The edge in private markets: how lower mid-market PE creates idiosyncratic alpha

Private equity often gravitates towards the largest opportunities. Big deals attract the deepest pools of capital and the most sophisticated investors. Yet beneath this institutionalised end of the market lies a segment that is far less efficient, and potentially far more rewarding for skilled managers.

For Sam O’Connor, partner at Fortitude Investment Partners, the lower mid-market offers a structural imbalance that experienced investors can exploit. These are businesses typically valued between $10 million and $200 million in enterprise value. Many generate annual earnings between $3 million and $20 million, yet attract comparatively little institutional capital.

“Think of the investment landscape as a map where the large and mid-markets are paved motorways. They’re fast, efficient and crowded with high-performance sports cars racing for the same exits,” O’Connor says. “But most of the country isn’t reached by those motorways. The lower mid-market sits on gravel roads, and navigating them requires experience rather than simply a faster engine.”

Those structural inefficiencies are central to the investment thesis. They create the potential to generate idiosyncratic alpha, returns driven by operational insight and deal sourcing rather than simply rising markets or leverage.

A structural imbalance in opportunity

The scale of the opportunity set in the lower mid-market is striking. Estimates suggest roughly 68,000 private businesses sit in this segment across Australia. That compares with around 2,200 companies in the mid-market and roughly 1,700 in the large-cap universe.

Yet the capital chasing these opportunities remains limited. Only around $1.5 billion in private equity dry powder is allocated to the segment, compared with more than $5 billion in the mid-market and almost $17 billion in large-cap private equity.

When measured against expected transaction activity, the imbalance becomes even clearer. The ratio of potential deal-value-to-available-capital in the lower mid-market can reach roughly 280 to one. Larger markets display ratios closer to 25 to one or 72 to one.

O’Connor says that imbalance fundamentally shapes how transactions occur.

“The lower mid-market is under-penetrated by institutional capital, which means deals are often relationship-driven rather than purely auction-based,” he explains. “There’s more complexity and more pricing dispersion, and that creates the potential for skilled investors to generate differentiated returns.”

In practical terms, founders in this segment often prioritise the right partner rather than the highest headline price. That dynamic can allow experienced investors to secure attractive entry valuations while building deeper partnerships with management teams.

Where alpha is created

If inefficiency explains the opportunity, execution determines the outcome. O’Connor describes the value-creation process in three stages: buying well, building well and exiting well.

Buying well begins with sourcing proprietary opportunities. Transactions in this part of the market are frequently less intermediated, meaning competition from other buyers may be limited.

“This part of the market is less intermediated and information is less symmetrical,” O’Connor says. “Two buyers can look at the same business and legitimately reach very different conclusions. That dispersion is where opportunity exists.”

Operational improvement then becomes the primary driver of value creation. Companies in the lower mid-market typically have proven products and established customer bases. However, they often lack the systems, governance structures and leadership depth required for the next phase of growth.

Small changes can therefore have outsized effects. Strengthening management teams, improving financial reporting or refining strategy can materially alter a company’s trajectory.

O’Connor argues that attracting senior talent is often easier than investors expect.

“There’s a common misconception that it’s difficult to attract high-quality executives into businesses of this size,” he says. “In reality, many leaders are excited by the opportunity to help shape a company at an earlier stage of its growth journey.”

Scaling these businesses also tends to rely less on leverage than traditional buyouts. Instead, growth is typically driven by operational improvements, product expansion and strategic acquisitions within niche markets.

The exit advantage

The final element of the strategy lies in exit dynamics. Lower-mid-market investments benefit from a broader buyer universe than many investors assume. Potential acquirers include trade buyers, sponsor-backed corporates and larger private equity funds seeking growth platforms.

Crucially, exits are less dependent on favourable IPO markets. Strategic buyers often pursue acquisitions that expand capabilities or secure market share, which can create wider exit windows.

“When we invest in this part of the market we’re often building businesses that larger buyers ultimately want to own,” O’Connor says. “Preparing companies for that strategic moment is a key part of the value-creation process.”

Industry data suggests the approach can translate into strong outcomes. Research cited by Fortitude indicates lower-mid-market investments have achieved around 21 per cent greater multiple expansion than mid-market deals, and almost double that of large-cap buyouts.

Individual investments illustrate how these dynamics can play out in practice. Lower-mid-market businesses often begin with limited institutional backing but strong underlying fundamentals. Over time, strengthening leadership teams, refining strategy and improving operational systems can position them for strategic buyers seeking growth platforms.

For advisers evaluating private market allocations, the broader lesson is compelling. Lower-mid-market private equity operates in a segment where inefficiency remains significant. Managers able to source proprietary deals, build stronger businesses and position them for strategic buyers may access a differentiated return stream.

As O’Connor puts it, the opportunity often lies away from the busiest parts of the market.

“While much of the investment world is focused on the motorways, we’re very comfortable driving on the gravel roads,” he says.