Everyone's trying to find their niche in the lower middle market, says J. Mark Jones (pictured), a partner at Chattanooga, Tenn.-based River Associates Investments LLC.

For deals to get done, the challenge for private equity firms doing deals valued at $250 million and less is to stand out. 

“You have to see funds differentiate. You’re seeing a proliferation of fundless sponsors and family offices bringing in former PE folks,” says Jones, a featured speaker at the Alliance of Merger & Acquisition Advisors' (AM&AA) Winter Conference in Scottsdale, Ariz. “We’re seeing more and more competition,” he adds, referring to the growing crop of rival firms and buyers.

The event, which takes place from Jan. 21-23 at  Fairmont Scottsdale Princess, credits its record attendance of more than 450 professionals to the increasing number of dealmakers looking to the lower middle market for M&A opportunities. AM&AA is an organization that aims to connect corporate financial investors and advisors.

As a result, it is becoming more difficult to compete for lower end targets, according to fellow speaker Tim Oleszczuk of Milwaukee-based investment bank Grace Matthews.

“Private equity firms say, ‘Let me tell you why we’re different.’ If you put them all up on a screen, they’re not,” Oleszczuk says.

With more players sticking their toes in the downstream market, attracting limited partners (LPs) may pose challenges as well.

One notable trend that Jeri Harman of Avante Mezzanine Partners points out, is the fact that LPs are consolidating their investments. “They’re saying we want to invest more, but in fewer PE funds,” she says. “If they’re looking to put $50 million in one fund, that’s not positive for the lower middle market.”

Stephen Berry, co-president of private equity firm Linsalata Capital Partners agrees. “The bar has been raised in terms of what you need to do in order to compete,” he says.

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