Why is the U.S. “middle market” important?

LiveWire

28 Jan

These midsize companies are the U.S. “middle market” and make up the beating heart and soul of the U.S. economy. The vast majority of these companies are private, not publicly traded. This means that ...

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This means that ...</p>\n\n<a href=\"https://www.livewiremarkets.com/wires/why-is-the-u-s-middle-market-important\">Source Link</a>\n\n</div>\n","source":"livewire_stock","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Why is the U.S. “middle market” important?</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nWhy is the U.S. “middle market” important?\n</h2>\n\n<h4 class=\"meta\">\n\n\n2025-01-28 10:28 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://www.livewiremarkets.com/wires/why-is-the-u-s-middle-market-important><strong>LiveWire</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>These midsize companies are the U.S. “middle market” and make up the beating heart and soul of the U.S. economy.\nThe vast majority of these companies are private, not publicly traded. This means that ...</p>\n\n<a href=\"https://www.livewiremarkets.com/wires/why-is-the-u-s-middle-market-important\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SOFR","symbol_name":"Amplify Samsung SOFR ETF","start_time":0,"source_url":"https://www.livewiremarkets.com/wires/why-is-the-u-s-middle-market-important","article_id":"2506554314","we_media_id":null,"thumbnails":[],"rights":{"source":"livewire_stock","url":"https://www.livewiremarkets.com/wires/why-is-the-u-s-middle-market-important","rn_cache_url":null,"directOrigin":true},"url":"https://stock-news.laohu8.com/highlight/detail?id=2506554314","pubTimestamp":1738031306,"columns":[],"sourceInfo":{"source_id":"livewire_stock","name":"Livewire Markets"},"weMediaInfo":null,"summary":"These midsize companies are the U.S. “middle market” and make up the beating heart and soul of the U.S. economy.The vast majority of these companies are private, not publicly traded. This means that they cannot be accessed through traditional ETFs or mutual funds, but only through private equity and private credit investments.In this piece, we highlight this important component of the U.S. economy and its relevance to the U.S. investment landscape.The middle market is often considered the “sweet spot” for private equity investors.Compared to small-market private companies, middle-market GPs are typically large enough to have meaningful resources to invest in growth and weather economic turbulence. Their portfolio companies are typically more established than smaller companies, with diversfied customers and geographies that can make them less sensitive to economic fluctuations.Compared to large-market private companies, middle-market companies typically have more room to grow their mark","collect":0,"end_time":0,"defaultTopTitle":"livewiremarkets.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"SOFR":"Amplify Samsung SOFR ETF"},"translate_title":"为什么美国“中间市场”很重要？","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SOFR":1},"content_text":"These midsize companies are the U.S. “middle market” and make up the beating heart and soul of the U.S. economy.\nThe vast majority of these companies are private, not publicly traded. This means that they cannot be accessed through traditional ETFs or mutual funds, but only through private equity and private credit investments.\nIn this piece, we highlight this important component of the U.S. economy and its relevance to the U.S. investment landscape.\n\n\n\n\n\n\n\n\n\nSource: World Economic Forum, as of 2024\n\n\n\n\n\n\n\n\n\nSource: National Center for the Middle Market, as of Q2 2024\nThe U.S. middle market in private equity\nThe middle market is often considered the “sweet spot” for private equity investors. Compared to small-market private companies, middle-market GPs are typically large enough to have meaningful resources to invest in growth and weather economic turbulence. Their portfolio companies are typically more established than smaller companies, with diversfied customers and geographies that can make them less sensitive to economic fluctuations.\nCompared to large-market private companies, middle-market companies typically have more room to grow their market share and expand their playbook across geographies.\nThe middle market is more fragmented than the large market. There are roughly 25x the number of privately held middle-market companies to choose from vs. privately held large-market companies. A larger opportunity set means more potential for GPs to generate alpha.\nAs JP Morgan reports, purchase multiples are lower for middle-market companies vs. large-market companies (10.4x vs. 12.4x–12.9x) and leverage levels at purchase are lower (3.2x–4.6x vs. 5.9x), seeking to provide better value and helping to lower risk.\nReturns for middle-market private equity have historically outperformed the large markets, with middle-market net returns broadly in line with small- market private equity, but without the low-lows that sometimes accompany small-market funds.\nFinally, there may be more exit options for middle-market private equity GPs. Middle-market companies are small enough to be a target of large-market GPs and digestible to strategic acquirers, while often large enough to make an IPO into the public markets an option.\n\n\n\n\n\n\n\n\n\nSource: Preqin, as of August 2024\nThe U.S. middle market in direct lending private credit\nSignificant bank consolidation started in the mid-1990s and led to the retrenchment of lending to small and midsize companies.\n\n\n\n\n\n\n\n\n\nSource: LCD US Leveraged Loan Volume Report, as of 6/30/24.\nAs a result, bank loan size has generally increased over the years. This has left a gap or white space for middle-market lending into which private lenders have stepped.\n\n\n\n\n\n\n\n\n\nSource: LCD US Leveraged Loan Volume Report, as of 6/30/24.\nWe believe supporting the U.S. middle market is incredibly important for the economy, and it has been the most fruitful part of the private lending market from an investment perspective.\nSize differences\nDifferent loan and company sizes have different barriers to entry. For example, to work with larger companies, a lender needs to be able to put large amounts of capital to work and compete against other large lenders, banks and public markets. To put the same amount of capital to work with smaller companies, a lender needs a larger team with depth and breadth of relationships to source deals and maintain relationships.\nMany lenders prefer to lend to large companies where they can get scale. Doing large deals typically requires a smaller deal team and fewer originators doing larger dollar transactions.\nOn the other hand, working with smaller companies generally takes a larger team to cover more relationships. For example, to originate $1 billion in loans, a lender can do one $1 billion loan or twenty $50 million loans—essentially 20x the work to loan the same money.\nThis works if the lender has a large team in place, but it is tough to do when a lender is starting off and wants to originate large quantities of money. So, many direct lenders of size stick to making larger loans, even though that means competing with banks and other large lenders in a more competitive market.\nDespite the greater work required to lend to smaller companies, there is typically a payoff in the form of more favorable spreads, better incumbency and ability to scale businesses as they grow over time. We believe those private lenders with the largest and most experienced teams are best positioned to provide the strongest performance.\nFor example, in today’s environment we are seeing a ~70 bps spread between smaller EBITDA and larger EBITDA borrowers. (See graph below.)\n\n\n\n\n\n\n\n\n\nSource: Ares Management, Data as of February 29, 2024.\nThis spread has persisted through various market environments, though it can change over time, as we illustrate below.\n\n\n\n\n\n\n\n\n\nSource: Ares Management. Data as of February 29, 2024\nSo there is a payoff for lenders that are able to work below the level of the largest companies, in what we call the middle market. Less competition can also lead to better terms for lenders. For example, higher Secured Overnight Financing Rate (SOFR) for loans to smaller borrowers can protect lenders in the case of falling interest rates.\n\n\n\n\n\n\n\n\n\nSource: Ares Management. Data as of February 29, 2024\nWe typically also see lower leverage levels in loans to smaller borrowers, reducing the risk of the deal.\n\n\n\n\n\n\n\n\n\nSource: Ares Management. Data as of February 29 2024\n\n\n\n\n\n\n\n\n\nSource: Proskauer Private Credit Default Index tracks, on a quarterly basis, the default rates of senior secured and unitranche loans as of 2023.\nIf everything is perfectly equal between a large company and small company, it is true that the larger company will tend to be less risky. But rarely are the terms the same between larger and smaller companies—typically lenders get better terms, better protections and more covenants from smaller borrowers. That said, we would still do both loans! Great companies can be found across the size spectrum, and we believe that lenders that are equally comfortable working across the smaller, middle and large markets hold an advantage.\nAs an illustration, below we show observed terms between different-sized borrowers over the past four years.\n\n\n\n\n\n\n\n\n\nFrom January 1, 2019 to September 20, 2023. Represents U.S. Senior Direct Lending portfolios as of each identified period. Included capital deployed by ARCC, the Senior Secured Loan Program (SSLP), the Senior Direct Lending Program (SDLP), mingled funds (SDL I, SDL II) and separately managed accounts (SMAs) on the platform. Certain financial information provided by portfolio companies is derived from available portfolio company data, has not been independently verified and may reflect normalised or adjusted amounts.\nFurther, portfolios can reduce idiosyncratic risk through greater diversification across more loans. Because of the fixed upside on a loan, differentiated returns come from minimising losses. As a result, we believe it is difficult to be “over-diversified” in credit, assuming the same underwriting standards are applied across all loans.\nConclusion\nAt 1/3 of U.S. economic output, the U.S. middle market is a critical part of the economy. However, with 99% of middle-market companies privately held and not within the largest name-brand private funds, they are so rarely included in investors’ portfolios.\nGiven the attractive growth rates and larger spreads the middle market typically experiences, we believe investors should look for ways to incorporate both U.S. middle-market equity and U.S. middle-market direct lending private credit.\n\n\n\nNever miss an update\n\n    Enjoy this wire? 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