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. 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.
Companies in this sector are heavily concentrated in service-oriented activities including business services, health services, and educational services. Significant numbers are engaged in retail or wholesale trade, construction activity, or manufacturing. If the U. There is no universally accepted definition of the middle market. Traditionally, annual revenues were the key differentiator. The U. However, some analysts prefer to define middle-market firms by their asset levels or numbers of employees.
Others characterize middle markets as companies with between and 1,, employees. By this reckoning, small businesses have or fewer employees. The lack of a clear delineation can result in some gray areas when attempts are made to group businesses by the classic three-level approach that includes small business, middle-market business, and big business.
Some cut the categories down to two and label all but the biggest businesses as small and medium-sized enterprises SME. The interests of middle-market businesses may be relatively under-represented in policy and economic debates, from the local level to internationally. Most big businesses are publicly traded companies. They report financial information quarterly and employ lobbyists to represent their interests. Small businesses have associations that represent their interests.
The middle market, by comparison, is more amorphous and less transparent. They are low-profile, and their products and services may be generally recognized only by their customers. Even discounting the effects of the pandemic, significant challenges remain. According to a report, maintaining customer relationships continues to be difficult, with a majority of middle-market executives citing this as one of their top challenges right now.
Managing workforce disruption and keeping employees engaged and productive also continues to be an ongoing problem for middle market leaders. Relative to big public companies, middle-market businesses can have a tough time raising capital to expand or invest, and their costs of debt are typically higher.
Although middle-market lenders, particularly boutique investment and commercial banks, aggressively compete for the business of the middle market, larger businesses enjoy the advantage of economies of scale. Many theories explain why this is the case but it often boils down to the added transaction costs banks undertake for due diligence and marketing activities when they cater to the middle market.
Middle market companies often look to business development companies BDCs for funding. These are similar to closed-end investment funds. Many BDCs are public companies whose shares trade on major stock exchanges. As investments, they can be somewhat high-risk but also offer high dividend yields. It must be a domestic company whose class of securities is registered with the Securities and Exchange Commission SEC.
The companies they invest in are often young businesses in need of financing or companies that are struggling to emerge from financial difficulties. The BDC is required to provide managerial assistance to the companies in its portfolio. Most middle-market firms are not publicly traded, but they can be found among small-cap or micro-cap companies. There are several a number of exchange-traded funds ETFs and mutual funds that focus on small-cap indexes including the Russell and the Russell Microcap Index.
Investors may also be able to invest directly in the shares of business development companies that provide financing to middle-market firms. That RIC status, though, means they don't pay corporate income tax on profits before they distribute them to shareholders.
The middle market is a significant part of the North American economy. In the U. Because of the wide range of company sizes within the definition, the middle market can be further broken down into the following:.
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