If you factor in co-investments, separate accounts and direct investments – three channels investors are increasingly using to pump money into the private equity sector – 2017 is shaping up to be a record year for the asset class. The industry is on pace to raise a wallet-busting $691 billion in commitments this year, about 10 percent more than the previous high mark. That’s on top of an estimated $1 trillion in dry powder already waiting to be deployed.

All this capital raising is good news, right? Maybe, because at the same time that cash is flooding into the sector private equity deals are getting smaller. Deals under the $25 million mark accounted for nearly half of activity thus far in 2016, representing the highest proportion since 2009. Observers chalk this up to a number of reasons, including rich stock prices and increased regulatory scrutiny, but our guess is that private equity firms are seeing better opportunity for returns at the smaller end of the market, where greater growth and operational wins are to be had.

Which takes us to a bigger point: it’s getting tougher these days for private equity firms to source the types of deals they want. The problem is that flood of capital chasing smaller deals combined with more competition. During the 15-year period from 2000 to 2014, the number of active private equity firms globally exploded 143 percent to 3,530. Intensifying competition further is a migration of large buyout shops moving down market in search of yield amid today’s low interest rate environment, and other kinds of entities with access to cheap debt, including sovereign wealth funds and pension funds with direct investment capabilities, entering the field.

To be clear, we don’t mean to imply that private equity will run into a wall just yet – there are still plenty of opportunities be had, and the M&A market is expected to get red hot in 2017. But the historic amount of capital investors have entrusted with the sector, combined with a record number of fund managers competing for smaller deals, means that private equity faces its greatest test yet in the year to come, and arguably for a few years thereafter given the mechanics of the industry’s long-term investment model.

There is no easily predictable outcome here, but one thing that seems certain is that firms able to distinguish themselves from what’s become a crowded mid-market dramatically improve their chances of winning the most-sought after deals. On that point, we have a few ideas to share. Navatar has been asking a number of our mid-market private equity clients how they compete given all the new racers on the track. Following those conversations, we believe we’ve identified five strategies not being used to their full potential, including a disciplined relationship building process and a more flexible investment approach. Three leading deal experts – David Duke (Edgewater Capital), Rob France (High Street Capital) and Mark Hollis (Centerfield Capital) – shared those ideas as part of a roundtable discussion on mid-market deal opportunities.

Private equity professionals operating in the middle market should anticipate 2017 to be a year of both immense challenges and rewards. But as leading firms jockey for attention, and outcompete the laggards with better differentiation strategies and business models, those struggles and successes will not be shared evenly across the industry.