A longstanding question in private equity is why lower-middle-market (LMM) buyouts have historically produced strong returns relative to larger buyout segments. This paper examines whether capital scarcity, rather than company-level risk, helps explain the valuation and return differences.
Using a proprietary "financialization ratio," Omnigence measures the amount of institutional private equity capital available relative to investable enterprise value across different company size segments. The analysis finds that institutional capital coverage is significantly lower in the LMM than in larger private equity markets.
In the United States, the LMM has approximately 3.4 cents of institutional capital for every dollar of investable enterprise value, compared to 17.3 cents in the middle-market above it. In Canada, the disparity is even greater, with approximately 0.3 cents of institutional capital per dollar in the LMM versus 9.0 cents in larger market segments.
The findings suggest that lower-middle-market businesses operate in a less financialized and less competitive environment. With fewer institutional buyers competing for assets, acquisition valuations may remain lower than those seen in larger private equity markets.
The paper argues that this structural capital gap contributes to persistent valuation discounts and helps explain the long-term return profile of lower-middle-market private equity strategies. For investors evaluating private markets, understanding capital availability may be as important as assessing traditional measures of company risk.