The next billion: how middle market managers scale without stalling

When an LP makes an allocation to the latest fund vintage of a private markets GP, the decision usually sits within an investment plan that has been years in the making. Investors set commitment plans years in advance to maintain vintage diversification, typically mapping allocations over a three- to seven-year period, according to Preqin.

Given the long-term nature of LP investment planning, and the resource-intensive manager due diligence process, LPs do not want to start each year from scratch. They seek to build long-term relationships with managers they believe have the investment strategy, track record and execution capability to generate sustainable returns over time.

The GPs that have raised their next billion, and then the billion after that, understand this. It is no coincidence that many leading multi-strategy firms have received backing from the same investors throughout that growth journey.

Strong performance in a GP’s latest fund will support fundraising. But when genuine manager skill and franchise consistency are harder to discern, one strong vintage alone may not build lasting LP conviction. The greater prize is long-term investor support across multiple cycles.

Investing today to scale tomorrow

The ability to earn this deep investor backing has become as much an operational question as one of pure financial returns. The firms that move successfully into the next phase of growth are defined by both. Investment performance is non-negotiable, but managers must also show that their platform can sustain it as the business grows.

In our first article in this series, we explored the operational inflection points managers encounter as AUM grows. At certain stages, a model that worked well in the past comes under strain as GPs raise more funds, manage larger portfolios and serve a broader investor base. Managers must strengthen their fund operations at each inflection point to sustain growth.

A consistent feature of successful growth is the decision to build institutional infrastructure before it becomes an urgent necessity. Middle market managers that invest early can gain a lasting commercial advantage. LPs can see that a manager receiving an allocation in year one will have the operating capacity to absorb a larger allocation in year five and beyond.

A GP can produce exceptional returns in its first fund while relying on a basic customer relationship management (CRM) system and general accounting software. LPs will still question whether those results are sustainable without stronger operational infrastructure.

A GP that scales its operational infrastructure ahead of growth is in a much stronger position to build LP conviction.

The four pillars of institutional infrastructure

Every GP follows a different path, but four themes recur in successful middle market growth stories: the operating model, technology infrastructure, data management and investor experience.

1. Building the operational model:

A scalable middle market franchise starts with a clearly defined operating model.

For GPs that have historically maintained lean infrastructure and shared operational duties among partners, the first step is to decide what stays in-house and which functions should be outsourced.

The chosen model should support repeatable workflows without depending on a small number of key individuals. GPs can build fund operations in-house, outsource fund administration and other functions to specialist providers, or adopt a co-sourcing structure.

Each model has trade-offs that GPs should assess against their objectives, resources and control requirements. Building an in-house team gives GPs greater control over data, but also brings fixed overheads and ongoing technology investment that can be difficult for a middle market manager to carry alone.

Outsourcing offers a more variable cost base and gives GPs access to a provider’s technology, geographic reach and specialist expertise. The trade-off is that data will typically sit within the provider’s environment, making data access, portability and the practicalities of switching providers important due diligence questions.

Co-sourcing provides a third route. Data remains in the GP’s cloud environment and under its direct control, while a third-party specialist supports the service. This model can preserve data ownership, although it may not deliver the full cost benefit of outsourcing because internal teams must still maintain the cloud infrastructure and software. Provider choice is another consideration, as relatively few fund administrators can deliver a genuinely tailored co-sourcing model.

There is no single right answer. The strongest middle market GPs review the options carefully and implement the operating model that best fits their requirements.

2. Technology infrastructure:

Running a firm on email and spreadsheets becomes unsustainable as complexity grows. Middle market managers eventually need institutional-grade CRM, fund accounting and portfolio monitoring systems if they are to scale efficiently. GPs generally follow one of two routes when selecting a technology stack, and each has advantages and trade-offs.

All-in-one, ERP-like solutions can simplify implementation and management. However, private markets-specific ERP options are relatively recent, while conventional corporate systems may require additional applications for fund accounting, capital account management and other specialist requirements.

Best-of-breed software offers deeper specialist functionality, but requires GPs to establish and maintain integrations between systems.

Whichever route a GP follows, its CRM, portfolio management and fund accounting systems must connect well enough to create a reliable single source of truth and reduce reconciliations across separate systems, spreadsheets and documents.

3. Doing more with data:

Private markets data has evolved from a byproduct of day-to-day activity into a core input for investment decisions, performance benchmarking, investor reporting and regulatory compliance.

Managers that scale understand its importance and establish rigorous data collection and governance standards.

They also identify the data that matters most, from portfolio company financials and fund performance to ESG metrics. Clear data standards across portfolio companies can then support automated collection and consistent dashboards.

4. The investor experience:

The pillars of operating model, technology and data ultimately funnel down to support the fourth and final pillar of investor experience.

Investor expectations are rising. LPs increasingly expect self-service portals and near on-demand visibility of capital calls, distributions and fund performance. Delayed, backward-looking reporting shared through static PDFs can create friction during operational due diligence and fundraising.

This investor experience depends on the operating model, technology and data foundations already being in place. GPs that prepare early can spend less time gathering information in response to LP requests and more time discussing what the data means.

Key considerations for the next phase of growth

Before choosing an operating model or service provider, managers should test the current environment against the needs of the next fund, rather than the last one. Can processes absorb more funds, vehicles, jurisdictions and investors without adding manual work or weakening control?

That assessment should cover four areas: the division of responsibility between internal teams and external partners; integration across CRM, portfolio monitoring and fund accounting; data ownership, governance and portability; and the timeliness and quality of investor reporting.

Any fund administrator or operating partner should be assessed on private markets expertise, technology, controls, data access, geographic reach and the ability to adapt as requirements change. The right model should reduce key-person dependency, preserve oversight and give LPs confidence that growth will not outpace the operating platform.