It’s no secret that middle market alts managers have been feeling the pain. So much so that a few months ago I was telling anyone who would listen that the so‑called “messy middle” of private real estate was doomed. My argument was simple: mega managers would keep vacuuming up capital on one end of the barbell, and hyper‑local operators would attract the capital looking for alpha on the other end. In that world, mid‑sized firms are feeling the pinch. They are neither small enough to be specialist nor large enough to be the mega manager. They are stuck in the messy middle.
The numbers from the PERE 2025 fundraising report seemed to support that view. Private real estate fundraising rebounded in 2025 to around $222 billion, up almost 30 percent from 2024, and a full 16 percent of that came from just two firms, Blackstone and Brookfield. Those two giants raised about $35 billion across three of the ten largest funds closed. From this data, it is easy to conclude that scale would continue to win and that anyone without a platform with dozens of strategies across several geographies was going to have a very hard time.
My thinking is evolving
When I dug into the numbers and listened to our LPs and to the operators I’ve interviewed on The Distribution over the past year, a different picture is emerging. The firms in that messy middle are battered, but not because they’re irrelevant. They got hammered because they built organizations that supported a business model that relied on quick and consecutively larger fundraises. This means they scaled teams of people as they scaled AUM. This includes very large and often bulky support teams in the back and middle office. In the go-go days of fundraising, efficiency was an afterthought. As far as most GP’s were concerned, as long as the capital was flowing, they would just keep throwing more bodies at the problem. There was little to no talk about efficiency. When allocations slowed, these firms were left with huge fixed cost structures and limited fee income to pay for the overhead. This created a big challenge as firms were forced to re-think their operating models to adapt to the changing market conditions.
But as I talk to more and more leaders of firms in the messy middle, I have come to a realization… these firms have what both ends of the barbell want. They often have deep sector or geography specialization, decades (or more) of track record, and a real (and proven) capability to scale. The challenging market conditions have forced many of these firms in the messy middle to focus not on deal flow or fundraising but rather on re-imagining their business. They are cleaning up, they are preparing for a world where their size, scale and history will be an advantage, not a challenge.
The barbell is real, but it’s not the whole story
The narrative right now is that LPs will split their dollars between mega managers on one side and ultra‑local sector specialists a.k.a sharpshooters on the other. Blackstone and Brookfield’s dominance in 2025 fundraising seems to validate that story. So does the appetite for operators who can deliver “operational alpha” by being local, hands‑on and narrow. I have interviewed dozens of leaders of these firms on The Distribution podcast and I have no doubt they will continue to be successful. But there’s will be challenges:
Local operators rarely scale. I mean.. really scale. This is a catch-22. Many sharpshooters stay small by design. This is a great strategy for focus and alpha generation and their returns often speak for themselves. Naturally, the LP’s are happy with the returns and want to put more money to work. This often forces the GP to scale to new markets, sectors and capital strategies. As they scale, they face the growing pains that the messy middle has been enduring. They may even loose their local/sharpshooter edge. Many simply don’t have the capital, experience or risk controls to absorb bigger commitments and scale but they do have the learnings of what didn’t work for the messy middle. The hope is that they apply these learnings but only time will tell.
Mega managers aren’t always the answer. Allocators like the “one‑stop shop” because it’s efficient, but it also means more concentration risk and less true diversification. These firms have to write very large checks which means they are boxed out from a large segment of the market. A segment, that has at least historically, seen some of the best returns. Some LPs are realizing they’re over‑indexed to a handful of platforms that are all doing similar things and from a portfolio allocation perspective, they are still seeking real alpha and diversification. This is a opportunity for the ‘messy middle’ that can reinvest themselves.
All of this leaves room for mid‑sized, vertically integrated GPs who can marry specialization with scale. Those firms can be national or even international in scope but still bring an operator’s sensibility to sectors like industrial, retail, multi-family or senior housing. To capitalize on that opportunity, they need to do three hard things.
What the messy middle must do to reinvent itself
Strip out undifferentiated heavy lifting. If every GP has to do something, it’s probably not your edge. Accounting, reporting, fund administration and other repetitive functions are essential but not differentiators. Outsource or find a partner to take these on for you. Shrink the middle & back office to remove the fixed cost from the P&L and gain flexibility to scale up or down as AUM changes through cycles.
Get better at telling your story. A few years ago it was enough to be “big, national and vertically integrated.” That’s no longer compelling. LPs want to understand what you’re the best in the world at — whether it’s cold‑storage logistics in the Sunbelt, value‑add multifamily in secondary markets or infill industrial on the West Coast. Once you know your lane, know your why. What makes you better than everyone else? Hint: It’s not because you are vertically integrated, nor is it about your team tenure mostly likely not about your off-market pipeline.
Prove you’re durable. LPs burned by recent vintage funds will ask what you’ve done differently. Be ready to show changes in leadership, technology and service providers. Compare your org design from the start of the last cycle to your team know? What changes have you made? What about how you are using service providers to rent vs. buy vs. build? How are you creating more opportunity for efficiency and scaleability without adding head count. And you need to be prepared to talk about AI. Every investor is asking. But don’t take this as a mandate to roll your own… Find great partners who have a deep customer base, industry knowledge and data scale and let them do it for you and with the industry. In short, you need to be able to demonstrate that you’ve taken steps to re-imagine your business for the next cycle(s) rather than doubled down on a structure built in the last one.
This is the hard work nobody wants to do. It’s far away from the comfort zones of fundraising, investing and asset managing. It’s the really gritty work. The kind that no IC can solve. You can search for the ‘easy’ button but it’s just not there. But I’m seeing GP’s make the shift. It doesn’t happen over night but what when I see GP’s that have “always done it this way” start to “reimagine” their business, it is encouraging.
What happens next
I don’t believe private real estate is a winner‑takes‑all game. 2025 fundraising data show a rebound but also heavy concentration. More capital is coming from private wealth platforms and individual investors. Institutional investors are rethinking the role of real estate in portfolios — not just as a return driver but as an inflation hedge and diversifier. In that world, capital will need scaled, vertically integrated national platforms to deploy effectively. The pendulum that swung towards “local alpha” may swing back toward “specialist plus scale.”
There will always be a role for the local operator; someone has to know every zoning nuance and sewer line in a neighborhood. Mega managers aren’t going anywhere either. But the competition is shifting. The real contest will be between local operators that have the foundation to scale with their capital partners and handle institutional tickets, and middle market specialists reinventing themselves to become lean, durable and trusted partners…at scale
My bet? By the end of this cycle, many firms currently stuck in the messy middle will be leading the market again. Not because they became mega managers or because they turned into boutique operators, but because they chose to shed what wasn’t special, sharpen what was, and rebuild for a world where doing less is doing more.
What do you think?
Really solid take on the barbell problem - the part about sharpshooters hitting thier own scale issues when LPs want more capital deployed is underrated. We've been looking at mid-market GPs for a potential allocation and the outsourcing piece keeps comingup in diligence. Firms that actually stripped out the non-differentiated stuff look way more durable than the ones still pretending every function needs to be in-house.