What Is the Middle Market?

The middle market is the segment of American businesses with annual revenues roughly in the range of $10 million to $1 billion, although some definitions set a higher top on the range. There are about 200,000 such firms, most of them privately owned or closely held, and their annual revenues combined total more than $10 trillion.

Middle market companies are responsible for about 30 million jobs and comprise about one-third of the annual $30 trillion in U.S. private-sector gross receipts. That makes the middle market a powerhouse of the U.S. economy, though many individual companies within the sector are little known to the general public.

Key Takeaways

  • Middle market businesses are too big to be called small businesses and too small to be big businesses. Nevertheless, they are a powerhouse of the U.S. economy.
  • About 30 million Americans are employed by middle market companies, and their numbers are expected to grow.
  • Businesses in this sector tend to be service-oriented and may be relatively unknown outside their industries.
  • Middle market companies are often financed through business development corporations (BDCs).
  • When publicly traded, middle markets tend to trade as small-cap or micro-cap stocks.

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Understanding the Middle Market

The middle market is a critical sector of the American economy and an important engine of job creation, accounting for the majority of new U.S. jobs since 2008.

Companies in this sector are heavily concentrated in service-oriented activities, including business services, health services, and educational services. A significant number of firms that fall under the middle market umbrella are engaged in retail or wholesale trade, construction activity, and manufacturing.

If the U.S. middle market was a country, its gross domestic product (GDP) would rank it as the fourth-largest economy in the world!

Characteristics of the Middle Market

There is no universally accepted definition of the middle market. Traditionally, annual revenues were the key differentiator. This segment, for instance, is defined by the U.S. Department of Commerce as those businesses with pre-taxed earnings between $5 million and $250 million, while others peg it as between $10 million and up to $1 billion.

However, some analysts prefer to define the middle market by asset levels or numbers of employees. Other experts have tried to characterize middle markets as companies with between 500 and 1,000-1,500 employees—small businesses have 500 employees or fewer.

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. As such, the middle market is sometimes referred to more generally as comprising small and medium-sized enterprises, or SMEs.

Challenges for the Middle Market

The interests of middle market business may be relatively under-represented in policy and economic debates, from the local level to internationally.

Big businesses are usually publicly traded companies. They report financial information extensively 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 are generally recognized only by their customers.

The COVID-19 pandemic has also hit SMEs especially hard. In fact, 43% of middle market executives believe the pandemic will have some adverse effects on revenues well into 2021.

Even with the pandemic's effect on the economy under control, significant challenges remain. According to a 2021 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.

Middle Market Lenders

Relative to big, public companies, middle market businesses often have a tougher time raising capital, and their costs of debt are typically higher. Although middle market lenders, including 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. Set up similarly 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.

To qualify as a BDC, a company must be registered in compliance with Section 54 of the Investment Company Act of 1940. It must be a domestic company whose class of securities is registered with the Securities and Exchange Commission (SEC).

By regulation, a BDC must invest at least 70% of its assets in private or public U.S. firms with market values of less than US$250 million. These companies are often young businesses seeking financing, or firms that are suffering or emerging from financial difficulties. Also, the BDC must provide managerial assistance to the companies in its portfolio.

How to Invest in the Middle Market

Many SMEs are publicly traded companies, so investors can buy shares on stock exchanges. Here, the middle market tends to consist of small-cap or micro-cap companies. Note that middle market companies are not usually considered big enough to be mid-cap stocks, which are defined as having a market capitalization valued between $2 billion and $10 billion.

There are also several small-cap indexes (with corresponding ETFs) that investors can hold for diversification amongst the middle market. These include, for example, the Russell 2000 or the Russell Microcap Index.

Investors may also be able to invest directly into BDCs by owning their publicly traded shares. Because BDCs are regulated investment companies (RICs), they must distribute over 90% of their profits to shareholders. That RIC status, though, means they don't pay corporate income tax on profits before they distribute them to shareholders. The result is above-average dividend yields. According to BDCInvestor.com, as of June 2021, the ten highest-yielding BDCs were posting anywhere from 9.19% to 21.99%.

Middle Market FAQs

What Is the Difference Between "Main Street" and the Middle Market?

"Main St." companies are most often small businesses that employ a relatively small number of individuals and take in a modest amount of revenue. The middle market is a step up from this, with larger operations, more employees, and revenues in the tens to hundreds of millions of dollars per year.

What Is the Difference Between an Enterprise and the Middle Market?

The term "enterprise" simply refers to any operating business entity. Companies in the middle market are therefore considered to be relatively mid-sized enterprises.

Are Mid Market Companies Risky to Invest in?

The middle market consists of companies that would make up small-cap and micro-cap stocks when listed on exchanges. These can be riskier than holding shares of larger, more mature companies, which tend to be more stable. At the same time, the growth opportunities and ability to be nimble can often be greater for the middle markets, providing higher potential returns.