Sep 29, 2025
For private equity investors, value creation has always been about finding leverage. In the lower middle market (LMM), that often means streamlining operations, professionalizing management, or consolidating fragmented industries. But in today’s environment, there’s a new lever on the table — one with the potential to deliver outsized returns in record time: artificial intelligence.
AI isn’t just a cost-saving tool or a productivity hack. Done right, it’s a direct line to EBITDA growth, multiple expansion, and faster exits. And for portfolio companies in the $10M–$100M revenue range, the opportunity is especially ripe.
AI as a Value Creation Lever
Recent research shows that 91% of SMBs using AI report revenue growth, and 86% report improved profit margins. Those numbers matter in private equity, where even small improvements in margins and revenue can compound dramatically in valuation.
Consider a $40M revenue company with $6M EBITDA. A 10% improvement in margin through AI-enabled efficiency translates to $600K in additional EBITDA. At a 7x multiple, that’s $4.2M in incremental enterprise value — from a relatively small operational change.
Multiply that across a portfolio, and the impact is undeniable.
Why the Lower Middle Market Is the Sweet Spot
It might seem like AI is better suited for Fortune 500 companies with billion-dollar budgets. But the LMM has unique advantages that make it fertile ground:
Agility: With fewer layers of management, LMM firms can test and deploy AI faster than corporate giants.
Intimacy with operations: Owners and operators often know the bottlenecks firsthand, making it easier to identify high-ROI use cases.
Cost sensitivity: Tight budgets force focus on initiatives with quick payback, which aligns perfectly with AI’s ability to deliver ROI in months.
In short, LMM companies can move quickly, prove ROI fast, and scale pragmatically.
Use Cases That Move the Needle
For PE-backed companies, AI opportunities often cluster in three high-impact areas:
Quoting and Sales Efficiency – Faster quote turnaround leads to higher win rates and revenue growth.
Reporting and Forecasting – Automated data aggregation improves decision-making and reduces finance team costs.
Customer Service – AI-powered chatbots enhance customer retention without adding headcount.
Each of these use cases can be piloted in weeks and scaled within months. They’re not moonshots — they’re pragmatic, measurable projects that improve EBITDA and cash flow.
Portfolio-Level Advantages
The opportunity isn’t limited to individual companies. For PE firms, AI offers portfolio-wide leverage:
Shared Playbooks: Once a quoting automation proves ROI in one manufacturing company, it can be rolled out across others.
Training Pods: Create cross-portfolio training cohorts so teams learn together, spreading adoption faster.
Benchmarking: Track AI-driven KPIs across holdings to compare performance and identify laggards.
This shared infrastructure compounds value creation, making each subsequent implementation faster and cheaper.
Investor Expectations Are Rising
The investment community is already watching. Private equity and venture firms invested over $10 billion in AI by mid-2024, and Blackstone’s CEO Stephen Schwarzman put it bluntly: “The timeliness and effectiveness of AI implementation will determine who the winners and losers are.”
In competitive deal processes, showing that a portfolio company has an AI-enabled value creation plan isn’t just nice optics — it could be the differentiator that secures capital or commands a premium multiple at exit.
The 12–18 Month Window
For PE firms and their portfolio companies, the window of advantage is now. AI adoption is moving quickly down-market, and within a few years, it will be table stakes.
That means the best time to act is in the current fund cycle. Firms that can show AI-driven EBITDA gains in 12–18 months will be rewarded with stronger valuations, smoother exits, and reputations as forward-thinking managers. Those that delay risk being left with assets that look outdated compared to AI-enabled peers.
Make a Strategic Pivot
If you’re a private equity leader, the next step is clear: make AI adoption part of your portfolio’s value creation plan.
Start with an AI Opportunity Assessment for one holding. Prove ROI in a high-impact workflow. Then scale across the portfolio with shared playbooks and training.
The payoff is tangible: more profitable companies, happier employees, and higher enterprise value at exit.
Ready to explore how AI can add millions in enterprise value across your portfolio? Reach out today to schedule an AI Opportunity Assessment and let’s start mapping the 12–18 month path from pilot to platform.
