What to Expect for the Lower Middle Market in 2024
As we look ahead this year, there remain plenty of unknowns. What will happen with interest rates? How will the U.S. elections shake up the markets? And what about global political factors such as the wars in Ukraine and the Middle East as well as evolving relations with China and Russia. At this point, a so-called “soft landing” from the recent inflationary period is not only possible but likely, though we still don’t know for sure what the next 12 months will bring.
The lower middle market (LMM) is no exception.
These investments, which focus on companies with an enterprise value between $5 million and $100 million, are well positioned to see notable growth and interest in the coming years. As the backbone of the economy, these companies often demonstrate stable performance and have the potential for substantial returns. That’s because they have largely avoided the depressed valuations and performance struggles that their larger peers have seen over the last few years, setting the sector up for a promising future.
Here are a few trends I’m watching in the LMM:
1. Shifts in Industry Focus
As economic trends and consumer behaviors change, certain sectors may emerge as more attractive investment opportunities. Keeping a pulse on these industry shifts and understanding their potential impact on investments will be crucial for investors and financial advisors.
2. Technological Advancements and Digital Transformation
Like every aspect of our lives, technology continues to shape the investment landscape. In the lower middle market, technological advancements and digital transformation offer new avenues for growth and innovation. Companies that embrace technology and leverage it to enhance their operations, products, or services may become highly sought-after investment targets.
3. Focus on Sustainability and ESG Investing
In recent years we have seen an increased focus on Environmental, Social, and Governance (ESG) considerations in the LMM, and those ESG factors likely are not going away anytime soon. In 2024, I expect to see an increased focus on sustainability and responsible investing within the lower middle market. Investors will prioritize companies that demonstrate a commitment to sustainable practices, social responsibility, and strong governance standards.
4. Global Opportunities
As the world becomes increasingly interconnected, investing in global markets presents both opportunities and challenges. Lower middle market investments may expand beyond domestic borders to tap into international market potential. This opens up new avenues for diversification and growth, but also requires a deeper understanding of foreign markets and regulatory frameworks. This takes on increasing likelihood when considering growth via acquisition.
5. Private Debt
Finally, as traditional lending institutions tighten their requirements, private debt investments are becoming increasingly popular. Investors seeking fixed income and higher yields are turning to lower middle market companies for their lending needs.
Simply put, we don’t know what we don’t know, and all we can do at this point is prepare ourselves for whatever comes next. As of the end of 2023, things in the LMM and beyond were starting to look better for 2024 than they have in a long time, so there is reason for optimism. After all, the lower middle market holds great promise for those who are prepared and informed.
However, it's crucial to remember that investing involves risks, and individual circumstances should be taken into account before making any investment decisions. If you're unsure about how to navigate the investment landscape or need tailored advice, consider reaching out to an investment professional who can guide you based on your specific goals and risk tolerance.
Remember, the lower middle market is a dynamic and ever-changing space. By staying informed, adapting to emerging trends, and seeking expert guidance, you can position yourself for success in the landscape of 2024 and beyond.
Learn more in my deep dive video into the 2024 market here.