pockets of value are often present across the large middle market opportunity set (Exhibit 2). Managers that are able to be more selective with purchase price can then pursue more exit options without a dependency on higher valuation as part of the exit strategy. Median entry valuations (EV/EDITDA) for deals below $1 billion are about 17% lower than those above $1 billion (Exhibit 2).
The valuation gap reflects greater inefficiencies and less intermediated deal sourcing that is typical of the middle market, which continues to be a structural advantage for experienced managers with strong origination networks.
Recent Market Trends
Over the past several years, the similar factors that have affected the overall private equity market also affected middle market buyout deals, although to a lesser degree. The cost of financing new deals increased, leverage ratios contracted, and loan-to-value ratios declined.
With middle market strategies less impacted from headwinds, there has been a steady level of sponsor engagement and capital deployment, suggesting that general partners (GPs) are finding viable entry points (Exhibit 3). Reasons that middle market strategies have been resilient include 1) the majority of deal flow in the aggregate buyout space should occur in the middle-market purely due to the opportunity size to source deals—there are nearly 200,000 middle market businesses representing one-third of private sector GDP in the U.S. 2) Middle market managers have more pathways to exit with less complex deals relative to large transactions. And 3), new deals are not overly dependent on debt.
Performance Snapshot
Small and middle market private equity historically provided investors with compelling risk-adjusted returns. Compared to other private equity strategies, they tend to offer lower volatility and higher annualized performance. This makes them interesting additions to a comprehensive private equity portfolio.
- National Center for the Middle Market, with data based on availability as of August 2025.
ADDITIONAL INFORMATION:
For all exhibits: Private Equity proxied by Preqin Private Equity excluding Venture Index which includes Balanced, Buyout, Secondaries, and Turnaround strategies within Private Equity, per Preqin. Buyout (Broad) proxied by Preqin Private Equity Buyout Index and includes Small, Mid, and Large Buyout Strategies, per Preqin. Buyout (Mid) proxied by Preqin Private Equity Buyout Mid Index. Buyout (Small) proxied by Preqin Private Equity Buyout Small Index. Growth Equity proxied by Preqin Growth Equity Index. Secondaries proxied by Preqin Secondaries Index. U.S. Equity proxied by S&P 500 Total Return Index. Global Equity proxied by MSCI ACWI Net Total Return USD Index. Global Bond proxied by Bloomberg Global Aggregate Index. Global 60/40 proxied by 60% MSCI ACWI Net Total Return USD Index and 40% Bloomberg Global Aggregate Index.
INDEX DEFINITIONS
Bloomberg Global Aggregate Bond Index: A flagship measure of global investment grade debt from a multitude of local currency markets. This multi-currency benchmark includes treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging markets issuers
MSCI ACWI Index: MSCI’s flagship global equity index is designed to represent performance of the full opportunity set of large- and mid-cap companies from developed and emerging markets around the world.
NCREIF Farmland Property Index: The NCREIF Farmland Index is a quarterly time series composite return measure of investment performance of a large pool of individual farmland properties acquired in the private market for investment purposes only.
NCREIF Timberland Property Index: The NCREIF Timberland Index is a quarterly time series composite return measure of investment performance of a large pool of individual U.S. timber properties acquired in the private market for investment purposes only.
Preqin Growth Equity Index: The index covers closed-end funds captured in the broader Private Capital index including funds/strategies listed as Growth, as defined by Preqin.
Preqin Private Equity Buyout Index: The index covers closed-end funds captured in the broader Private Capital index including funds/strategies listed as Buyout, as defined by Preqin.
Preqin Private Equity Buyout (Mid): The index covers closed-end funds captured in the broader Private Capital index including funds/strategies listed as mid-market as defined by Preqin including those with capital commitments between $501M and $1.5B for vintage years 2005–present; $301M to $750M for vintages 1997–2004; and $201M to $500M for vintages 1992–1995.
Preqin Private Equity Buyout (Small): The index covers closed-end funds captured in the broader Private Capital index including funds/strategies listed as mid-market as defined by Preqin including those with capital commitments of $500M or less for vintage years 2005–present; $300M or less for vintages 1997–2004; and $200M and less for vintages 1992–1995.
Preqin Secondaries Index: The index covers closed-end funds captured in the broader Private Capital index including funds/strategies listed as Secondaries (PE), as defined by Preqin.
S&P 500 Index: The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 of the top companies in leading industries of the U.S. economy and covers approximately 80% of available market capitalization.
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