Until recently, institutional investors have always had a love-hate relationship with the middle market – minus the love.
Compared to reassuringly large, liquid credits, companies with less than $50 million in Ebitda tend to be private, their debt unrated, their businesses niche-oriented, their access to public markets limited, and their management teams entrepreneurially lean.
Further, they issue few bonds to provide relative value guidance to cross-over buyers, their bank debt trades infrequently, if at all, providing little comfort to funds who demand instant liquidity. Finally their smaller scale often means more customer and vendor concentrations, and implies more vulnerability in cyclical downdrafts.
But in the wake of the credit crisis, funds are recognizing the virtues of the asset class. Middle market’s limited access to capital markets also sheltered it when large cap prices swung wildly. More conservative structures with real covenants helped protect lenders. And when issuers’ struggled, the smaller groups of like-minded, buy-and-hold lenders hung together. Hey, the kick-the-can-down-the-road strategy actually works!