“Middle market” companies (typically called “mid-caps” in the public markets) are important to the U.S. economy. 99% of this segment is private, forming the basis of the opportunity set for both private equity and private credit.
One of the arguments that we make for owning private equity and private credit is that these asset classes provide exposure to the middle market segment, which accounts for approximately one-third of employment and one-third of output for the U.S. economy. If the U.S. middle market represented its own country, it would be roughly the size of Germany or Japan1.
It is, therefore, important that we keep track of this segment, in particular its health and trajectory relative to small and large-cap public equity.
Q2 2023 results show continued growth
According to an index that tracks private equity-owned companies, middle market companies remained resilient with year-over-year earnings growth of approximately 5% during the second quarter of 2023.
| Year-Over-Year (YoY) Growth | REVENUE | EARNINGS |
|---|---|---|
| Q2 2023 | 4.3% | 4.5% |
| Key Sectors Q2 2023 (YoY) | REVENUE | EARNINGS |
|---|---|---|
| Consumer | 5.1% | 0.8% |
| Healthcare | 2.5% | (0.8%) |
| Industrials | (3.9%) | 9.2% |
| Technology | 7.9% | 26.2% |
Of note is the continued earnings growth in the Technology sector, up 26% year over year for the period ending in Q2 2023. In Technology and Industrials, earnings growth outpaced revenue growth, which is likely explained by falling input costs vs. prior quarters.
Meanwhile, labor market tightness weighed on margins, and therefore earnings, in the Consumer and Healthcare sectors in Q2. When we compare these results anecdotally to our own portfolio of private corporate loans, we notice some differences. Across businesses in the U.S. from which we receive financials, earnings (expressed as “EBITDA”) growth remained in the high single digits over the most recent reporting period through Q2. In Europe, we have witnessed a similar dynamic with 10% EBITDA growth across companies we see. Additionally, it may be helpful to note that we have not seen a meaningful pickup in restructurings. For example, the non-accruals we have been seeing in the market were relatively stable in Q2, and they remain well below 15-year historical averages2. Furthermore, the pace of amendments we have seen also remained at stable levels during the second quarter. Terms were also improved as we witnessed new middle market borrower transactions with lower leverage levels of under 5x debt-to-EBITDA ratios during Q2.
Continuation of historical outperformance vs. public market equivalents
Over the last two years, we can see the fairly consistent outperformance of the middle market relative to its large and small market public equivalents.
Revenue Growth (Quarterly YoY)
We regularly monitor the middle market to get a broad gauge on the U.S. economy. Although revenues and earnings have moderated versus the COVID-recovery years of 2021 and 2022, we have continued to see underlying strength.
Earnings Growth (Quarterly YoY)
These results continue to make the case that if you want to own durable, sustainable growth, private investments in the middle market may be a good starting place to consider.
