The New Edge in Private Equity and the Lower Middle Market

In this episode of 5 Minutes in the Lower Middle Market, we explore how AI is starting to automate some of the most expensive cognitive work in finance — and why that matters for private equity, search funds and traditional small businesses.

As analytical work becomes more commoditized, the edge shifts somewhere else: sourcing, relationships, trust and access.

Timestamps:
0:00 AI is automating high-value cognitive work
1:45 Why sourcing and relationships become more valuable
2:42 How AI will impact traditional small businesses
3:12 Faster quoting, scheduling, customer service, and operations
3:58 The real lower middle market lesson from AI

Transcript

SPEAKER_00 0:00

Welcome to 5 Minutes in the Lower Middle Market, where I break down the best ideas about buying, building, and owning small businesses. Today's idea is very simple. AI is starting to automate some of the most expensive cognitive work in finance. And that is going to matter for private equity and the lower middle market as well. Mr. Anotida Matsuba made a great point. He said the irony of the knowledge economy is that some of the most expensive, highly specialized cognitive labor was actually the easiest to map out and automate. I agree. Because for years, a lot of people assumed the safest work was the most analytical work, the work done by people with MBAs, master's degrees, PhDs, and years of training. But more and more, AI seems to be going after exactly that kind of work first. And Ken Griffin made that super clear. He said that at Citadel, work that used to take people with master's degrees and PhDs in finance weeks or even months is now being done by AI agents in hours or days. And importantly, he said that these are not meat-hired jobs. These are highly skilled jobs. And for the context, Citadel is a large hedge fund and investment firm founded by Gen Griffin back in 1990. That should get the attention of anyone in private equity and lower middle market overall. Because a lot of work in investing has traditionally been built around execution skills like research, summarizing, modeling, analysis, and pulling together different materials. If AI keeps getting better at that work, then those skills become less scarce. And when something becomes less scarce, the edge moves somewhere else. In private equity and lower middle market, I think that means one thing. It means sourcing, sourcing, sourcing. Number one, and number two, relationships, relationships, relationships. If more people have access to similar analytical tools, then the real edge becomes who hears about the deal first, who gets the call from the owner, who has the trust of intermediaries, who can build relationships before a process starts, and who people actually want to work with. That has always mattered in the lower middle market, but I think it's going to matter even more from here because AI makes PowerPoint modeling and a lot of analytical prep less valuable on a relative basis, then success in private equity, success in lower middle market becomes even more about access. Access to people, access to deals, access to trust. And there is another angle here. Lower middle market traditional businesses are not very safe as well. A lot of people hear those stories and think, okay, that affects hedge funds, analytics, consultants, knowledge workers, but not local service businesses, distributors, manufacturers, trades, and traditional operators. I don't really think that's true because yes, maybe AI won't replace the plumber, the HVAC tech, or the field operator tomorrow, but it can really start changing the economics around them. It can help one company quote faster, it can ri respond to leads faster, train people faster, handle customer service so much better, improve pricing, tighten scheduling, support managers, speed up bookkeeping and reporting, and overall make decision making sharper. And in competitive and commoditized industries, that stuff really matters because over time, if one company starts using these tools better and earlier than the next one, that gap is going to show up somewhere. It might be the revenue, it might be service quality, it might be customer retention, it might be the margins. So if I had to pull one lesson from all this today, AI is making some finance execution skills less scarce. That means in private equity and the lower middle market, the value of relationships, trust, and sourcing is only going higher. And traditional businesses that ignore those tools for maybe too long may eventually pay for it in market share or in margins. That's it for today's five minutes in the lower middle market, and talk to you again in the next video.