Lower Mid-Market PE Fills Growing Capital Gap

In Brief:

Josh Koplewicz, managing partner of Thayer Street Partners, appeared on Capital Allocators to discuss his boutique private equity firm's unique positioning in an increasingly underserved market segment. Speaking with host Ted Seides, Koplewicz identified a critical funding void emerging in the $5-50 million capital market as massive private credit firms consolidate around larger deals while smaller banks retreat post-SVB collapse. The boutique PE firm, founded in 2012, provides structured equity solutions to lower middle-market companies in financial and business services, capitalizing on what Koplewicz sees as an underserved segment where traditional debt is either unavailable or prohibitively expensive. With 70+ million baby boomers owning nearly 50% of small businesses and lacking succession plans, Koplewicz predicts a massive wave of consolidation opportunities ahead for firms positioned to provide flexible capital solutions.

Big Picture Drivers:

• Consolidation: Private credit market dominated by 20% of players focusing on $50M+ deals, leaving smaller companies underserved

• Demographics: 70+ million baby boomers own ~50% of small businesses without clear succession plans, creating consolidation wave

• Regulation: Bank retreat from small business lending accelerated post-SVB/FRB failures, creating capital scarcity

• Fragmentation: Target industries remain 90% fragmented with high-recurring revenue models ripe for roll-up strategies

Key Insights:

• Capital Gap: The convergence of massive private credit consolidation around larger deals and continued small bank retreat has created an efficiency void in the $5-50 million financing market that structured equity providers can exploit.

• Demographic Opportunity: The impending retirement of 70+ million baby boomer business owners represents the largest generational wealth transfer in history, creating unprecedented consolidation opportunities in fragmented industries.

• Risk Management: Investing in businesses that can survive and thrive without leverage provides crucial downside protection, as companies entirely dependent on cheap debt financing face existential risk during credit cycles.

• Relationship Premium: Building multi-year relationships before formal deal processes allows investors to secure proprietary opportunities and better pricing while avoiding competitive auction dynamics.

• Execution Risk: The primary failure mode for lower middle-market companies occurs during scaling phases when management teams struggle to adapt from 30 to 100+ employees, requiring proactive operational support.

• Structure Innovation: Creative preferred equity structures can bridge the gap between entrepreneur valuation expectations and investor risk tolerance while preserving more upside for management than traditional buyouts.

Memorable Quotes:

• "My first office was the print center at Staples, two blocks from my house that I would skateboard to in the morning, because I had to get out of my apartment." - Koplewicz, describing his scrappy early days building the firm

• "I think my second or third week in the job, someone handed me a stack of papers and said, we're buying four aircraft from American Airlines. Figure out how to get the deal done and close it." - Koplewicz, on Goldman's trial-by-fire culture

• "How does this business and how does this opportunity make a lot of sense on a completely unlevered basis? Does it make sense to bring in leverage? Great. It's icing on the cake." - Koplewicz, on his core investment philosophy learned from the 2008 crisis

• "Usually when we've struck a deal with someone or found a company that's ready to go, 80 percent of our diligence is done." - Koplewicz, explaining their relationship-first approach to deal sourcing

• "There's a lot of dating before there's a proposal. And it's outside of a process. In some cases, it could be years of dinners, lunches, golfs." - Koplewicz, on building long-term relationships with potential portfolio companies

The Wrap:

Koplewicz's strategy represents a sophisticated response to structural market changes that have left lower middle-market companies increasingly underserved by traditional financing sources. By positioning Thayer Street in the "fat middle" of the capital structure with flexible, relationship-driven solutions, the firm is capitalizing on both the retreat of traditional lenders and the demographic-driven consolidation wave ahead. The approach suggests that success in today's fragmented capital markets increasingly depends on identifying and filling specific structural gaps rather than competing in oversaturated segments.