February 22, 2025
The Concentration Paradox
Why Mid-Market Outperformance Matters ↓
In today's edition:
- The dangerous concentration of capital in private markets
- Why the best returns aren't where the money is flowing
- The data-backed case for mid-market
- What critics get wrong
0.2% Control 20%: The Capital Concentration Problem
Private markets have an allocation problem.
Just 0.2% of managers control 20% of all private equity capital. This concentration would make sense if it aligned with performance. It doesn't.
Institutional capital continues flooding into the largest fund managers. Meanwhile, the data consistently shows superior performance in mid-market investments.
Large funds occasionally venture into mid-market deals. But their primary focus remains on larger transactions. They need to put significant capital to work efficiently.
This disconnect isn't a matter of opinion. It's documented in the numbers.
500 Basis Points: The Mid-Market Performance Edge
The evidence is compelling:
- PineBridge research shows upper quartile U.S. mid-market buyout funds outperform large-cap focused funds by over 500 basis points annually.
- Morgan Stanley's analysis found mid-market companies generate 2.9x revenue growth from entry to exit. Large-cap acquisitions? Just 0.75x.
- Mid-market company EBITDA growth hits 2.7x from acquisition to exit. Large-cap deals don't come close.
This performance gap persists even in challenging environments. During the recent rate hike cycle, mid-market funds delivered 12.7% IRR versus just 7.6% for large-cap funds, according to FS Investments' 2024 analysis.
The numbers don't lie. This performance gap represents the difference between top-quartile and mediocre returns for institutional portfolios.
7.6x vs 11.8x: The Valuation Gap That Drives Returns
Why such dramatic outperformance? Two key factors.
First, mid-market deals come at better prices.
Crosbie & Co. research quantifies this gap:
- Mid-market acquisitions: 7.6x TEV/EBITDA (2022)
- Large-cap acquisitions: 11.8x TEV/EBITDA
- Discount: A full 36%
Second, mid-market investments create more real business value. Morgan Stanley research found 75% of mid-market value comes from revenue and EBITDA improvements. Large-cap companies? Just 35%.
This pricing advantage exists because mega-funds must deploy enormous capital pools. They chase the same limited set of large targets. They bid up prices.
Mid-market specialists operate in less competitive environments. They find value in sectors and niches overlooked by larger players.
The formula for outperformance becomes clear: Lower entry prices + stronger operational improvements = superior returns.
94% of Deals, Not Enough Capital: The Mid-Market Opportunity
The concentration of capital in large managers doesn't happen without reason. These firms offer important advantages:
- Efficiency in deploying large sums
- Simplified portfolio construction and oversight
- Reduced career risk for investment committees
Large funds might claim they invest in the mid-market too. Don't be fooled.
There's a fundamental difference between a mega-fund occasionally doing smaller deals and specialized mid-market managers. The specialists:
- Focus exclusively on this segment
- Build networks and expertise specifically for these company sizes
- Give appropriate attention to deals that would be rounding errors for larger funds
- Aren't simultaneously pulled toward deploying capital in larger transactions
The scale of this specialized opportunity is compelling.
Juniper Square reports that mid-market focused funds represent 58.7% of all U.S. PE funds by count in Q3 2023. Their highest proportion since 2009.
According to PineBridge, mid-market transactions account for 94% of all PE deals globally.
If institutional investors redirected even a portion of capital from the largest managers to specialist mid-market firms, the value creation would be measured in tens of billions annually.
Forward-thinking allocators are recognizing the disconnect: they understand that the concentration of capital in the largest managers isn't validation.
It's an opportunity to focus where the specialists operate.
In an industry where everyone claims alpha, dedicated mid-market managers offer something increasingly rare: focus, expertise, attention… and evidence-based returns.