This paper analyzes the valuation gap between public equities and lower middle market (LMM) private equity, and how differences in entry pricing can shape return outcomes for institutional investors.
Public equities currently trade at approximately 17x EV/EBITDA, while LMM private equity transactions are typically completed at 6–9x, with smaller transactions priced lower. This spread reflects structural characteristics of the private market, including lower competition for smaller deals, transaction complexity, and information asymmetry.
Importantly, the analysis shows that diversified LMM portfolios do not exhibit materially higher earnings volatility than public equities at the portfolio level. This suggests the valuation gap is not fully explained by higher risk, but by how capital is allocated across market segments.
The spread has persisted over time and has widened in the current cycle, as public market valuations expanded while private market pricing remained relatively disciplined.
For allocators, the implication is straightforward: lower entry multiples in LMM private equity represent a structural pricing difference that may influence long-term portfolio construction and return expectations.