The middle market is an incredibly important yet largely invisible portion of the American economy. Find out what the middle market is and why it can be a space full of opportunity for investors.
What Is the Middle Market?
The middle market consists of mid-range (and generally mid-size) companies within an industry. On a macroeconomic scale, middle market businesses can have revenues between $5 million to $1 billion. This essential part of the U.S. economy comprises a third of the nation's gross receipts and the majority of the nation's jobs. While middle markets are typically defined by their annual revenue, some analysts have more recently begun factoring in the number of assets and size of the company by employee headcount.
While no middle market businesses fall into one industry, they often offer business-to-business products or services geared toward a specific niche. This can make them nearly invisible, particularly because they often keep a low profile publicly and are only known within their niche industries. However, many other factors around middle market businesses vary. They can be new or old businesses, and have a wide range of growth rates.
Traditionally, analysts have attempted to group businesses into three simple categories: small businesses, middle market businesses, and big businesses. However, definitions have become increasingly complicated. Beneath the middle market category, lower middle market businesses fall on the lower end of the revenue scale, generally from $5 million to $50 million, and upper middle market businesses fall at the higher end of the scale, usually between $500 million to $1 billion.
Middle Market in Different Industries
What makes a middle market business varies dramatically by industry. Every industry a firm falls within has its own classifications of small, large, and big businesses. The role the middle market businesses play within each industry also tends to vary.
For example, a middle market bank will typically offer its services exclusively to middle market businesses. Some middle market banks will even focus on providing services to a specific industry. Because of their size and limited access to capital relative to larger institutions, these banks do not offer more complex services such as market restructuring or leveraged finance. Instead, they limit their services to middle market mergers and acquisitions and other simple financial services. While they often have locations spanning a single nation, middle market banks are rarely found internationally.
Why Is the Middle Market Important?
Aside from being the powerhouse behind America's job market and a good portion of the nation's gross receipts, the middle market plays a huge role in the financial industry. One thing that makes middle market businesses so interesting is their unique position in the economy. They produce significant revenues compared with small businesses, but they don't have access to the capital that big businesses utilize for significant growth. This makes it more difficult for them to raise capital and grow.
Investment and commercial banks often vie for middle market business accounts, particularly if they are trying to generate new revenue and grow. However, middle market businesses often lack the extensive credit histories and collateral of larger businesses. This means that while banks are happy to accept their business, they are less likely to extend the substantial loans they would provide to the larger companies.
Investors take interest in the middle market because it can be an incubator for future big businesses. Though the middle market is a highly competitive space, successful middle market companies are less volatile investments than others. These companies have specific niches they serve and are incredibly profitable, making them perfect candidates for acquisition. This could potentially yield huge returns for investors.
However, investing in the middle market isn't free of risk. While middle markets offer a great deal of opportunity, their lack of transparency can make it difficult to invest wisely and have the appropriate expectations around investments.
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