Why the small & middle cap PE Market is considered to be the powerhouse of the US Economy?

When it comes to private equity investments, investors are often inclined towards large–cap funds, assuming that they offer better returns and lower risks due to their size and stability. However, this assumption has turned out to be quite the opposite in reality, with small and mid cap funds proving to be more lucrative. In this blog, we will explore the reasons as to why small and mid cap private equity funds are more attractive than their large cap counterparts and why they have caught the attention of investors in recent years. Get ready to change your mindset about investment strategies!

Let’s dive deep and understand why small and mid cap are more attractive than large cap?

The small and middle market, comprising American businesses with annual revenues ranging between USD 10 million to USD 1 billion, represents only 3% of all US businesses – yet is responsible for one-third of the country’s GDP and employment, generating combined revenues of USD 10 trillion and employing nearly 50 million people. If it were an independent country, the US middle market would rank as the fifth-largest economy in the world.

Highly Fragmented Market

The small and middle market presents a compelling opportunity for private equity investors. The market is highly fragmented, offering growth opportunities through organic growth and acquisitions. small and middle market firms tend to be more flexible, adaptable, innovative, and better positioned to seize opportunities, making them ideal for driving revenue growth and margin expansion. Additionally, middle market investments often use less leverage than buyouts in larger companies, offering lower acquisition valuations. As a result, private equity investments in middle market buyouts have the potential to generate higher returns than the larger end of the market.

Outperformance through Manager Selection

Top-tier buyout funds focused on the small and middle market have generated net IRRs of 22.1% since 2000, compared to a net IRR of 19.0% for upper-quartile large buyout funds, resulting in an incremental net IRR of 3.1% for top-performing middle-market funds. These figures highlight that small and middle market investments can lead to outperformance fortunes versus larger companies, particularly when partnering with the right managers. The impact of manager selection is underscored by performance differences of 0.8% p.a. between median midmarket and large buyout funds.

A Resilient Market

Small and middle market companies have shown a remarkable ability to withstand uncertainty, as exemplified during the 2007-2009 financial crisis when they generated over 2 million new jobs while large businesses lost 3.7 million positions. More recently, data from the National Center for the middle market shows 12.2% YoY revenue growth throughout the middle market, with nearly four out of five companies reporting revenue growth compared to the previous year. Employment growth also remains robust, with 58% of middle-market companies increasing their workforce.

Family-owned Business Opportunities

Most of the small and middle market companies are founder-owned and constantly growing. USD 30 to 40 trillion in wealth expected to be passed on from the baby boomer generation to their successors over the next few decades, many family-owned middle market businesses will require capital for management transitions and other strategic issues. As a result, only 5% of the 200,000 US middle market companies currently have private equity backing, indicating vast investment opportunities for private equity funds.


The small and middle market has become a powerhouse of the US economy, and private equity investors are uniquely positioned to benefit from the market’s continued growth and fragmentation. Through careful manager selection, compelling valuations, and opportunities for operational enhancements, private equity investors can take advantage of these unique features to generate meaningful returns.

If you’re an investor in Asia seeking access to private equity managers, Finex can connect you. Our team caters to all levels, from small to medium to large cap PE. For more information, feel free reach out to our CEO – Chris Kim or Head of the Group, Lili Wang. We look forward to hearing from you

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