Private Equity (and Debt):

Access to capital is the lifeblood of middle-market companies. Yet, securing that capital has long been a challenge. Regulatory constraints on banks—the traditional lenders to these firms—tightened significantly after the Great Financial Crisis, making it more costly for banks to lend to mid-sized businesses with lower current profitability but strong growth potential.

So, where should these firms turn? Increasingly, the answer is private equity (and debt), as a recent study conducted by the National Center for Middle Market (NCMM) shows.[1] The study reveals that private equity ownership—and the debt financing that could accompany it— can significantly accelerate growth.

NCMM data from the past decade has shown significant growth differences between PE-backed firms and non-PE-backed ones. For example, the first group saw employment growth of 13% and revenue growth of 15% by the end of 2024, while others grew at a slower pace of 8% in employment and 10% in revenue. While PE-backed companies likely differ in some key characteristics from their peers, the recent survey results show that firms overwhelmingly view private equity as a direct contributor to their superior performance.

What Drives This Growth Gap?

This is perhaps the most important question. The PE business model plays a critical role: Better governance leads to better access to capital and more profitable operations. Specifically, surveyed firms identified the top three benefits of having a PE sponsor as:

1. Access to growth capital
2. Faster decision-making
3. Operational improvements.

A supermajority of sponsored firms acknowledge that this PE-backing is essential to their success.

What Are the Trade-Offs?

 These funding and governance advantages come with costs, though, as noted by the survey participants. The top three costs of PE sponsorship they point to:

1. Higher cost of capital and changes to capital structure;
2. Increased short-term performance pressure;
3. Complexity and reporting requirements.

Interestingly, these concerns are most pronounced among firms that already have banking relationships or alternative funding sources—highlighting that capital access remains the lifeblood of growth.

Private Debt is a Fast-Growing Alternative

For companies hesitant to share ownership, private equity firms offer another option: private debt. This asset class has been the fastest growing one over the past decade. While private debt typically carries higher interest rates than bank loans, it offers not only credit access in times of growth but also various benefits over bank loans: faster execution and greater flexibility in loan terms. Most importantly, this flexibility can be critical during times of stress, helping firms secure financing and achieve growth targets, and can also be structured as mixed deals of debt and equity, which banks cannot offer.

Looking Ahead

PE-backed middle-market firms still represent a small share of the overall market, but the potential is enormous. Almost half of surveyed mid-sized firms without a PE sponsor say they are somewhat likely to consider private equity within the next three years. Meanwhile, the private debt market continues to expand rapidly, becoming an even more important funding source, as highlighted by survey participants.

I believe private equity firms—sponsoring both equity and debt—will be a powerful growth engine for a greater universe of middle-market firms in the years ahead.

Access the Full Report, Private Equity in the Middle Market