Master Class in Lower Middle Market Private Equity with UCLA’s Deputy CIO
Title: A Strategic Blueprint for Lower Middle Market Dominance
Podcast Guest: Michael, Deputy CIO, UCLA Investment Company
Host: David Weisburd
Audience: Venture Capitalists, Fund Managers, Institutional Investors
Run Time: ~1 hour 5 minutes
Focus: Endowment investment strategy, asset class allocation, lower middle market private equity
Summary
Michael Marvelli, Deputy CIO of the $5B+ UCLA endowment, provides a deep and disciplined look at how a university endowment can systematically outperform in private equity by focusing on a specific, overlooked segment: the lower middle market. For VCs, especially those managing capital-intensive platforms or considering adjacency strategies, this is required listening. The insights presented here go beyond allocation strategy — they offer a full-stack blueprint for value creation in a space often too small for megafunds, yet too complex for casual entrants.
Highlights: Strategic Rigor Meets Tactical Excellence
1. Asset Class Strategy: The Underdiscussed Middle Layer
Michael introduces a three-tiered framework that should resonate with any sophisticated allocator:
Portfolio Construction
Asset Class Strategy
Manager Selection
He critiques the common practice among institutions of skipping the second step entirely — going from macro allocation targets straight to finding “best-in-class” managers. His key insight: even a world-class manager operating in a mediocre segment will yield suboptimal returns. Strategy, not pedigree alone, drives alpha.
“You can be the best manager selector in the world and still only achieve mediocre outcomes if you’re not targeting the right segment.”
For VCs used to segmenting venture into pre-seed, seed, Series A, etc., this will feel familiar — but the idea of layering strategy before manager search is an instructive inversion.
2. Why Lower Middle Market? The Goldilocks Zone of Private Equity
Michael makes a compelling argument for why the lower middle market (LMM) is UCLA’s high-conviction zone in private equity:
Size of Opportunities: Typically buying $3M–$6M EBITDA businesses at ~7x EV/EBITDA.
Entry-to-Exit Multiple Arbitrage: Their data shows a 7.5x valuation multiple uplift, not MOIC — purely from buying low and selling into a higher valuation strata.
Dry Powder Arbitrage: The majority of PE dry powder is trapped in funds over $500M; UCLA operates underneath that capital tide, preparing assets for “graduation” to bigger buyers.
Low Competition, High Fragmentation: Smaller companies, fewer bidders, and a chance to partner rather than extract.
“We’ve sold companies at 15.5x that we bought at 8x. That 7.5x is pure multiple expansion — not MOIC, but multiple.”
In other words, UCLA isn't just picking better — they're buying fundamentally different assets with more upside.
3. Structure Enables Strategy: Governance and Team Design
This episode is also a lesson in institutional design:
Team Size: From 3 professionals at launch to 15 today, with specialization in private markets.
Governance: UCLA’s board has delegated manager selection authority, allowing agility — a constraint that slows many endowments.
Fund Entry Timing: 12 of their 15 managers were fund I investments. Their diligence process focuses on operational capabilities, not logos.
VC listeners who struggle with LPs requiring brand-name funds will find validation in Michael’s clarity: “We entered at Fund I. No track record. No brand. Just conviction and diligence.”
4. Specialization as a Competitive Advantage
UCLA doesn’t invest in generalists. They focus on:
Single-sector firms
Operator-led partnerships
Funds with five to nine portfolio companies, not 15+
This allows deep pattern recognition, faster diligence, and stronger rapport with founders — particularly important when founders roll equity.
“Our goal is for the founder to walk away from the first meeting and not want to meet any other buyer.”
VC firms looking to compete on more than just capital — especially with founder-led roll-ups or transitions — should take note.
Insights Relevant to VC Audiences
A. Fundraising Implications for Emerging Managers
Michael reveals that UCLA has an appetite for fund I investments, provided the strategy is clear and risk is managed through:
Single-sector focus
Operating leverage (real operational skill, not just jargon)
Realistic fund sizes (ideally <$250M)
This validates a path for emerging managers outside of Silicon Valley — particularly those with deep operational chops in fragmented sectors.
B. Value Creation ≠ Leverage
One of the clearest takeaways is the different role of leverage:
In the upper middle market, leverage is accretive and predictable.
In the lower middle market, it’s often unavailable or risk-destructive.
Instead, UCLA looks for returns from:
Cash flow growth (1–2 turns of uplift)
Operational improvement
Multiple arbitrage (primary driver)
The implication? For smaller companies, story and execution matter more than structuring.
C. LP Alpha Comes from Saying No (A Lot)
Michael’s framework allows the team to ignore huge swaths of the market. That’s LP alpha in practice: focusing not only on what to do, but what not to do. The same lesson applies to VC portfolio construction: specialization strengthens pattern recognition, speeds diligence, and enhances GP-GP knowledge sharing.
Tactical Nuggets for Practitioners
Ideal PE fund: 5–9 investments, 3-year deployment, single-sector focus, 2–3 turns of MOIC from operational improvement, rest from multiple expansion.
GP Structure Preference: 1 operator + 1 investor (or 2 operators + 1 investor). No “rock stars,” just competence and clarity.
Search and Independent Sponsors: UCLA passes on unfunded search and most sponsor deals due to governance complexity and execution risk.
Founders Will Take Less for Trust: In lower middle market deals, founder alignment > price. Multiple anecdotes affirm this dynamic.
“That founder would never sell to 90% of private equity buyers — no matter the price.”
Areas of Reflection for VCs
Is there a segment in venture that’s today’s “lower middle market”?
Could overlooked verticals (e.g. govtech, industrial automation, healthcare services) offer similar arbitrage?
Could pre-seed/pre-accelerator platforms mirror this buy-and-graduate strategy?
Are you too diversified to be differentiated?
UCLA rejects multi-sector funds. Could your generalist platform be hurting your edge — or worse, your trust with founders?
What’s your “dry powder arbitrage”?
UCLA thrives below the capital swell. Where in venture or growth are others overfunded — and what’s just below that?
A Playbook, Not Just a Podcast
This episode is the most rigorous, transparent, and intellectually generous conversation on institutional private equity allocation in recent memory. Michael’s clarity around segment targeting, team design, governance enablement, and value creation makes this essential listening for LPs and GPs alike.
For VCs, it challenges several sacred cows:
That fund size correlates with performance
That brand names outperform emerging managers
That “strategy” begins after you set allocation
Instead, Michael offers a more disciplined approach: strategy before search, focus before fame, and partnership over price. In short: a real edge.
Verdict: 🌟🌟🌟🌟🌟 (5/5)
Recommended For:
VCs considering fund size adjustments
Emerging managers looking to raise from endowments
LPs rethinking their manager selection process
Anyone tired of buzzwords and ready for rigor