Ian Fowler, Co-Head of the North American Private Finance Group, discusses the dynamics of each middle market segment—including upper-end style shift resulting from competitive pressures—and explains why the traditional middle is the sweet spot.
Can you start by defining the middle market for us?
The middle market in the U.S. represents over 200,000 companies that employ over 50 million Americans. As an investible asset class, S&P defines it as companies with less than $50 million of EBITDA, whereas Reuters calls it those with revenues or a loan facility size under $500 million. From a GDP perspective, the U.S. middle market would be the third largest economy in the world. So, as a whole, the middle market represents a significant growth engine for the U.S. economy. It also poses a particularly attractive opportunity for our clients, because these companies often cannot directly access liquid capital markets, and therefore they need private lending to raise capital for investments.
Can you describe the different segments of the middle market issuer universe? And where do you see the most value?
You can break it into three market sub-segments—the first being the lower end of the middle market, which we think of as companies with $15 million or less of EBITDA. This equates to a loan facility size of $5-25 million. The traditional middle market would be companies with EBITDA between $15 and $40 million, which would mean loan facilities of under $100 million in size. On the upper end, we’re talking about companies with EBITDA north of $40 million, probably up to about $75-100, with loan facilities over $100 million.