There is concern about the responsiveness of traditional medium-sized firms to such challenges, which may be undermined by under-investment in the middle market. Canadian merchant banker Gordon Sharwood (Sharwood and Company) has repeatedly noted that insufficient debt and equity pools probably inhibit the health and progress of this country's medium-sized business sector in a changed domestic and global environment. If the sector is to grow as it has in other national economies, he argues, middle market investing must be addressed as emphatically as the needs of large corporations and new business formations.Endnote 57
Unions in Canada and internationally are concerned about the negative impact on-going rationalization and restructuring trends can have on existing, well-paying employment found in traditional workplace settings. In fact, this has led some in labour to express an interest in the potential of merchant banking to protect and preserve jobs through rescue operations for firms temporarily caught in short-term cyclical downturns and low levels of profitability. In the United States, the Economic Policy Institute (EPI) has confirmed the necessity of such investment activity to union members given precipitous erosion in the base of high-wage jobs provided by large manufacturers over nearly three decades. Compounding this dilemma is the trouble small manufacturers currently encounter in attracting financing to sustain a growing presence in this sector.Endnote 58 The EPI's warning about the future of many firms in competitive and job-intensive American manufacturing industries without adequate capital for investment is applicable to Canada and, above all, to Canadian single industry communities and regions of low economic diversification.
Preventing firm closures where there remains commercial viability or encouraging new development, sometimes through buyouts by employees (or through other worker financial participation schemes) or by managers, is another important function of the middle market. In Canada, this process has been underway for some time in such industries as forest products and steel, though demand does not always met with capital supply.
Succession of company ownership is still another economic change issue resolved in the middle market. Increasingly, it has become necessary for large numbers of private, family-owned firms begun in the postwar years to transfer ownership from aging founders to a next generation of heirs (i.e., family members or new managers). This procedure often entails a succession plan and financing from a merchant bank. SME succession planning that maintains resident ownership is a paramount concern in individual communities and regions, especially in rural Canada.
The middle market does not always witness outcomes of clear-cut economic benefit. Public controversy occasionally arises over the volume of capital resources expended on corporate concentration and particularly leveraged buyouts. Proponents argue that, at its best, this activity can help maximize economic efficiency and productivity - by integrating multiple business entities, for example. On the other hand, detractors argue that such investing results in little more than "paper entrepreneurship" and, at its worst, can actually be job- destroying. Much depends, of course, on the project in question.
Regardless, leveraged buyouts have been gathering steam, evident in the United States where pools managed by specialists in this field, such as Kohlberg, Kravis and Roberts, have attracted more than $70 billion in the past two years from pension funds and other institutional investors. This has transpired despite concern about the price impact of huge cash infusions and about waste given a finite number of quality buyout situations.Endnote 59 At present, Canada has no leveraged buyout market of comparable size and scale.
The financial means of the middle market are no less heterogeneous than the events they try to address. This said, it is not uncommon for the owners of medium-sized and larger firms to be unaware of the existence of private placement alternatives to going public or otherwise relinquishing some portion of ownership. One task of merchant banks, and other middle market advisers and intermediaries, is to apprise prospective business clients of these financing options.