Lower middle market

The lower middle market (LMM) is the lower segment of the middle market, the market of mid-sized companies financed with private debt. No regulatory definition exists and each manager sets its own boundaries. In Europe, some private debt managers use an EBITDA of €15m at most. The broadly syndicated loan and high yield markets do not finance tickets of this size, which keeps this segment away from the competition they bring to large transactions. Financing terms in this segment differ from those at the upper end of the market. Between early 2023 and January 2025, margins in the core and upper mid-market fell by nearly 100 basis points and dropped below 600 basis points. Over the same period, the fall in LMM margins was limited to around 20 basis points. Financial maintenance covenants remain common in the LMM, and a growing share of transactions there closes with leverage below four times EBITDA. Fewer private debt funds operate in this segment. Banks limit their appetite there because of their capital constraints, especially for undrawn lines. A borrower in this segment compares offers on three quantified parameters: the covenant levels, the leverage the lender accepts and the margin.

An industrial maintenance company generates €9m of EBITDA and seeks €30m for an acquisition, or 3.3x its EBITDA. It belongs to the lower middle market. The funds that respond offer a leverage covenant tested every quarter, set with headroom against its business plan.

• The EBITDA level each fund uses to define its segment
• The testing frequency of maintenance covenants
• The proposed leverage, expressed as a multiple of EBITDA
• The number of funds active at the ticket size sought