A decade back, investment banker David Schnabel pulled up stakes from New York City and headed to Dallas. He arrived with some skepticism. He has since become a Dallas devotee. "Ten years ago, I never would have believed it, but yes, I'm in for the long haul. I've never lived in such a place that is transforming itself in such a positive way," he says, adding: "Texas may seem like a totally different world, but once you get in, it's easy."

Schnabel came to work for TRT Holdings, the family office of the Rowlings, which first made money with oil and gas wildcatting. (For those who keep track of such things, Robert Rowling ranks 66th on the latest Forbes' 400 list of the wealthiest people in America, tied with Blackstone Group LP's Stephen Schwarzman.)

In 2008, Schnabel joined Dallas-based private equity firm Phoenix Strategy Investments. A year later, Phoenix Strategy teamed up with another local private equity firm, Teakwood Capital LP, to acquire for an undisclosed amount ­ExamSoft Worldwide Inc., an educational technology company, then based outside Boca Raton, Fla.

Schnabel now serves as ExamSoft's president. He didn't leave his adopted home, however. Instead, the private equity sponsors moved ExamSoft's headquarters to Dallas. "Texas is a great market for small and midmarket companies," he declares.

Dallas may seem an unlikely host for educational technology. Yet stories abound about this kind of economic expansion across a wide array of sectors. Many times, middle-market private equity capital plays a role. "Dallas may not have the velocity you see in the Silicon Valley, but it serves us well," says Shawn Kelly, managing director of Teakwood, which targets middle-market businesses in Texas and adjacent states and provides growth capital to companies with less than $5 million cash flow and revenue between $5 million and $25 million.

"There's no reason not to be in Dallas," adds Gurvendra Suri, CEO of Optimal Solutions Integration Inc., a software consultancy firm that is also private equity backed.

Think Dallas and many will say "Dallas": J.R. Ewing. Oil. Cattle. OK, throw in Jerry Jones and the Cowboys or Mark Cuban and the Mavericks if you must, but the cliché remains the same: outsized, rough-hewn, slightly cartoonish.

In fact, the city and its sprawling metropolitan area have long outgrown their original, unfettered oilfield-soaked roots. Rowling, for example, sold the family oil business to Texaco Inc. and Unocal Corp. and is known more these days as the owner of Gold's Gym International Inc.and Omni Hotels & Resorts.

Suri, who was born in India and moved to Dallas from New Jersey two decades ago, calls his home "surprisingly cosmopolitan."

The Dallas metropolis of 6.4 million is America's fourth largest. It is an economic jumble that mixes everything from manufacturing and financial services to healthcare and telecommunications. While the area lost more than 100,000 jobs in 2009 and is still slightly below peak 2008 levels, Dallas didn't fall as hard as most other metropolitan areas. "We are a broadly diversified economy. That has given us some insulation against economic cycles," says Terry Clower, an economist who heads the Center for Economic Development and Research at the University of North Texas in Denton.

What's more, the Dallas metroplex is home to 20 Fortune 500 companies, which represent an array of sectors and attract a deep, talented managerial pool. But the area's economic strength can be found in the thousands of smaller companies, both homegrown and transplanted.

"Where are the companies that are expanding?" Clower asks rhetorically. "The real action in job creation is the middle market."

He cites the area's telecommunications industry, which had been dominated by large companies until the tech implosion of 2001. Those in the industry "didn't go anywhere," Clower says. Instead, they branched out into small companies in everything from digital media to financial industry-related software. (History may be repeating itself. Dallas suburb Irving announced with great fanfare in late 2007 that it would house U.S. headquarters of Canadian-based Research In Motion Ltd., which makes the BlackBerry. RIM is now in free fall and announced it may seek a buyer.)

Neither Clower nor Tim Glass, the chief planner at the Dallas Office of Economic Development, is aware of any study that weighs the relative strength of the area's middle market. However, using data compiled by the Dallas Business Journal, perhaps half of the Dallas area's top 100 public companies are middle market and probably 80% of the top 100 private companies.

Dallas is economically far more varied than Houston, its energy-dependent neighbor to the south. That said, the current energy boom is critical to Dallas' economic well-being and its relatively low unemployment rate of 7.1%. The Barnett Shale of North Central Texas leads the way, as does the resurgent Permian Basin of West Texas. "Energy is going gangbusters," says Jeff Matthews, managing director of Dallas-based financial advisory Challenger Capital Group Ltd. The giants get much of the ink. (Kohlberg Kravis Roberts & Co. LP, for instance, said April 2 that it had acquired from WPX Energy Inc. properties in the Barnett Shale and elsewhere for $306 million.)

But Dallas' smaller middle-market companies have benefited as well, notably those that service big exploration firms. That includes everything from truckers to pipeline manufacturers and suppliers to those who manufacture and lease out the water tanks used in hydrofracking.

"Oilfield services are 35% of our business. They've grown dramatically," says David Mahmood, chairman of middle-market investment bank Allegiance Capital Corp. and the dean of investment bankers in Dallas. "This has had a dramatic impact on the economy. We see companies in the middle market with revenues of a few tens of million. All the sudden, they're 100 million ... companies with $5 million in adjusted Ebitda, then $12 million, then $47 million."

This kind of revenue leapfrog directly affects M&A. "They're all growing like crazy, but they don't generate enough capital, so in many instances they need to bring in equity groups or sell their businesses," Mahmood continues. "I probably have 10 companies ready to sell."

Mahmood, who founded Allegiance in 1998, describes a recent client: a local contract driller in his 30s, who owns 13 drilling rigs. "What he needs for more opportunities," Mahmood says, "is a strong equity partner. If he had enough money, he could take a share in the wells he drills."

The Dallas-area economy may range far and wide, but there are also some noticeable gaps. The city was pretty much ground zero for the banking crisis of the late '80s. A combination of severely overbuilt real estate and rapidly falling energy prices felled many Dallas financial institutions, which had gorged on energy and real estate loans. Dallas lost its biggest homegrown banks in the upheaval. Until the 2008 financial meltdown, First RepublicBank Corp., which once ranked as America's 14th-largest bank, held the record as either the biggest- or second-biggest-ever commercial bank bust (depending on definitions of failure). MCorp failed, as did Texas American Bancshares Inc. and InterFirst Corp.

By 1990, banking executive Jody Grant wrote recently in D Magazine, "Dallas didn't have a single home-based bank with more than $1 billion in assets. Dallas had been transformed from one of the nation's great banking powers to a financial wasteland."

A few regional banks have risen from the ashes. With a national footprint, Comerica Bank moved its headquarters from Detroit to Dallas in 2007. But the biggest players in town tend to be the usual suspects: J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of America Corp.

No one says Dallas suffers a capital deficit. "It's a very competitive lending market," says Matthews.

The city's peculiar banking scene may actually play to its economic strengths, some believe. "Midmarket and asset-based lending is more active than large lending," says Terry Conner, a Haynes and Boone LLP managing partner.

For an economy the size of Dallas, the venture capital community is paltry. By extension, that hurts technology startups. Part of this may be due to the fact that Austin is a 3-1/2-hour drive south on Interstate 35, relatively nearby, at least by Texas standards. Austin is a venture-backed and technology-driven hotbed, not to mention Austin is also -- sorry, Dallas -- way hipper for the younger set and home to the main campus of the University of Texas.

"It's harder to hire serious talent because Austin is so robust," says Dennis Leibl, CEO of Teakwood Capital portfolio company, InReach, an Austin-based developer of online continuing education

Last year, there were 36 venture capital deals in Dallas, which totaled $523 million. That's less than 1% by number and 2% by value of national totals.

Venture capital aside, the diversity of the Dallas economy is evident in both large and small businesses. While Exxon Mobil Corp. heads the list of Dallas' biggest Fortune 500 companies, AT&T Inc.'s headquarters is nearby, as is Texas Instruments Inc., Kimberly-Clark Corp., Southwest Airlines Co. and Dean Foods Co. (Bankrupt AMR Corp., the holding company of American Airlines Inc., is also on that list. U.S. Airways Group Inc. openly covets American Airlines, although AMR has the exclusive right to reorganize under Chapter 11. There's widespread concern in Dallas that if U.S. Airways takes over the Fort Worth-headquartered airline, hundreds of jobs could be lost. Already, AMR has said it will close down a Dallas-area maintenance facility.)

Clower, like many other economists, says a headquarters doesn't usually stimulate job growth. "It's more about bragging rights than economic development," he says adding: "Exxon may have all of 500, 515 employees working here. It's significant, but it's not like having 5,000 manufacturing jobs."

It's further down the economic food chain that matters. Take Optimal Solutions, for example. This year, a profitable Optimal Solutions should register revenue between $140 million and $150 million, according to Suri. That's triple 2007 levels. Optimal Solutions now calls itself "the largest exclusively SAP consulting firm in the world."

Suri and Andersen Consulting (now Accenture) alum Sam Sliman co-founded the company in 1995. They met in Dallas on an SAP AG implementation project for a pharmaceutical distributor. For the first decade or so of the company's existence, clients were large companies.

Five years back, the two sat down and decided two things: "The company had reached a level where it needed outside investment," says Sliman, the company's president. And, with new capital, it could begin to craft SAP offerings for the middle market. That strategy has paid off, the two say. The middle market now accounts for 30% of total business.

In 2008, New York's Tailwind Capital acquired a majority interest in Optimal Solutions for an undisclosed amount. "They were at an inflexion point in their business cycle," says Rahul Vinnakota, a Tailwind principal, who marvels at the company's growth since. "When we invested, they had about 300 people. Since then, they've tripled their head count."

The firm is national, with offices also in India. While more than 100 employees call Dallas home, its consultants live throughout the U.S. Even those in Dallas are often rushing for flights at Dallas/Fort Worth International Airport, just 10 minutes away from headquarters. But Sliman says there's a healthy business in Optimal Solutions' backyard, where "Dallas is a very vibrant market for us," he says. "We get a lot of work locally."

While Dallas lacks indigenous big commercial banks, fund management is a different story. By some accounts, the number of fund managers in the Dallas-Fort Worth region ranks third in the nation behind the New York-Connecticut corridor and San Francisco-Silicon Valley. That's an accident of history. The Dallas rich surrounded themselves with investment managers who became pioneers in private equity and hedge funds.

Some Dallas asset management still reflects an energy focus. One of the biggest is NGP Energy Capital Management, the Fort Worth-based natural resources investor headed by Ken Hersh. NGP ­Energy has more than $9.5 billion funds under management.

But most asset managers are much more diversified. Highland Capital Management LP, for example, boasts $20 billion under management and, the firm claims, stands as America's largest manager of collateralized loan obligations, or CLOs. Highland also acts as a private equity investor in distressed assets. Significantly, the firm targets the middle market.

In the history of private equity, Dallas holds a place of honor. Local legends such as Robert Bass, Richard Rainwater and David Bonderman are considered pioneers in the industry. Gone are the days, however, when these kinds of figures dominated the local scene. Of the three, only Bonderman remains active in private equity, and his TPG Capital considers itself global, with offices in San Francisco and New York as well as Fort Worth.

What's happening, suggests Ned Fleming III, managing partner of Dallas private equity firm SunTX Capital Partners, is a generational change in private equity. Targets and expectations are different. "The next generation of private equity is coming through. For that generation, the opportunity is in the middle market," he says.

Midmarket private equity and local midmarket corporate strength reinforce each other. "We don't have the megafirms headquartered here, but there are quite a number of midsized private equity firms with a strong presence," explains Taylor Wilson, a Dallas-based partner at Haynes and Boone who heads the firm's investment funds practice group. "One of the reasons for having a strong private equity market is the number of midmarket companies and a thriving midmarket."

That midmarket focus extends to investment banks as well. Houston's energy dominance demands a strong, physical presence by large banks. Not so Dallas, although Goldman, Sachs & Co. and Credit Suisse Group have small offices. Instead, Dallas is the domain of smaller, homegrown investment banks such as Allegiance Capital Corp., with a clear middle-market focus and a largely Sun Belt bias. The number of such banks has grown over the past decade.

"It's gotten pretty crowded," says Mike McGill, a co-founder with the decade-old investment bank MHT Securities LP, whose M&A and fundraising advisory firm of 20 professionals targets companies with enterprise value of $30 million to $300 million. When MHT began, he says, the investment bank had that middle-market field practically to itself. Now, he says, "it's turned into a very competitive market."

Still, business has never been better, McGill stresses. The bank now gets two-thirds of its revenue outside Texas. Even after the 2008 financial crisis, MHT kept its entire team intact. "We chose not to lay off anyone," says McGill's fellow MHT co-founder, Shawn Terry. "That builds loyalty in-house and among our clients."

When listing Dallas advantages, its many boosters talk about the lack of a state income tax and a business-friendly environment. They mention relatively cheap office rent and housing costs. While they dodge the weather -- witness the devastating tornados that pounded the area in early April -- they inevitably bring up geography. That's encapsulated in the two metropolitan airports. "Transportation is the No. 1 advantage of being in Dallas," says Mark Barbeau, a co-founder of local distressed private equity firm Renovo Capital LLC, none of whose investments is local. Barbeau moved to Dallas from Irvine, Calif. "Orange County to Portland [Ore.] isn't a whole lot closer than Dallas to Portland."

That kind of centrality works for companies such as Optimal Solutions as well. "Dallas is a natural place to be headquartered," says Sliman.

"It's very easy for a fund manager to say goodbye to his family in the morning, take a flight most anywhere in the country, get to his meeting and still be back at home at night," says Wilson.

Colleague Conner interrupts: "Dallas is home to more private equity, consultants and professional golfers than any city of its size."

Deal communities in many cities across America talk of a local bias. There's a preference, especially by family-owned businesses, to entrust their companies to local advisers and, ultimately, local or regionally kindred buyers. That advantage is usually expressed in terms of "culture."

Dallas, say its denizens, is no different. "Dallas can be a provincial market," says McGill. "Being on the ground matters. ... Relationships really do matter."

Take SunTX, whose investments, with one exception, are in the southern Sun Belt, two-thirds of which are in Texas. Fleming talks of cultural affinity and trust. He details investments in two Dallas-based companies: London Broadcasting Co., which invests in small- and medium-market radio and TV, and Vertex Community Bank NA.

His firm's first platform investment was made in 2001 in Construction Partners Inc., a road construction company based in Dothan, Ala., which has since acquired a number of similar operations in the South. Before SunTX could seal the deal, says Fleming, the owners wanted face time.

"They invited us to go quail hunting," he relates. "They wanted to make sure we wouldn't shoot the dogs."