Middle Market Essentials: What You Need to Know

Key Takeaways

• While there is no formal definition of the middle market, the segment is generally comprised of companies that have an annual revenue ranging from $10 million to $1 billion. 

• The middle market is responsible for about a third of the U.S. gross national product as well as employment.

• While commercial banks and other lenders do vie for middle market business, bigger companies have the benefits of economies of scale, which can reduce costs.

About 50 million U.S. residents work for what are called middle-market companies, numbers that are expected to continue to go up. 

Middle-market companies are attractive to many private equity investors, as they typically have room to grow, compared to those in larger markets, both in scale and operationally, whether organically or through acquisitions. These companies also generally offer the potential for margin expansion and are less reliant on the use of debt.

With that said, here are the middle-market essentials: what you need to know to take advantage of the segment.

What is the Middle Market?

Many people associate the nation’s economy with the giant corporations and international tech companies that reign on stock market indices. In reality, it is the middle market – or mid market — that is responsible for about a third of the U.S. gross national product as well as employment. In fact, were it its own country, the middle market would be the world’s fifth-largest economy.

A critical sector of the U.S. economy, the midmarket is a key engine of job creation, with employment in the segment growing more than twice as fast as the national average.

Characteristics of Middle Market Companies

Some define middle-market companies as being not big enough to be big businesses, but too big to be considered small businesses.

While there is no formal definition of the middle market, the segment is generally composed of companies that have an annual revenue ranging from $10 million to $1 billion, and with up to 500 employees. Some others put the defining revenue range at between $5 million and $50 million.

More than 200,000 such firms exist in the U.S., most of them privately owned or closely held, producing a combined revenue of around $10 trillion and possessing an average of 31 years in business.

There are some analysts who favor defining middle-market firms according to their estimated value and market presence.

According to the National Center for the Middle Market, the mid market segment remained steady last year at 12.2 percent, and about four of every five mid market firms reported growth in revenue, compared to 2021. Also last year, 58 percent of companies in this market increased their workforce size.

Generally bounded between small and big business, the sector is mostly service based, with a concentration in business, health, and education. Other middle-market companies pertain to industries such as manufacturing, construction, and retail.

How Does Middle Market Compare to Main Street Companies

“Main Street” is a term often used for small businesses, those which have a modest number of employees and tout relatively modest revenues. Some of these businesses are colloquially called “mom and pop” shops. A step up from this is the middle market, with more expansive operations, more employees, and generally much more revenue.

What are Some Well-Known Middle Market Companies?

While many mid market companies are not well known, there are some that are, including:

• Chobani.  The top-selling yogurt brand in the nation, Chobani was founded in 2005, it was scheduled to go public last year but such plans were nixed due to falling market conditions. The company’s peak revenue of $880 million occurred last year.
• Shake Shack. The fast-casual restaurant chain, which began as a hot dog cart in New York, is a public company with a 2022 revenue of $900.5 million.
• SoFi. Founded in 2011 and based in California, this digital personal finance company has about 4,200 employees and posted revenues last year of just over $1 billion. 

Challenges for the Middle Market

For one thing, the segment is under-represented on every level in economic and policy discussions. That can be a disadvantage from the start, as small firms have associations and trade groups that represent their interests, and big businesses report financial information at regular intervals and have lobbyists to support them.

By contrast, the midmarket is less transparent and not very clearly defined. It is lower profile, and most companies are not household names. In fact, it is often the case that the only people who know a middle-market company’s products or services are their customers. With relatively little brand awareness outside their particular industry, the middle market relies significantly on its active customer base.

In addition, there may be some relative difficulties maintaining customer relationships in the middle market since the segment is so firmly rooted in personal connection. Witness how many mid market businesses suffered during the brunt of the COVID-19 pandemic, which forced closures that affected customer relationships. Many of those relationships did not recover, nor did some of the businesses.   

Maintaining employee engagement and managing workforce disruption also remain ongoing issues for middle-market companies.  

Middle Market vs. Lower Middle Market

If they were listed with public markets, middle-market companies would comprise micro-cap and small-cap stocks.   

Note that a smaller subset of middle-market companies is called the lower middle market, which is valued at between some $10 million and $100 million. Lower middle-market companies, due to their size, are generally better-suited than the rest of the middle market for mergers and acquisitions. PE investors favor them for that reason as well.

Then there is the upper-middle market, which generally consists of companies with revenues of between $500 million and $1 billion. Usually possessing reputable brands, such companies overall have high entry barriers, gain premium valuation multiples, and tout a healthy market share. Thus, these companies are highly sought by private-equity investors in addition to financial and strategic buyers. 

Middle Market Funding

Compared to large public companies, midmarket firms can be hard-pressed to procure the funds to grow or invest, and debt costs are usually higher. While boutique investment and commercial banks, along with other lenders, do vie for middle market business, bigger companies have the benefit of economies of scale — which can be achieved with efficiency — since costs can be spread over more goods. Note the added expense of due diligence for lenders, as well as the costs of marketing to the middle market.   

Midmarket firms commonly seek funding from business development companies (BDCs), many of which are public and trade shares on major exchanges. With similarities to closed-end investment funds, BDCs, while somewhat risky, can offer high-dividend yields.

BDCs are required by regulators to invest at least 70 percent of their assets in public or private U.S. companies that have market values of under $250 million. The firms in which they invest are often nascent and in need of financing, while others are attempting to rebound from financial woes. A bonus is that the BDC must give managerial assistance to the companies it works with.

Investing in Middle-Market Firms

Armed with knowledge about the middle market, interested investors may seek to put capital in such firms. 

One way to do so is through leading alternative investment platform Yieldstreet, which provides a highly curated selection of PE investment offerings, and with accessible minimums and early-liquidity possibilities.

To date, Yieldstreet has had nearly $4 billion invested on its platform, which offers the broadest selection of alternative assets available. Through the Bonaccord Private Equity Fund II offered by Yieldstreet, for example, targets include middle-market managers across PE, real assets, and private credit. 

Another advantage of taking positions in middle-market opportunities through private equities is portfolio diversification. As an alternative asset class – outside public markets – PE can mitigate overall portfolio risk and volatility and protect against economic downturns. Diversification is a critical component of long-term successful investing.

Alternative Investments and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

While the number of midmarket companies continues to grow, less than 5 percent of such firms in business today have PE backing, which means that opportunities abound for private equity funds. Yieldstreet offers such opportunities, which can also help with all-important portfolio diversification.