Capital Allocators• Nov 24, 2025• 1:00:14Interview

Michael Kelly - Democratizing Access to the Middle Market at Future Standard (EP.473)

From Capital Allocators

Michael Kelly•Co-President and Chief Investment Officer, Future Standard

Executive Summary

The era of generating high private equity returns through financial engineering (leverage, multiple expansion) is over; future outperformance will be driven by operational value-add and faster revenue growth, particularly in the middle market.
The 'democratization of alternatives' is a major trend, with the private wealth channel identified as the fastest-growing source of capital for the alternative asset management industry.
The middle market (<$1B enterprise value) offers a more attractive investment environment than the large-cap space due to lower entry multiples, fragmentation, and greater opportunities for operational improvement.
Future Standard has grown from a single-strategy distributor (Franklin Square) with $12B AUM to a $90B multi-vertical alternative asset manager through strategic partnerships (GSO/Blackstone, KKR) and acquisitions (Portfolio Advisors, Post Road Group).

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Concerns Raised

The 'old playbook' for investing will not work in a new market regime of higher uncertainty, volatility, and inflation.
The risk of 'fees on fees' in products designed for the private wealth channel can erode investor returns if not structured properly.
Successfully serving the private wealth channel requires a significant, long-term investment in distribution, education, and client service resources.

Opportunities Identified

The private wealth channel is the fastest-growing source of capital for alternative investments.
Middle-market private equity is poised to outperform the large-cap segment due to better entry points and value-add potential.
Private credit and secondary markets remain undercapitalized relative to the size of the opportunity.
The future digitization and tokenization of private assets will create significant new efficiencies and investment opportunities.

Key Themes

The End of Financial Engineering in Private Equity

The traditional private equity playbook of using leverage and relying on multiple expansion to generate returns is no longer viable in the current market environment. The focus must shift to fundamental business improvement, such as accelerating revenue growth and implementing operational efficiencies, to drive outperformance.

This fundamental shift changes the required skill set for private equity managers and favors those who can act as strategic partners to portfolio companies, particularly in the less efficient middle market.

The Democratization of Alternatives

A significant transformation is underway as alternative investments, once the exclusive domain of institutions, become increasingly accessible to individual investors. This is driven by new fund structures (e.g., evergreen funds, BDCs) and dedicated distribution platforms targeting the private wealth channel.

This trend unlocks a massive new pool of capital for alternative asset managers, creating a significant growth opportunity for firms that can effectively build the necessary distribution, education, and client service infrastructure.

The Middle Market Advantage

The core and lower middle market (companies with valuations under $1 billion) is positioned to outperform large and mega-cap private equity. This segment offers more reasonable entry valuations, a less competitive landscape, and more significant opportunities for hands-on value creation.

Investors and managers should focus on this segment to find alpha, as it provides a more fertile ground for the operational value-add strategies that are now critical for success in private equity.

Scaling Through Strategic Partnerships and M&A

Future Standard's growth exemplifies a successful strategy of combining organic builds with strategic partnerships and acquisitions. By partnering with scaled originators like KKR and acquiring specialized firms like Portfolio Advisors, the firm rapidly expanded its capabilities, product suite, and access to proprietary deal flow.

In a competitive asset management landscape, this hybrid 'buy, build, and partner' model is a powerful way to achieve scale, enter new verticals, and create a differentiated, non-commoditized value proposition for both LPs and portfolio companies.

The Future of Private Asset Structures

The industry is evolving beyond traditional closed-end funds to meet the needs of new investor types. The rise of evergreen vehicles, BDCs, and interval funds provides greater liquidity and accessibility, and future innovations like the digitization and tokenization of private assets will further transform the market.

Asset managers must innovate on product structure to capture the growing private wealth opportunity, while investors should anticipate new ways to access and manage private market allocations in the future, including within 401(k)s.

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Topics

Private Equity Private Credit Middle Market Investing Democratization of Alternatives Private Wealth Management Asset Management Financial Engineering Business Development Companies (BDCs)Evergreen Funds Secondary Markets Alternative Investments Capital Allocation Distribution Strategy Mergers & Acquisitions (M&A)Digital Infrastructure

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