What is the Middle Market?

— 5 min read

The middle market is often the hardest segment for investors to crack. That may be because it’s so difficult to define, company data isn’t readily accessible, and because there’s often much more focus on the enterprise market and small businesses.

But there’s so much value waiting to be unlocked in the middle market. Companies in this segment are driving innovation, solving some of the biggest challenges for businesses and consumers, and experiencing solid growth year-over-year. 

What does the middle market look like today? Here’s what investors should know.

The Middle Market, Defined

There are varying definitions for the middle market, largely based on revenue size. 

The Federal Reserve defines the middle market as businesses with between $10 and $250 million in annual revenue, while the U.S. Chamber of Commerce has a more expansive definition, including companies with between $10 million and $1 billion in this category (see chart on page 8).

Industry associations also define the middle market in specific ways. The Small Business Investor Alliance (SBIA), one of the leading associations for senior investment professionals, divides the middle market into three categories:

  • The lower middle market: Firms with between $5 and $150 million in annual revenue
  • The “middle” middle market:  Firms with between $150 and $500 million in annual revenue
  • The upper middle market:  Firms with between $500 and $1 billion in annual revenue

One of the leading authorities on this market segment — The National Center for the Middle Market (NCMM) at Ohio State University — defines the middle market as companies with annual revenue between $10 million and $1 billion. These companies can include public, private, family-owned businesses, partnerships, and sole proprietorships.

In total, middle-market companies account for $10 trillion in annual revenue, according to the NCMM. Separate research finds that these companies average $45 million in annual revenue, typically employ just under 370 employees and comprise 25% of employment in the private sector. Additionally, the U.S. middle market accounts for 99% of all businesses and 50% of GDP.

As the sources show, the middle market is defined so differently that the best way to define this segment is “not a startup and not public, rather everything in between.”

The Middle Market — A Prime Opportunity for Investors

In the last five years, there’s been an explosion of interest in the middle market. What used to be synonymous with “private equity” (4,000 firms in the US), the middle market has grown rapidly to attract interest from over 25,000 firms, ranging from VCs, large asset managers and hedge funds to growth equity firms, family offices, and even one person search funds

Growing competition has caused asset prices to rise, driving firms  to find new avenues to deliver returns for investors. Rather than going after “big fishes” in an increasingly crowded pond, they are now turning to the lower middle market to build their competitive advantage. 

We’re already seeing evidence of this in different industries. For example, the air conditioning and ventilation (HVAC) industry has seen a flurry of private equity activity in recent years. M&A transactions have more doubled over from 2017-2021 and firms like KKR, Apax Funds and Levine Leichtman have acquired numerous middle-market HVAC companies. 

The middle market is fertile ground for investors, according to recent Pitchbook research. In 2021, PE firms closed more than $602 billion across 4,121 deals in this market — more than 50% the previous annual records for transactions and deal value set in 2019. 

Where does this leave us? The middle market is becoming its own asset class. Just like an institutional investor or asset manager thinks about allocation across large cap public equities, VC/startups, real estate, cryptocurrency or bonds, they’re beginning to define the middle market as its own asset class. 

The Middle Market, Unlocked

The potential is there. But to invest in these companies, you need to find them first. Historically, it hasn’t been easy to discover these companies and understand their financials and ownership.

 To find deals in the middle market, private equity (PE) firms typically rely on connections. A former colleague, college or grad school classmate, LinkedIn connection, or friend of a friend may know of a company that is doing well but is currently under investors’ radars. 

In some cases, a firm may use mapping tools to identify second and third-degree connections, receive an introduction to a CEO or founder, and begin to nurture the relationship from there. As you can imagine, this process is both time- and labor-intensive. It’s very piecemeal and individualized, which means it doesn’t scale well. 

There’s also no guarantee a firm is targeting a company that actually meets its investment criteria. By the time an associate or principal discovers this, the firm may have wasted an inordinate amount of time it can’t get back — time that instead could have been spent identifying and nurturing the right companies. Some private equity firms are abandoning these manual, inefficient processes with the help of automated deal sourcing technologies and company search engines. 

As Jeff Fluhr, co-founder and general partner of Craft Ventures, says “Data is the key that unlocks value in the 21st century. Corporate dealmakers and institutional investors need robust, searchable, and accurate data to identify the needle-in-the-haystack opportunities within the myriad of companies.”

Grata helps dealmakers unleash the true potential of the middle market with smarter search, relevant intelligence and automated technology. With access to the right data at the right time, firms that leverage Grata uncover new investment opportunities, fill their pipeline with promising companies and unlock the middle market

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