Some of Europe’s largest private equity firms, once renowned for multi-billion buyouts, are increasingly seeing that bigger is not always better.

Sponsors including KKR, EQT, CVC, Permira, and others, have all dropped the average size of their global deals over the past five years, and especially when compared to the heady days of 2021.

This is not just the result of lower valuations and a lack of large-cap assets to buy but also because the middle market has taken precedence as a fruitful hunting ground for sponsors, according to multiple sector participants.

The main drivers are obvious: more exit optionality, greater levers to pull for value creation, scope for transformational M&A activity, and easier-to-secure leverage at a time when debt financing has been difficult.

For those reasons M&A has been buoyant in the mid and small-cap market and far more fruitful than large-cap buyouts; auctions have been relatively competitive with smaller sponsors now seeing unexpected bidders sat at the same table.

Such processes include Bain bidding on the GBP 15m EBITDA Broadstone and Apax and Cinven separately competing for the EUR 26m EBITDA carve-out of Adevinta‘s Irish classified unit.

Large-cap sellers have instead found themselves being driven to the IPO market in the absence of sponsor bidders.

These deals are largely being completed via two means: raising specific mid-market/sector specialist funds or using the flagship vehicle. Bain’s bid for Broadstone makes more sense considering its insurance strategy.

Neither approaches are without headwinds.

Fundraising broadly remains difficult, especially without a track record, and will mean that many sponsors are waiting at least six months to start to deploy capital.

Multiple placement agents, however, tell this news service that upper-mid GPs are looking to start deploying downsized strategies. Argos Wityu and PAI are already on the bandwagon, having registered new iterations of their long-standing mid-market strategies in recent months.

One challenge in raising a new fund for smaller deals is the perception that the team working on those deals is seen as the B team, or one in training before upgrading to the big fund, said one LP.

“One of the things we’re looking for is that the partners have an expected carry that is more or less the same as the flagship.”

Cinven recently hired Michael Weber from smaller fund Riverside, as the fund increases its focus on the mid-market.

The other conundrum for sponsors in seeking smaller platform deals from their flagship funds is that they still have to hit the minimum required equity ticket, which can be hundreds of millions. Some are using lower leverage, but more are making less use of the co-investment that they have promised LPs.

There is also one glaringly obvious issue with both – resources. Sponsors used to having say 12-14 portfolio companies per fund and now having many times more will find themselves stretched to drive growth sufficiently and perhaps lacking the necessary expertise.

“Driving a return in a small business is different to driving a return in a big business,” said one LP, adding that they question whether any GP they commit to can handle everything from deal origination to value-creation across the size spectrum.