The lower middle market has long rewarded investors who can bring more than capital to the table. Now, dealmakers say advances in artificial intelligence and automation are creating an even larger opportunity. With AI adoption still limited among smaller businesses, investors say firms that move fastest to implement new tools can drive margin expansion, accelerate growth and unlock significant value in an already fragmented market.
“With this kind of emergence of transformative and disruptive technologies, cloud infrastructure, modern data systems, even applied AI, that type of technology would never filter down to the lower middle market in years before,” says Jamie Kennedy a partner at Boston lower middle-market private equity firm Griffin’s Wharf Partners. “We think the opportunity set is only getting better.”
Kennedy says that the lower middle market is so fragmented and inefficient that the firms that bring in technology and human resources in addition to financial resources will benefit the most. “It’s always been a source for real alpha,” he says.
“The next five to 10 years could be generational in terms of the opportunity set,” he adds.
Technological enhancements, whether it is workflow automation with AI, or other different technologies that are going to transform the industry, are not only going to enhance margins, but growth rates as well, according to Kennedy.
Kennedy is not wrong. Software companies with defensible niches are drawing high valuations and M&A interest, according to dealmakers.
“We think the most nimble platforms are the ones that are going to adopt the fastest,” he says. “It’s table stakes to automate workflow. That’s just going increase margins. if you can enhance your product offering and your service offering, you’re now competing against other platforms that are well more capitalized than you, but you’re doing it much more nimbly.”
Kennedy estimates that less than one percent of lower middle-market businesses are what he calls “AI power users.”
“We do believe that those adoption rates are only going to accelerate,” he adds.
Griffin’s Wharf focuses on businesses that are valued below $150 million across the manufacturing, food and beverage and energy transition sectors. The firm was formed earlier this year by a group of former Landon Capital Partners executives and has no immediate plans to raise a fund. Kennedy says it will stick with the deal-by-deal process for now.
“We’ll see what the future holds,” he says.
Reach Kennedy at: [email protected]
