Smaller Deals, Larger Appeal

Private equity activity is shifting toward smaller transactions, according to research from Marquette Associates. Total deal value for transactions of $100 million or less increased nearly 60% in the second quarter on a quarter-over-quarter basis. Over the same period, deal value declined more than 31% for transactions in the $100 million to $1 billion range and 63% for deals above $1 billion. Deal count fell across all three size categories, but smaller transactions proved more resilient, with sub-$100 million deal count down roughly 7%, compared with declines of 29% and 21% for the mid-sized and large categories, respectively.

The shift comes as private equity firms contend with higher entry valuations and a challenging exit environment. Larger, more scaled businesses continue to command premium valuations, partly because fewer sponsors are seeking to exit them, which constrains the supply of attractive platforms for sale. Larger and more mature companies also offer fewer opportunities for significant growth or margin improvement, placing greater weight on entry valuations and exit multiples in determining realized returns. Smaller businesses, by contrast, typically trade at more attractive valuations and offer more levers for value creation, including acquisitions, operational improvements, professionalization, and expansion into new products or markets. Private equity firms are often the first institutional investors in these companies, allowing sponsors to invest before such initiatives are fully implemented.

The valuation gap between market segments has widened. As of the end of the first quarter, the median entry multiple for companies valued between $500 million and $1 billion exceeded 13x EV/EBITDA, up from around 12x in 2025. The median multiple for companies valued between $25 million and $100 million fell roughly 4% over the same period to just above 8x. Higher interest rates and tighter debt markets have contributed to this divide by making large, highly leveraged buyouts more expensive and harder to underwrite.

Limited partners are also adjusting their preferences. Beyond the benefits of lower entry valuations and greater scope for operational improvement, LPs are increasingly favoring sector-specialist managers over generalists and looking further down the market. Lower-middle-market firms can use industry expertise and established networks to access proprietary or less intermediated deals that may be less available through broader auction processes. Marquette expects the lower middle market to remain a key focus for sponsors and LPs, particularly if elevated valuations, higher financing costs, and exit challenges persist, as company-specific growth and operational improvement will become increasingly important to generating returns.