What New Research Says About PE’s Impact on Midmarket Businesses

A special report from the National Center for the Middle Market (NCMM) dispels some myths about private equity’s impact on middle-market businesses and offers some hard data on how PE-backed companies perform compared to their counterparts. NCMM’s Executive Director Doug Farren joins the podcast for a deep dive into the research findings, and what it means for both middle-market companies and the PE firms that hope to invest in them. To read the full report, visit middlemarketcenter.org.

Read a transcript of the podcast below.

Middle Market Growth: Welcome to Middle Market Growth Conversations, a podcast for dealmakers discussing the trends shaping the middle market. I’m today’s host, Katie Maloney, and this is a production of the Association for Corporate Growth. I’m joined for this episode by Doug Farren, executive director of the National Center for the Middle Market, to discuss new research from the center that explores the relationship between private equity and middle market growth and value creation. Doug, welcome to the podcast.

Doug Farren: Thanks, Katie. It’s great to be here.

MMG: We like to start these interviews off with a little bit of a get-to-know-you segment. I suspect that a lot of our listeners already are pretty familiar with you, but for those who are not, can you tell me a little bit about yourself and the work that you do at the National Center?

DF: Sure, yeah. I’m a native Ohioan, born and raised northeast Ohio. I went to Penn State for undergrad, had a business degree there. And then I started my career at a consumer lending organization called Norwest Financial, which is now part of Wells Fargo Bank. From there I had the really good fortune of hooking up with a very small Six Sigma consulting firm. So, I had a family friend who was one of the principals of a 15-person organization, but those folks all came out of Motorola. They were really some of the early adopters and founders of Six Sigma. So they needed someone to help kind of run the backend of that business. So I did that for a few years, went to Ohio State for my MBA, and then spent about 11 years in the retail industry with a company formerly known as L Brands here in Columbus, Ohio, mainly in supply chain and logistics functions. And then in 2011, the Fisher College of Business reached out really to recruit me to help launch the National Center for the Middle Market. So, we were originally created as a partnership between the college and GE Capital. We opened almost 14 years ago—coming up on that anniversary, which is hard to believe—but we’re the nation’s only research center of our kind that’s focused on supporting the U.S. middle market. And we do that through research, outreach, and engagement with different groups across the country as well as education both for students and executives. So, I kind of oversee all those activities formerly with our recently retired dean Anil Makhija. But right now we are working closely with our partners who are Chubb, Visa, and Wells Fargo.

MMG: Great. No, thanks for that background. ACG and the National Center have been longstanding partners, so we’ve certainly used your research in a lot of our reporting and know that it’s a great benchmark for a lot of the ACG members that we work with as well. Doug, you touched on some of your earlier career experience, but I want to take you even farther back. Can you talk a little bit about your very first job and whether there’s a lesson or two that you learned from that that you’ve taken with you throughout the rest of your career?

DF: Yeah, sure. So, I was big into sports growing up. I mean, I played everything, and this is like obviously way before like internet days and all that stuff. So, I was always outside playing something. Baseball, basketball, football, I mean, you name it. So, my first paying job was as a little league umpire in my community. I think I was 14 years old. I lived close enough to the fields where I literally just like rode my bike over and I umpired everything from like t-ball up to coach pitch, and then eventually, you know, kids that were not that much younger than I was. And this was kind of before the days of like all the intense year-round travel teams and all that. It was really just summer community baseball. But some of the lessons I took from that, I thought it would just be like super easy, low stress. No, I mean, it was, you know, parents, coaches, people yelling at me, criticizing every call and every decision that I made. So, it got to be kind of a stressful thing. But it was a great learning experience because at that age, you know, I kind of learned you have to make very decisive decisions. I was literally calling balls, strikes, whether a runner was out at a base and then having conviction and standing up for that decision when a coach would, you know, come out on the field and challenge me. Or there’d be parents yelling, like, right behind me behind the fence. So yeah, kind of learning to develop, you know, that thick skin, being fair, but I think just being decisive and then just sticking to that and not wavering were kind of things that I took with me certainly into the rest of my sports career and then also into my early business career. So, some bad memories, but a lot of good memories in that experience.

MMG: The different personalities alone, I feel like is great exposure for adult life.

DF: Yeah, certainly. Yep.

MMG: Well, so let’s get into the research. Can you tell us a little bit about what motivated this project and why you wanted to explore the relationship between private equity investment and business outcomes for middle-market companies?

DF: Yeah, sure. So, I mean, research is kind of at the root of what we do, the NCMM being part of really a top 15 business school in the U.S. So, a lot of the strength in what we do has been rooted in collecting data from middle-market companies. So, going all the way back to, gosh, 2011 when we launched, and then in 2012 we established our middle market indicator (MMI), which is still going on today, the semi-annual study of a thousand companies. It’s really about talking to businesses, getting data-driven insights from them about their challenges, their opportunities, maybe a little bit about how they’re making decisions and really understanding from their perspective how the middle market operates, how it grows, what are some of the headwinds that that happen. So, you know, this is just really a continuation of that. I think in our library now, we’ve got somewhere along the lines of 45 middle market indicators and another 35 or 40 of these reports, which we call flagship studies. So private equity, you know, you mentioned the relationship with ACG as longtime partners. I think they were one of the first groups that reached out to us after we opened, just wanting to, you know, collaborate and understand more about mid-size companies. We know that over 90% of these businesses are privately held, so it makes getting data and information really challenging. And to that extent, we’ve looked at different topics, right? Talent, operations, innovation, globalization, and I’m really excited about this latest study, which was a collaboration with a group called Future Standard out of Philadelphia, formerly FS Investments. And the report is called Private Equity in the Middle Market. And what we really wanted to do was maybe bolster some of the anecdotal things that we’ve seen over the years. You know, I used to go to ACG Intergrowth every year, and I’ve worked with a lot of the chapters around the country and just talking with, you know, not only the middle market companies, but the PE firms and the lawyers and the accountants and everyone that’s kind of in this ecosystem, right? This M&A ecosystem really was exciting to finally craft and launch a project where we talked with companies that, you know, majority of them had had involvement with PE but some of them had not. And we wanted to see kind of both sides of that coin and understand, you know, is there really a significant difference in the performance and how these businesses operate, some of the benefits they’re seeing, maybe some of the issues that they’ve been having. And then for those that don’t use PE, what’s the reason behind that? Are there barriers? Are there misconceptions? So, it was a really broad research platform that we undertook. Certainly, the team at Future Standard helped us significantly with thinking about the right questions to ask and, you know, the type of insights that we hypothesize we would get out of this. But we’re really happy with the output and I’m so glad to be here talking about it today.

MMG: Yeah, no, we’re happy to have you. And I think the structure of the survey is really interesting. You touched on it, but, you know, talking to both companies with private equity backing and then also those without, and kind of comparing their responses. So, I guess in that vein, after doing the survey, when you dug into the numbers, what correlations did you find between private equity ownership and growth and revenue numbers at these businesses?

DF: Yeah, great place to start. So, you know, that’s been a foundation of what we’ve done at the center is really monitor middle market growth from the standpoint of top line revenue as well as employment. We look at other aspects of that, like organic growth activities, expansionary activities, where these companies are investing their capital. And what was really interesting in this project is, yes, we typically conduct a survey and collect a lot of great information. And in this case, we talked to over 400 companies, but we also realized we were sitting on, hmm, somewhere around 12, 13 years of data on performance of PE versus non-PE companies in the middle market. And the reason we have that is because it’s one of the demographic questions that we have in our MMIs. So, we had a chance to go back, look at all that data, and we said, okay, over the course of many years, and over the course of some significant macroeconomic shocks, none bigger than the pandemic, but most recently we’ve had geopolitical issues. We’ve had, you know, a couple of wars around the world, and then we’ve had high interest rates and inflation, and now we’ve got trade and tariffs, so all these things are going on, but we had the ability to go back and combine all of that historical data with this recent survey data, which we just collected earlier this summer. Bringing all that together, we were able to look and see like, do PE companies perform better than their non-PE-backed peers? And that was certainly the case. We saw the growth rates for both employment and revenue are much higher for PE-backed companies. If you just look at revenue, for example, in the fourth quarter of last year, PE-backed companies grew at about 15% the balance of the middle market at about 10%. And while those numbers have changed over the history that we’ve been collecting this, it has consistently stayed higher for PE companies. Similarly, from an employment growth standpoint, last year for 2024, these companies added headcount at an average rate of 13%, where the rest of the middle market was about 8%. So in both, just those two metrics, the rates of growth for both employment and revenue were higher for the companies that had PE involvement.

MMG: I thought that employment statistic in particular was so interesting, because frankly, that’s not the reputation that private equity has in a lot of circles. So yeah, the fact that these businesses actually are adding jobs and creating positions as opposed to the opposite, that was a really insightful finding that again, runs against conventional wisdom in a lot of circles.

DF: No, that’s a great observation. That’s something that we are curious about as well, but it certainly did prove to be the case,

MMG: And I wonder if you found any clear reason why private equity is correlated with these positive indicators around revenue growth, around employment, EBITDA growth, these positive metrics?

DF: Yeah, well, I’ll first start, and, and like you said, this probably isn’t much of a surprise for an ACG audience, but maybe for others who aren’t that familiar with how the private equity industry works in the middle market, it is not a slash and burn, you know, chop shop mentality. I was just having a conversation last week with somebody who was like, oh, do you remember barbarians at the gate and KKR and you know, all like, they come in and slash and burn. And I’m like, yeah, that’s not really how this works, right? What we see is more about firms finding the right companies. It creates a really good partnership. They can use their expertise to help drive growth in a lot of different areas. So again, backing up the anecdotal evidence we’ve seen over a number of years with now what we see in this research project is not only is the PE firm bringing that much-needed capital to help support and fund growth, they’re also bringing in all types of other things, right? Management tools, maybe technology platforms. Certainly in a lot of cases where we see specialization, their experience from working with other, you know, like-sized companies in a similar industry. So what they can do is use, you know, very proven strategies and tactics to drive growth in maybe a new investment or a new portfolio company. And so therefore, you know, the drivers of that top line growth then creates the need for more people. So it’s kind of a causal effect. We say we want to become much more aggressive with expansion plans; well, now we’ve got the capital to do it, we’ve got the tools to do it, maybe we’ve got some new leadership to help drive it. All that contributes to, in our eyes, what’s driving the higher employment numbers as well.

MMG: Another difference between private equity-backed companies and their non-PE-backed counterparts that came out in this research was that private equity-owned firms are more likely to be actively exploring a liquidity event. That’s probably not surprising to most of our listeners, given the finite hold periods that private equity has, but I did think it was interesting that there was also quite a high share of non-sponsored companies that are open to some type of liquidity event in the next five years. So, I wondered if you could talk a little bit more about what the data showed there and what this can tell us about the market.

DF: Yeah, this was an interesting one for us because both data sets really shed a lot of light on what’s happening in the middle market. So, for about the past, well, actually for longer than the past year or two, we’ve been considering this phenomenon of, you know, founder owners that have either reached or will soon be reaching a retirement age or just a time where they just want to no longer be part of the business. And so you know, whether that was something that would’ve happened five years ago and then was delayed because of the pandemic situation and, you know, just the instability. And maybe some of these owners have told us like, hey, I’m not getting the valuations that I think I deserve. Again, I’m not a private equity specialist or expert by any means, but we hear that quite a bit and in some other studies that we’ve done on exit planning, we know that there there’s a lot of time that goes into this. There are a lot of advisors that should be at the table, and there are a lot of, you know, middle-market owners and founders who just don’t go through this many times in their career, most of them, some of them do. They may be, you know, kind of serial entrepreneurs and have maybe gone through the sales process, but a large majority of them have not. So, as they think about this, it’s not as easy as just, well, I’m going to pass it down to a family member, or I’m just going to sell to a competitor. There are all these options out there. And I think even for the non-PE backed companies, as you mentioned, they’re starting to think long and hard about this because our larger data set would suggest that the average middle-market company has been in business for about 35, 36 years. So, if that is founder-led right now, that means that person could easily be at a stage in their life where they just want to move on, retire, or do something else, spend time with their family. And so yeah, from the PE side, not that surprising, as you said, these investments are usually held for a particular amount of time to drive the return and the value creation and increased growth and all those great things. But we see in both sets of companies, this is becoming more and more of an interest. And I think some of it has to do with the demographics at play, where we may be seeing a lot of this leadership change and ownership transition just across the segment over the next couple of years.

MMG: It tracks with the prediction that we’ve been hearing for the last few years that the dam is about to break, [and there’s] soon to be this influx of companies coming to market. And I think this research echoes that, both from the private equity standpoint—you have all these businesses that are having many of them extended hold periods that are going to be coming to market—and then you have aging owners who are maybe exhausted from the last several years of running their business and exploring an event. So, it sounds like it may be finally coming true.

DF: Right?

MMG: So, overall, and what we’ve been talking about so far, there’s a pretty positive picture of private equity being painted in this research, but there were also some downsides that were highlighted in the report. So I was hoping, Doug, you could talk about what the biggest negatives associated with private equity were and what you heard from mid-market companies who maybe don’t have private equity sponsorship currently, and why they’re not pursuing that route.

DF: So, again, 400 plus companies, the sample was split. Roughly two thirds, like 230 or so, had PE backing and involvement the other 130 or whatever that math is, did not. And so, again, you know, those who are currently in it or have done it in the past, or a combination of those two, I mean, 50% of them said, well, one of the challenges just the cost, the higher cost, the capital structure, right? We’re paying fees. We’re diluting our equity. So there’s some hesitation in that. Clearly now you bring in a partner, there becomes maybe more urgency, more pressure, right? Because one, we’ve always said at the center, one of the benefits of running a middle-market company is that because almost all of them are privately held, they’re not necessarily answering to Wall Street and worrying about the next earnings call. They’re often taking much longer views and can be conservative and so on and so forth. So now with the PE partner, they may feel, and again, could be a negative, could be a positive in some cases, but at least the owners are telling us, well, we now have to step up and report our results and show our budgets consistently to our partner and meet some shorter term performance targets that we may not have had before. Another one that gets cited by just under four out 10 of these companies is the loss of control, right? You’ve been privately held, you’ve been running this business maybe as a family entity or as a private company, and all of a sudden now you’ve got a partner who’s in the mix. And so, losing some of that, what it means from a management standpoint, maybe some organizational disruptions, if you end up losing people or new leadership comes in, that can cause some of the challenges as well. And then just making sure that there’s the right cultural fit. About a third of the companies cited that as a major challenge that, you know, maybe what they saw during the courtship phase didn’t necessarily play out once that partner came in. And so you could point to maybe some issues in the vetting and the presale process with that. But those are things that they’re saying they experienced. And then for those who aren’t using private equity, I mean, clearly the number one reason was that they just don’t need the funding. So, you know, some companies in the survey had told us that they have become somewhat frustrated with traditional, call it bank financing. This is not to slam the banks, but companies are saying, look, there are a lot more requirements, interest rates are certainly a lot higher now than they were at the end of the last decade, it costs a lot more to borrow money. The restrictions and regulations tied to it, the decisions to loan money aren’t happening as fast. So those are frustrations just in overall. But yeah, the ones who aren’t are saying, look, I just don’t need it right now, I’m operating fine, I’ve got good cash flow, I’m profitable, I just don’t have a tremendous need to go out and drive a huge capital infusion to maybe drive some of my growth goals or an investment that I’m looking to make others. Another about 40% said, look, we’re family or founder-owned, and we just want to preserve that right now, maybe in the rare cases that they have a formal succession plan, maybe they know the next generation is going to be ready in a couple years, and, and that’s their plan. They’re going to transition in that way. Some of the other callouts were just some of the things I mentioned with the challenges as well, losing control, the cost of capital, maybe the timing just isn’t right for the business. So those are some of the things that we’re seeing in terms of why companies don’t use private equity.

MMG: And I guess setting aside the ones who just don’t need capital—they’re likely not going to pursue a partnership with a private equity firm—but for the other folks who have some reservations or, you know, these perceived downsides are in their head, are there any actionable insights within this research that a private equity sponsor who’s listening to this can keep in mind as they’re approaching business owners and making the case for why PE is the route to go?

DF: Yeah, well, I’ve seen instances where PE firms have done a really good job at positioning themselves as, you know, kind of a niche expert in a vertical or an industry segment. I mean, I can’t tell you how many times where it’s like, hey, we deal with light industrials, we are consumer products, we are retail focused. It’s like, okay, the more you can do that, I think it positions you as, there’s going to be a lot more confidence and trust in the early conversations that, look, this is what we do. We specialize in this, we have a track record of investing and helping drive these companies. And so that can bring a lot to the table. When you talk about examples, case studies, you know, proof of concept where it’s like, hey, don’t take us at our word, we’ve actually done this work before, and you can talk to these other owners almost as like a reference. And then just being very clear and upfront about the process and about how the relationship’s going to work. So, you know, I think some of the companies that haven’t used PE, they do have some of those misconceptions where it’s like, oh, if I sell, it’s going to be the influx of capital, but then I’m just giving everything away. I’m going to be treated as, you know, no longer am I the CEO or the founder, I’m an employee of this firm. And that’s really not the right approach for these businesses to take. So, I think if the sponsors can be very clear about setting the expectations, communicating the expectations, you know, being very, very direct about what this is going to entail, then I think that’ll help all parties get comfortable with how this relationship is going to work long term.

MMG: It also seemed encouraging that in the survey, the folks that have private equity backing did seem to have a brighter outlook on the future. Can you talk a little bit about that and what they were saying?

DF: Yeah, I think that just kind of logically makes sense, right? Because now all of a sudden, instead of tackling some of these challenges alone, you now have a very experienced partner to help guide you through that. We say at the center all the time, middle market companies, especially when they scale, right? Because our definition of middle market, $10 million to a billion in revenue, once you’re talking 50, 60, a hundred million dollar businesses, they are facing now big company problems, oftentimes with small company resources. And that creates a lot of friction because, you know, they may have great plans and goals and things they want to do, and you know, the owner may have a great vision, but sometimes they’d be constrained just by the lack of resources. And those resources can certainly be the capital to fund the activity or the expansion or whatever it is they want to do. But also just be internal resources—I don’t have enough IT people; I don’t have expertise in these certain areas. Say I want to enter a new country. I don’t know the trade laws, I don’t know the regulations. So those are just a couple of examples where, you know, having an experienced partner all of a sudden, it’s like, oh, great, I’ve got somebody that now I can turn to, I don’t have to walk this road alone, stumble, make mistakes, figure it out along the way. I can actually get some guidance and have a trusted advisor there whose interests align with mine because it’s their investment as well and they’re clearly motivated to see our company succeed. So, I think all that fuels kind of this optimism in addition to saying, well, gee, now maybe we can accelerate some of these plans that we thought were three, five years down the road. We can do it today, tomorrow. I think about AI, right? We’ve been tracking AI for about two and a half years, even a year ago when we were surveying about utilization in the middle market, very few companies were doing it. Now, you know, here we are halfway through 2025, a little more than halfway, it’s like 60% of the middle market is telling us, yeah, we are actively training people on how to use AI. So, it is not a nice to have, it is kind of table stakes. Everyone’s figuring out where the best fit is for their business. And again, this wasn’t a particular focal point of this study, but that could be another area where a PE partner’s like, oh yeah, we know exactly how to come in and implement some new platforms for you. All that creates a lot more confidence. You’ve got game plan, you’ve got experienced operators, and then you combine that with your own expertise of founding, owning and growing a business. That can be a very powerful combination. So that’s why I see that brighter outlook on the future, being able to navigate things outside of their control like policy and macroeconomic challenges. I think it just becomes much more tolerable when you’ve got, again, that backing and that partner to look to for help and guidance.

MMG: I have to imagine, too, that now the many flavors that private equity comes in where you can pursue a partnership where it’s a just a minority position or it’s a long-term hold where you don’t have to worry about your company being sold in three or five years. So, you can kind of like pick your poison a little bit and tailor your partnership in the way that best suits your business, which is maybe also a contributor to some of this optimism.

DF: Yeah. And I mean, I think a lot of these owners have been getting inbound calls for a number of years. And again, either because of timing or they just don’t know if it’s the right fit or they’ve got some of those misconceptions. I mean, my message to the middle market would be, it’s worth it doing your homework to understand what these opportunities are. Because again, I’m not saying it’s the right thing now, but maybe in the future if entering into a private equity partnership becomes the right fit for you, you’re going to want to have time to think about that and be prepared for those conversations rather than just maybe making a rash decision or doing something because you feel like you have to rather than because you want to. And I know a lot of these firms do a really good job of doing that origination work and talking to these businesses, but the earlier that that can happen, the better because then when that time does become right, then both sides are ready.

MMG: Well, it’s really fascinating research. We have just scratched the surface here, so I would definitely encourage folks to read the full report. Doug, where should they go to learn more and access more of these findings?

DF: Yeah, the best place to find the report is at the Center’s website, which is www.middlemarketcenter.org. Not dot edu, we are part of the university, but we have a dot org address. So, within there we have a research library. This report will be featured front and center because it’s our latest report. So, you can go there, you can download the PDF. You can also subscribe if you’re interested in getting additional insights going forward from the center via our biweekly newsletter. But yeah, certainly downloading the report’s a great place to start. And you know, we’re always happy to answer any questions or follow-ups as well.

MMG: We’ll include a link in our podcast notes as well. Before I let you go, Doug, any other upcoming projects from the center or things that you’d want listeners to know about?

DF: Yeah, so we’re working right now on a new study of veteran-owned middle market businesses. So, this is an initiative with Wells Fargo, who’s a relatively new partner of ours, but they look at their commercial banking, and they’ve got some diverse segments that they focus on. And actually, a big one and a growing one is middle-market companies that are veteran founder owned or led. So, we’re talking to those businesses about kind of what makes military service unique to their business leadership, what are some of the resources that they actively use to help grow their businesses, and maybe some of the unique challenges they face particularly relative to other middle market companies. So, that’s a project that we’re just getting kicked off right now, and we’re looking to have a report, you know, hopefully by the end of Q1 2026. Other than that, we continue to build out our case studies. We’re writing up all types of stories about middle market companies that have solved a certain challenge or issue. We feel at the center that oftentimes these middle market companies learn best from each other, so having these stories out there is a great way [to do that]. The succession planning, which we touched on a little bit today, that’s a great one. Our next case is going to actually be a succession planning story for a middle market company. So, our goal there is to publish about six cases a year and then eventually build up a library that companies can access and use when they’re facing similar issues. That’s another initiative that I’m really excited about, something new that the center is doing as of this year.

MMG: Doug Farren, executive director of the National Center for the Middle Market. Thank you so much for joining me today on the podcast.

DF: Yeah, thank you. It was great being here today.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

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