Why Work in Middle Market Private Equity vs. a Megafund

Why would you want to work in middle market private equity vs. megafund private equity? It’s a classic question that you’ll need to think through as you head into private equity recruiting.

The answer is really a personal choice, and there are a number of pros and cons between each option. We’ll break it down here and you can get an idea of what path might be best for you.

Middle market vs. megafund private equity: understanding the differences

First, let’s talk through what the difference actually is between middle market and megafunds (including the largest upper middle market firms).

The key thing to understand is that segmentation is not necessarily based on AUM or fund size, but rather on the types of deals that the private equity firm targets. For example, some sponsors, such as Riverside or H.I.G., have large AUMs, but still target smaller deals that would classify as middle market, or even lower middle market.

That said, megafunds do have the largest fund sizes, typically in excess of $10 billion+. Most middle market firms tend to operate in the $1 – $5 billion range, with upper middle market bridging the gap on the high end, and lower middle market on the low end.

Generally, middle market private equity firms focus on investing in companies with an enterprise value between $50 million and $1 billion. Target companies are usually private, and often either bought from another sponsor or a founder. On the whole, middle market firms tend to be smaller than their megafund peers (excluding outliers mentioned above), and may have a more regional or specialized focus (like a target industry).

In contrast, megafund private equity firms typically invest in larger companies with enterprise values of $1 billion or more. They’re more likely to look at publicly-traded assets (take privates), though still look at sponsor-backed deals and other private opportunities. Megafunds are often global players with significant resources at their disposal, which means more back office support and better internal resources for portfolio companies to draw on.

Benefits of working in middle market private equity

If you’re considering a career in private equity, you might wonder what middle-market firms can offer (and if it would ever make sense to choose one over a megafund). Here are some key benefits to keep in mind.

1. Easier to break in

It’s often easier to land a spot at a middle market firm vs. a megafund. This is both due to the greater number of middle market firms (more opportunities), as well as the fact that megafunds often require that candidates come from a very specific background (target school, top-tier investment bank). If you don’t have that background, you probably won’t get an interview.

2. More responsibility

While very firm dependent, on the whole you’ll have a greater chance of having significant contribution as an associate at a middle market firm compared to a megafund. You’re more likely to lead diligence calls, present in investment committee, and run with third-party workstreams. At a megafund you’re more likely to stay in a production role vs. a leadership role, meaning you are tasked with model, IC deck, and diligence deliverables, instead of getting the chance to participate in the discussions evolving from those deliverables.

3. Opportunities for professional growth and advancement

You’ll have a higher likelihood of advancing past the associate level and building a career at a middle market firm. They’re often less hierarchical and regimented, showing more willingness to promote from within. Though some firms are starting to move away from this, megafunds have historically required associates to exit after two years to attend business school before attempting to re-recruit.

One attractive strategy for promotion is to join a growing middle market shop. As they (hopefully) grow and raise bigger funds, they’ll naturally need to hire more people. This can be an opportunity to step into a promotion, jumping to the next step on the ladder. Eventually, you might have a reasonable shot at a path to partner. Conversely, megafunds may not grow as rapidly and will be more likely to make outside hires.

4. Opportunity to make meaningful contributions to portfolio companies

Working in middle-market private equity means you have the ability to make meaningful contributions to the companies in which you invest. You can help identify and execute strategic initiatives to drive growth and create value. This can be very engaging and enjoyable, particularly if you’re able to complete the platform transaction and continue working with the same portfolio company through the life of the deal. You’ll likely build a great relationship with the management team, even as an associate, which is something that would be much less likely to occur at a megafund.

5. Potential for better work life balance

Conventional wisdom is that you’ll get better hours and an improved work life balance in the middle market. In practice, it’s very firm dependent and you’ll need to do your diligence before you join. But, generally, you’ll be able to find plenty of middle market firms that will let you avoid the 100+ hour weeks that can be common at place like Apollo.

Just make sure you avoid the worst case scenario, which is working 100 hour weeks at a lower middle market firm with terrible comp and no exit prospects.

Challenges of working in middle market private equity

As with any job, working in middle market private equity has its challenges. Here are a few potential downsides you might run into:

1. Compensation

There can be a huge difference in compensation at middle market firms vs. the upper middle market or megafunds. An associate at a lower middle market firm in a third-tier city may only make $200k all-in, while a megafund associate in New York will pull $400k. Generally, the larger the firm, the higher the compensation.

However, it is important to note that you might have higher likelihood of receiving a small carry allocation as a junior employee at a middle market firm. Along with the improved prospects for promotion and potential co-investment, it’s important to consider all of the various factors when judging your comp package.

2. Limited exit opportunities

Another hurdle in middle market private equity is potential for more limited exit opportunities. You won’t have the name brand that a megafund provides, which can make things more difficult if you’re interested in recruiting elsewhere for senior associate or VP roles, or thinking about checking out business school. This is particularly true if you’re interested in making a jump to a hedge fund, many of which will only recruit from megafunds.

3. Messier work

One issue in middle market PE that’s often overlooked is the impact of working with smaller companies. You’re more likely to get in frustrating situations where your targets or portfolio companies have poor management teams, incorrect financials, failing internal functions, and generally worse operations. It’s pretty common for a middle market associate to fill in as an auxiliary member of a PortCo’s finance team at some point in their 2-year stint. This could be great for some people, but can be a shock if you’re coming from an investment banking experience where you only worked with high-performing publicly traded businesses.

4. More admin tasks

Coinciding with the earlier commentary on megafund resources, you may find yourself spending significantly more time on fund admin and reporting work in the middle market. You’ll probably be looped into various tasks related to LP reporting, fundraising, and miscellaneous internal operational initiatives (CRM, sourcing, benchmarking, etc.). Firm dependent and some people may not mind, but certainly something to be aware of.

Final thoughts on working in middle market private equity

Middle market PE can be a great place to work and offer you opportunities you won’t be able to get in any other role. There are few other chances for ~25 year-olds to get the same level and depth of interaction with senior executives and experienced investors. You’ll probably find that you come out of middle market PE with a unique (and incredibly strong) set of skills that will put you in a great position no matter what you want to do.

But, at the end of the day, the most important thing is to land at a firm with a team you enjoy working with. Your success in the role (and in the industry) will be based more on your ability to keep grinding it out, not any difference in your placement at a middle market shop vs. a megafund. To do that, it’s critical that you find a place with people that you can bear spending time with.

Sam Hillier

Sam Hillier is a reporter at Transacted covering private equity and investment banking. He previously spent time as an investment professional focused on direct buyouts, as well as an earlier strategic advisory stint.