A Driving Force in the U.S. Economy
Home to millions of businesses including 132 of the 500 largest companies in the world as of 20171, the might and scale of the United States economy is widely known. From colossal household names to neighborhood storefronts, the largest and smallest companies are the most visible in our day to day lives, comprising 99.03% of all American businesses. The firms between the two extremes however make their impact felt; despite representing less than 1% of commercially active companies, the middle market generates more than a quarter of total revenues in the United States.2
What Companies Make Up the U.S. Middle Market?
The term middle market is used to describe companies with revenues between $10 million and $1 billion per year.2
How Large is the U.S. Middle Market?
The middle market is made up of 179,782 companies which generate a combined $9.3 trillion in revenues, and employ roughly 52.7 million workers in total. This means that these firms account for more than one quarter of all revenue (26.8%) produced by U.S. businesses and employ more than one in four workers in the United States (27.2%), shares which have continued to increase over the last decade.2 In fact, if the U.S. middle market was its own country, it would be the 3rd largest economy in the world.
How Resilient is the Middle Market?
More than half of U.S. middle market companies have been in business for more than 30 years and are, on average, less financially leveraged than large companies. During the economic downturn from 2007 to 2010, surviving middle market companies created more than 2 million new jobs, while surviving larger companies shed nearly 4 million jobs.3 Given the substantial contributions to the U.S. economy, one might expect that the market segment would garner more attention; however, the middle market lacks familiarity for many investors.
Certain fundamental reasons explain, in part, this unfamiliarity. For one, many of these companies are private or otherwise do not have access to the public equity or bond markets, which means that ordinary investors will have limited access to making investments in these companies. Second, it is very labor-intensive for a bank to underwrite financings for such companies as they are perceived to be less creditworthy than large corporations. Banks would prefer to put the same work into a large company to arrange much larger financing amounts, thereby generating higher fees.
Despite the unfamiliarity among the general public, this market segment presents unique opportunities and is only growing. In fact, revenue growth of such companies has outpaced that of all companies 99.9% to 48.8% since 2011.2 In the wake of the credit crisis however, there has been an abundance of middle market firms facing difficulty obtaining the financing needed to run their businesses.
How Do Middle Market Companies Secure Financing?
When middle market companies need to raise funds to expand their businesses’ day-to-day operations, they may not have access to inexpensive financing from a bank because they may carry a lower credit rating than a company of larger scale. They also do not enjoy the same financing options as large corporations which can issue stock or bonds in the public marketplace. Instead, these companies turn to the private credit market to obtain loans from private lenders. To learn more about private credit, you can read our Private Credit article.
To learn more about Credit and how to invest, please contact your financial advisor.