Between Wall Street and Main Street: Your Guide to the Middle Market
Because they lack the visibility of large-cap publicly traded companies or the well-known narrative of struggling small business owners, middle market companies are often ignored.
Yet, when the nation is in dire need of economic recovery, ignoring the middle market may be a mistake. Private equity investors, consultants, lawyers, and many others working with middle market companies are increasingly joining the chorus: if you want growth — and opportunity — look to the middle.
What is the middle market?
By general consensus, ‘middle market’ refers to companies with annual revenues between $5 million and $1 billion.
The sector is a huge piece of the economy, generating approximately $6.1 trillion in annual revenue — 40 percent of GDP. It’s also the nation’s bread and butter, employing 24.6 million people, more than all of the S&P 500companies combined, according to recent Deloitte research.
While diverse, they also tend to have two things in common: they are predominantly US-based and private, or family, owned.
How do you invest in middle market companies?
Because the are so often closely held, mid market companies are often out of the purview of the investing public.
Yet the public market offers plenty of options. On public stock exchanges, middle market companies are traded as “small cap” stocks, generally defined as having a market capitalization between $300 million and $2 billion.
You’ll find many of them in the S&P 600 index — a well-known index of small cap companies that trade on both the New York Stock Exchange and NASDAQ.
Some well known names include: Ethan Allen, WD-40, Liz Claiborne, and OfficeMax .
While middle market companies are known for their high growth prospects, they’re also more expensive than their larger corporate cousins. According to Standard & Poors, the estimated price to earnings ratio for the S&P 600 small cap index is 14.0 times 2012 earnings, while the same measure on the S&P 500 index is 10.8 times.
What middle market sectors are the best performers?
Representing ten industry sectors of the middle market, the S&P 600 index is diverse: financials (19.0%) and technology (19.3%) are the largest components, while utilities (3.9%) and telecommunication companies (0.7%), are the smallest.
The technology sector led the index lower, down 10.45 percent, whereas the utilities sector has been the year’s best performer, up 9.14 percent.
Overall, publicly traded middle market companies did not escape the third quarter’s savage market selloff, with the S&P 600 index down -4.58 percent this year.
How much money is the middle market making?
As a group, middle market revenues aren’t bad. Their $6.1 trillion in annual revenues compares well to the S&P 500’s $8.3 trillion.
A look at earnings of the public portion of the middle market is also impressive. On average, companies in the S&P 600 index have improved operating earnings 28.95 percent from August last year, with the strongest growth from financials (111.5%) and energy (57.2%).
Are these companies really job creators?
According to Gary C. Butler, Chief Executive Officer of ADP the answer is lately, yes, but in moderate amounts. ADP’s August employment report shows that within the private sector, small businesses added 58,000 jobs, medium businesses added 30,000, and large businesses added only 3,000.
June and July’s numbers also show mid-sized companies falling behind their smaller peers in hiring. Why, when the middle market is larger in terms of revenue and sheer scale, is it hiring less?
“They are matching skill sets to target strategic needs within their companies – which is not broad based hiring,” Tom McGee, national managing partner for Deloitte Consulting told CNBC.com.
Some middle market businesses laud the efficiency of doing more with less. “We’re selling almost as much ethanol today as we did in our heyday with half the staff. Our business is definitely in a growth mode again, but we are doing it in a more careful fashion than arguably we did the first time around,” said Neil Koehler, CEO of Pacific Ethanol .
For those not hiring, the emphasis is on productivity. Thus, while earnings excel, expecting a spike in hiring levels among the middle market may still be a long shot.