"Lower middle market business growth is getting stronger and that is great for those investing in the space," said Brett Palmer, president of The Small Business Investor Alliance, a trade association of lower middle market funds and investors in Washington, DC.
"Although it's a very competitive deal market, there are many more businesses in the lower middle market," added Palmer. "Although bigger, there are fewer choices at the very large end of the spectrum."
Palmer and others in middle market investing—many of whom gathered at an SBIA conference in snowy Manhattan Wednesday—have good reason to be bullish.
The growth of those smaller businesses are five times faster than the S&P 500 in 2013, according to new a new survey released by the National Center for the Middle Market Wednesday. And executives at the companies are mostly bullish for increased growth in 2014: they project 4.3 percent revenue and 2.2 percent employment growth over the next 12 months.
"The middle market continues to deliver consistently strong performance during both recessionary and growth periods of the overall economy," said Dr. Anil Makhija in a statement. Makhija is academic director at NCMM, a partnership of GE Capital and The Ohio State University Fisher College of Business.
(Read more: Apollo raises largest PE fund since financial crisis)
More private equity firms that focus on smaller opportunities are doing it through business development companies or "BDCs."
These publicly traded entities are run by private equity firms and invest mostly in the debt of smaller companies. Unlike standard PE funds, they are open to the public thanks to a legal exception to spur investment in smaller businesses. BDCs have gained in popularity as their relatively risky leveraged debt investments have performed well in the bull market, earning gains and dividends that combine to give investors high single or low double digit returns.
There have been 21 initial public offerings of BDCs since 2010 that raised $2.16 billion, according to data from Dealogic. Funds launched over the last 12 months include Garrison Capital, Harvest Capital Credit, Fifth Street Senior Floating Rate, Capitala Finance and American Capital Senior Floating.