The overlooked 20%: Why the next generation of private equity alpha is already being built

As private equity scales into the mainstream, capital is clustering in mega-funds, and alpha is getting competed away. In this piece, Elizabeth Weymouth, Founder & Managing Partner, Grafine Partners, spotlights what she calls the overlooked 20%: Sub‑$1B managers operating in less crowded deal bands where bilateral processes, operational value creation, and pre‑institutional access can drive durable outperformance. Explore why smaller and first‑time funds can capture inefficiencies others miss, and how to back tomorrow’s core managers today, then continue the conversation at SuperReturn North America.

Over a 20-year career in private equity, I have watched the industry transform from a niche strategy into a core pillar of institutional portfolios worldwide. That transformation has been remarkable – and it has fundamentally changed where the opportunity lives.

Private equity is no longer an alternative. It is mainstream. With that shift has come greater institutionalisation, larger funds, and increasingly standardised approaches to deploying capital. Nearly 80 per cent of private equity fundraising today goes to funds with assets of more than one billion dollars. Brand, scale, and perceived safety drive the majority of allocation decisions. That is rational. It is also, for the investor willing to think differently, an extraordinary opportunity.

We believe that when capital crowds into the same strategies, alpha gets competed away. The most durable outperformance has rarely come from crowded corners of the market. In our view, it emerges earlier in overlooked segments where talent, alignment, and opportunity intersect before scale changes the equation.

That conviction has shaped my entire investment philosophy – and it is what led me to focus on what I call the overlooked 20 per cent: the roughly one-fifth of private equity funds operating below $1 billion in size. This is not about small for small's sake. It is about recognising where the structural conditions for alpha are strongest – and getting there before everyone else does.

How sub-$1 billion funds drive alpha

These managers fish in smaller, less crowded ponds, writing equity checks of roughly $25 to $150 million into lower middle and middle market companies that are too small, too complex, or too operationally demanding to matter for a $10 billion platform. In that deal band, we see processes are more often bilateral or lightly intermediate, auction dynamics are weaker, and pricing reflects genuine inefficiency. Competition thins precisely because the work gets harder – and that is exactly where disciplined investors can earn their premium.

These managers are naturally drawn toward idiosyncratic situations: founder-led successions, corporate carve-outs, and niche businesses in the $50 to $500 million enterprise value range. Those transactions are difficult to scale inside a global platform, but they can drive fund-defining outcomes for a $350 to $750 million fund. Entry valuations tend to be lower, leverage is more conservative, and value creation depends not on financial engineering but on genuine operational intervention – installing professional management, building commercial infrastructure, and executing disciplined buy-and-build strategies in businesses that have never had an institutional partner before.

A $350 to $750 million fund might own six to ten platform companies. That concentration enforces discipline. Every investment must earn its place with a clear, quantified path to value creation. There is no room to spray and pray. Properly managed, that concentration is not a risk – it is a feature.

Where outperformance really comes from

One persistent and underappreciated feature of this segment is that the funds operating within it have quietly and consistently outperformed. Over the past decade, first-time private equity funds have generated net IRRs roughly 400 basis points higher on average than managers raising their fourth fund or later – a performance gap that in our view is structural, not incidental.

The majority of these first-time funds operate at a sub-$1 billion scale, and according to our analysis, more than 90 per cent fall below that threshold, placing them squarely within the portion of the market that remains chronically underallocated by institutional investors. That outperformance has come from a segment that is often too small for the largest pools of capital and too operationally intensive for passive investors - leaving disciplined, hands-on GPs to capture the illiquidity premium and the upside from real value creation.

Dispersion in this part of the market is real but often misread. Smaller and first-time funds show wider return dispersion – yet downside performance has historically been broadly comparable to established peers, while upside potential is meaningfully higher. The real question for investors is not "Is there more risk?" It is "Am I willing to go where the upside actually lives?"

Pre-institutional access: The real edge

What sophisticated investors ultimately seek in this segment cannot be manufactured at scale: pre-institutional access. The ability to back exceptional managers before the platform build-out, before the fundraising machine, and before every competitor has them on a short list.

The managers generating the strongest returns in the overlooked 20 per cent will not remain overlooked indefinitely. They will scale and become tomorrow's core managers. Investors positioned alongside them at the beginning – when fund sizes are smaller, terms more favourable, and alignment at its highest – can capture a compounding advantage that late movers cannot replicate. Allocating to the overlooked 20 per cent is not a bet against large platforms. It is a complementary strategy that helps to source tomorrow's core managers when alignment is strongest and opportunity is greatest.

In a world where 80 per cent of capital flows to the same corner of the market, index-like comfort in private equity is a choice. So is deliberately fishing in the 20 per cent where alpha still exists.