What’s so special about the middle market? In a world where every conversation seems to revolve around AI, mega-software M&A, and data center infrastructure, it is easy to overlook the arena that creates 30% of private sector employment and 33% of revenue growth. But as investors grapple with AI transition risks, elevated leverage, and weaker structures in large cap portfolios, the core middle market is getting second and third looks.

Pest control companies, veterinary clinics, and HVAC services aren’t featured on many prime-time business TV programs or conference agendas. But “old economy” sectors are commanding more attention from private equity buyers and their direct lending partners who specialize in core middle market companies. Purchase price multiples for these HALOs (heavy asset, low obsolescence) with cash flows in the $25 – 75 million range have risen to double-digit ebitda multiples, improving the cash equity share of buyouts and holding down leverage multiples. 

Today’s industry composition of portfolios for the leading core MM direct lenders did not materialize over night. Those few private credit managers who lived successfully through the Great Recession learned some important lessons in those tough times. First, diversify. Keep watch on your outsized sector concentrations. No matter how much you may love dental practices, don’t build your entire portfolio with them.