Lower Middle Market M&A: Deal Sourcing For Search Funds in 2026

The lower middle market is heating up, and if you’re a search fund operator or ETA buyer, you need to pay attention. Here’s what’s happening.

The Money Is There

Private equity firms entered 2026 with approximately $2 trillion in dry powder. That’s a lot of capital looking for homes. And according to David Solomon at Goldman Sachs, 2026 is shaping up to be a record-breaking year for M&A. But they always say that.

The backlog is real. Since 2022, high interest rates and regulatory scrutiny created a massive pile of unexecuted deals. Now? The macroeconomic environment is stabilizing, PE pressure is mounting, and the floodgates are opening.

EY’s Private Equity Pulse showed a 57% rise in deal value in late 2025. That’s not a typo. Fifty-seven percent. That’s what we’ve seen too: it’s a seller’s market.

What This Means for Search Fund Acquirers

Here’s the thing: all that PE capital doesn’t just compete for the $500M deals. It’s increasingly pushing into the lower middle market, exactly where search funds operate. And to be in the game, you need to plan your dealflow strategy a year or more in advance of your anticipated close.

The generational wealth transfer is starting, but the buzz around it is driving the buyer/seller imbalance. Baby boomers retiring means thousands of businesses changing hands. GulfStar Group noted that “both private equity firms and strategic buyers are awash with liquidity and actively seeking acquisitions.” But how does one get those deals? If you’re a search fund, you better have a strategy. And that’s where proprietary comes in (and what we do here at OutSearched).

Translation: the competition for deals is fiercer than ever.

The Opportunity

Despite the increased competition, there’s a silver lining. The sheer volume of deals means more opportunities, but only for those who can source them effectively.The firms winning right now aren’t just bidding on listings. They’re finding off-market opportunities. Building relationships with intermediaries. Getting to sellers before the competition knows the business is for sale.

Enter OutSearched.

That’s where deal sourcing for search funds becomes your competitive advantage.

The Numbers

$2 trillion — PE dry powder entering 2026
57% — YoY increase in PE deal value (Q4 2025)
$12 trillion — potential PE market size if retail investor access approved (McKinsey projection)
40%+ — of all M&A transactions are lower middle market deals (SRS Acquiom)

What To Do

Move fast: The window of opportunity is open, find your dealflow partner now.
Build relationships: Get from intro to in-person ASAP.
Specialize: The more niche your focus, the less competition you face.
Use technology: AI-powered deal sourcing is the minimum bar.

The Bottom Line

The market is rewarding preparation. The firms doing the work now will be the ones closing deals at better valuations.

The search fund model has never had more capital available. But it also has never had more competition. Those who figure out deal sourcing for search funds will win.

The clock is ticking.

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