13 May Defining the “Lower-Middle Market” Segment That We Serve

By Mike McAdams, President, Pasadena Private Lending

This month I wanted to provide some clarity on the often-confused definition of the U.S. corporate middle market on which PPL focuses its lending efforts. We actually focus on the lower end of middle market corporate borrowers owned by successful, proven entrepreneurs where we believe there is the greatest need for creative financing and where other financing sources are more limited.

But what is the lower end and, for that matter, the middle and upper end of the “middle market?”

Middle, as a word, is an imprecise concept and in the context of corporate America even more confusing. Worse still, in recent years, some have devised the even broader and less precise term SME, meaning Small and Medium-sized Enterprises. So maybe it is best to define our market by what it is not.

There are literally millions of family-owned businesses in this country. Dry cleaners, family restaurants, barber shops, hair salons and furniture stores all come to mind. But also included in the true-small business world are machine shops, independent film production companies, consulting firms, independent equipment renters, nurseries, business service firms, and specialty food and light manufacturing firms. Most are financed by family and friends plus business cash flow. They seldom buy out other businesses, double their production capacity or need more than equipment or modest working capital assistance. Roughly, they generate $2MM or less in revenues.

On the other extreme are, first, the few thousand largest public companies that routinely use banks for liquidity backups and trade finance along with the public bond markets. Smaller than that are still very large firms, about 5,000 in number, periodically engaged in acquisitions or corporate restructures that tap the broadly syndicated loan market comprising both major banks and hundreds of non-bank funds and insurance companies.

Then we come to the middle market. The chart below from our friends at Churchill Asset Management does a great job of breaking down the differences within the middle market.

For PPL, we are particularly intrigued by the inverse relationship between the number of potential borrowers and the number of lenders focusing on the lower-middle market segment. That is, as the size of the companies decreases, the number of companies increases dramatically. We believe there are over 100,000 potential borrowing clients in our focused market compared to approximately 10-15,000 in the upper end of the middle market. And as the chart indicates, from a lender’s perspective, the loans can be more prudently structured while still serving the borrower’s needs.

In short, we are lower-middle market specialists because that is where we believe the market needs us and where we can make a difference. Should you have any questions, we invite you to contact us and explore how PPL can assist you in your entrepreneurial journey.