The Middle Market Comes of Age

For those of us who have made the middle market our livelihood for a while, last week’s Wells Fargo 2016 Middle Market Opportunities Forum was an extraordinary event. To see the likes of Steve Schwartzman, Lloyd Blankfein, Leon Black, and (in a lunch keynote) Michael Milken, at a conference dedicated to the virtues of private credit, was to witness how far this increasingly public asset class has come.

Presided over masterfully by the BDC virtuoso, Jonathan Bock, the two-day NYC symposium also included panels populated by leading midcap firms such as Golub, Antares, and Ares, as well as global asset managers TIAA, T. Rowe Price, and Fidelity. Speakers covered topics such as asset allocation models, returns, credit risk/reward, fees, and private equity strategies.

One of the themes that came through loud and clear was that, given today’s low-rate environment, investing in alternatives is critical to achieving high single-digit returns to meet client demands. Private credit, as a key arrow in the alts quiver, has garnered attention thanks to its steady performance through the downturn, and its relative lack of volatility compared with more correlated assets.

One of our favorite observations came from one leading middle market arranger, who took on the question of “overheating in the middle market.” His view, which we have been stating for a while now, is that the midcap market is growing and maturing, not overheating. Yes, there are more dollars coming into the space – $37 billion this year (according to Thomson Reuters LPC), versus $24 billion last year. But that’s dwarfed by an estimated $200-$300 billion per year of potential supply of middle market loans from new private equity dry powder and refinancings from existing deals (the “refi cliff”).