Why The Next Decade Of Private Equity Could Be Built In The Lower Middle Market

Private equity has evolved from a postwar niche strategy into one of the largest and most sophisticated asset classes globally, with mega funds continuing to dominate deal value and scale. However, according to Varun Parikh, a private equity vice president with over eight years of global investing experience, the next decade of differentiated returns is unlikely to be generated at the top of the market. Instead, opportunity lies in the lower middle market—a segment that remains fragmented and under-institutionalized despite trillions in private equity assets and intense competition for large deals.

The lower middle market operates as a market largely hidden in plain sight. In the U.S., more than 30 million small businesses operate across the economy, while India hosts over 63 million MSMEs. Globally, most enterprises remain founder-run and sub-scale. Unlike large-cap auctions characterized by standardized disclosures and efficient pricing, lower middle market deals are often relationship-driven and information-light. This structural inefficiency creates a clear advantage for investors able to underwrite operational complexity, translating into pricing dispersion and opportunity.

Over the past decade, mega funds have consolidated at the top of the market and expanded into multi-asset strategies to sustain growth. Larger fund sizes inherently require larger deal sizes, which reinforces competition and compresses entry yields at the top of the market. In contrast, lower middle market investors can maintain focused specialization within specific sectors where operational improvement—rather than financial engineering—drives value creation, enabling them to generate returns independent of the mega fund compression dynamic.

Three structural characteristics define the lower middle market opportunity. First, fragmentation remains endemic across multiple industries, including B2B services, niche manufacturing, distribution, and consumer sectors. The absence of scaled national players in these segments creates a durable foundation for disciplined buy-and-build strategies, allowing specialized investors to consolidate fragmented landscapes and create genuine operational value. This contrasts sharply with the mature, efficient markets where mega funds compete, where pricing has already absorbed much available upside and scale advantages matter less.