There is no precise definition of the middle market that enjoys broad subscription in the Canadian financial system. Indeed, the realm of private debt and equity placements that can be roughly ascribed to the phrase "middle market investing" is certainly among the least discussed, examined and comprehended of all capital markets. This is unfortunate since an increasingly large volume of capital resources has recently been pouring into Canada's middle market, at the behest of several new financial institutions, investors and agents specialized in its often complex, high yield transactions. Moreover, middle market investing has assumed a critical role in the national economy.
The middle market is perhaps best discerned in the character of its essential demand targets and supply sources. The demand side of the market is primarily composed of medium-sized and larger enterprises. Compared with other SMEs, such firms are distinguished by greater maturity (e.g., anywhere from ten years to several decades old), an established business status (e.g., long track records, experienced managers), and an established financial status (e.g., some collateral, consistent streams of revenue). As a consequence, they tend to enjoy access to a broader spectrum of external financing options.
For the most part, middle market financing demand is also to be found in traditional manufacturing and service industries. The majority of business clients are also private and closely-held; as a matter of fact, many are family-owned. Another client group is larger corporations that are publicly-listed and traded.
The middle market is sometimes discussed with reference to the identity of its supply side. These are, in the main, investment or merchant bankers. While the latter term also suffers from imprecise usage, merchant banking generally refers to the private placement activity of the divisions, subsidiaries and pooling vehicles of large corporations, lenders and institutional investors, such as employer-sponsored pension funds. As a financial institution, its genesis has been traced to the establishment of Hees International in the 1970s.Endnote 55
Despite having certain advantages over other SMEs, firms active in the middle market still encounter significant financing impediments. Apart from the standard explanations linked to size, information problems, etc., this is due to the unique and multi-various development needs and patterns of well- established, traditional, medium-sized business, especially in the current economic context.
For this reason, middle market investing has been dubbed "event-driven." This means that events or happenings of a very specific nature in firms, or in relation to firms, in certain industries or sub-industries, determine the financial transaction to take place as well as the potential range of supply solutions.
For instance, in attempting to expand productive capacity, a private middle market client may proceed, much like a late stage venture-backed project, towards initial public offering. Alternatively, the same end may be facilitated by a business combination event, such as a merger or acquisition, which leaves the final entity in private hands. Restructuring, manifest in examples of major internal re-organizations, financial distress or management of substantial cost liabilities, is also a pervasive influence in middle market deal-making, as is changing ownership, sometimes assisted by leveraged buy-outs. Publicly-listed firms may also seek out merchant banks if their investment requirements cannot be easily or cost-effectively financed in securities exchanges. These are all "events."
A detailed list of typical projects that regularly receive disbursements in the middle market is provided in The Event-driven Middle Market. A consistent theme in most examples is business preference for private placement over financing through public securities exchanges.Endnote 56