Private equity returns have historically been driven by leverage and multiple expansion, particularly in large and mega buyouts. However, in a higher interest rate environment, this model is becoming less effective as financing costs rise and refinancing risk increases.
This paper examines the structural advantages of lower middle market (LMM) private equity. LMM buyouts typically use lower leverage, enter at more conservative valuation multiples, and maintain a higher equity cushion. These characteristics shift return generation toward operational value creation rather than reliance on financial engineering.
With reduced exposure to debt markets and less dependence on multiple expansion, LMM private equity offers a differentiated approach to navigating today’s market conditions. As capital structure becomes a more critical driver of performance, equity-heavy strategies may provide a more stable framework for long-term private market returns.View Full Report