The Lead Left: How Big is the Middle Market? (First of a Series)
PDF | Research | Week of July 17, 2017
State of the Capital Markets
Second Quarter 2017 Review and
Third Quarter 2017 Outlook
Quote of the Week
“Everyone is starving for yields, chasing diﬀerent assets.” – Jim Madison, portfolio and
cash services analyst, Manulife Asset Management.
How Big is the Middle Market? (First of a Series)
As great mysteries of life go, it’s not quite in the same category as what’s the universe
made of, how does gravity work, or what ever happened to tan M&Ms. But for those who
make it our career home, one of the most often‑asked and vexing questions over the years
has been, how big is the middle market?
It feels like something that should be answerable. As our Chart of the Week depicts, the
outstanding total of all US leverage loans is well‑established at around $925 billion. One
would think it a simple ma er to separate out smaller loans from that data set.
Unfortunately there are several hurdles. First, there’s no consensus on what constitutes
the middle market. As a loan conference veteran, we’ve witnessed midcap panelists each
proferring diﬀerent deﬁnitions.
The top loan research agencies themselves aren’t in agreement. S&P LCD deﬁnes middle
market issuance as borrowers with ebitda of $50 million or less. But because private equity
sponsors are reluctant to publish borrowers’ ﬁnancial information, only a minority of
companies can be accurately ranked.
Thomson Reuters LPC categorizes mid caps as borrowers with $500 million or less in
revenues and facility size equal or less than $500 million. This makes tracking quarterly
and annual issuance an easier ma er. However, knowing how many loans come to
market doesn’t tell you how many of them are actually out there.
Another challenge is that, unlike the broadly syndicated loan market, middle market
loans are mostly to private companies. They generally have unrated debt and small
“clubby” lender groups that buy‑and‑hold rather than trade their loans. Visibility on new
issuance and repayments is less certain than for the large cap market.
Finally, the burgeoning of new direct lenders in the private credit space has made
accounting for all middle market loans tricky. Deep‑pocketed arrangers can now take
down an entire $250 million ﬁnancing themselves. Non‑syndicated deals may never make
it into LCD News, LevFin Insights, or LPC Weekly.
To glean be er insights into middle market outstandings we reached out to Fran Beyers,
Thomson Reuters’ middle market specialist.
“No one knows how big the middle market is,” she told us in a recent interview. “We
have data on BDC outstandings and MM CLO outstandings. That’s it.”
What about the universe of all loans? Can we extrapolate from that? “I don’t think a lot of
the middle market is in that $925 billlion,” she said. “That’s just the LSTA Index. It
includes mostly the larger institutional loans and second liens that get sold oﬀ to the
larger buy‑side ﬁrms.”
Over the several weeks, we’ll assemble some relevant facts towards a more accurate
picture of just how many middle market loans are out there.
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Chart of the Week
The outstanding volume of all US leveraged loans, now at $924 billion, has steadily risen.
Source: S&P/LSTA Index.
Stat of the Week
Loan Stats at a Glance
Contact: Timothy Stubbs
Lead Left Spotlight
This week we continue our conversation with
George Majoros, Jr., Co‑Managing Partner,
EagleTree Capital (formerly Wasserstein
Partners). Mr. Majoros joined the original
predecessor ﬁrm Wasserstein Perella in 1993. He
currently serves as Chairman of the Boards of
Directors for Paris Presents and Jamberry Nails
and is a member of EagleTree’s Investment
Commi ee. Second of two parts – View part one.
Since 2001, the team has focused on mid‑market
buyouts. Currently, the EagleTree Capital team is
investing its fourth private equity fund,
EagleTree Partners IV, with $790 million of
commi ed capital.
The Lead Left: So what’s the next yoghurt?
George Majoros: There’s a continued focus on
what people are pu ing in or on their bodies.
That’s not going away. We previously owned New
Hope/Expo West through our portfolio company,
Penton Media. That provided a great window on
developing trends in the natural and organic
We’ve also connected with families and
entrepreneurs for many years. Our water team
spends countless nights in Fresno covering family
businesses in irrigation and related water sectors,
TLL: Speaking of water, what kind of angle do
you bring there?
GM: We decided as an adjunct to our business
about ten years ago that there were a ractive
dynamics in water. Not just drinking. There’s too
much water in some places, and not enough in
others. Waste water, food production – there are a
number of family businesses out there in those
areas. That includes pipes, pumps, valves, and
irrigation equipment. We needed to court those
people. In that sense, middle market assets are
underserved. We brought in the former CTO of
GE’s water division to work with our senior
partner, Rob Fogelson. That led to other
opportunities, such as pumps and other industrial
products for related applications. It’s helped
broaden our investable universe. It gives us an
sectors. There are some new and exciting small
companies out there. Five years ago there were ten
beef jerky companies. Today there are twenty‑ﬁve!
There’s some phenomenal innovation in categories
like kale and quinoa. Some will take hold.
“Natural” and “organic” categories will only
continue to grow in importance.
TLL: Have you seen a social media shift?
GM: Young buyers don’t care about print or TV
ads. They care about Instagram, YouTube, and
other social media like the PP YouTube tutorial
videos. The relationship with bloggers is very
important. Ad agencies picked up on this ﬁfteen
years ago. So Delicious is about authentic
engagement with the consumer. The company has
outsized engagement statistics. We responded to
every consumer posting. It’s engrained in the
marketing of our companies. It’s all about social
media and being part of a brand community.
ʺYoung buyers don’t care about print or TV ads.
They care about Instagram, YouTube, and other
TLL: How small a company will you invest in?
GM: We have to be mindful of our fund size,
which is $790 million. We like to deploy a
minimum of $50 million. With LPs we can expand
that to $250 million. Our minimum ebitda is
probably $10 million.
TLL: What sectors don’t you like?
GM: The obvious things. Anything with a retail
component or strategy. We’ve never been
comfortable with apparel or fashion. We’re very
skeptical of that, particularly with millennials. It’s
diﬀerent with things you put in your body, versus
adorning your body. That’s the beauty of Sephora
and Alta – you can go to one place and try many
TLL: Other non‑starters?
GM: Firearms and other “sin tax” items. We’re not
big on microbreweries, for example.
TLL: George, how do you source your deals?
GM: Every possible way. We have over twenty
years of relationships in each industry across a
variety of CEO networks. We also have great
relationships with deal intermediaries and
ability to pivot where we can ﬁnd the right
situation for us.
TLL: You’ve just successfully raised your fourth
fund. What kind of changes are you seeing in LP
GM: It sounds obvious, but transparency and
communication. Favorable returns are required
but not suﬃcient. Everything doesn’t always go
according to plan. So we make a point of visiting
them regularly, and being completely transparent
and highly communicative.
TLL: What about co‑investing?
GM: We’ve tried to limit the number of investors
so we can satisfy everyone, but we’re fortunate to
have eight or so co‑investors of size. They can put
in anywhere from a $5 – 100 million equity check.
They also understand that prompt feedback to us
TLL: Any interesting anecdotes about auctions
you’ve seen to share?
GM: We try not to spend too much time or money
on busted deals. We’re limiting the number of
auctions unless we’re only one of a couple buyers.
Or if we have a competitive edge.
TLL: How about ﬁnancing? I’m sure you have
plenty of debt providers, including Churchill.
GM: Yes, indeed. And it would be great to do
more with you! There are certainly additional
sources of capital in the market. Having close
relationships is critical. We like working with
groups that know how we think, like Churchill.
That’s be er than shopping for the last dollar on
TLL: Finally, George, what’s the biggest surprise
you’ve had this year?
GM: I’m surprised that multiples have continued
to expand and prices haven’t fallen given the
cycle. I don’t think there’s a recession coming in
the very near term. There are macro factors that
could change that quickly, like Brexit or other
exogenous risks. The UK sales in our brush
business have been impacted. The lack of tax
reform and the possible border tax adjustment
could hurt. I worry how these things could impact
the performance of our companies. On the other
hand, repatriation and other things could be
stimulative. So we’ll just have to wait and see.
investment banks who think of us when things
come to market.
Contact: George Majoros
Leveraged Loan Insight & Analysis
Primary leveraged yields widen in July
Average yields have increased across the board so
far in July, more so for lower rated issuers. The
average yield, assuming a three‑year term to
repayment on ﬁrst‑lien institutional term loans is
5.79% for B‑rated issuers so far in 3Q17. This is up
11% from the 5.22% average recorded in 2Q17. For
higher rated BB‑issuers, the increase has been a lot
lower. At 3.91%, the average yield on ﬁrst‑lien
institutional term loans for BB‑rated issuers is up
3% from last quarter’s average. But when looking
at the yield components, a large part of the
increase in yields can be a ributed to the increase
in the Libor rate, which is currently at 1.31%.
The average Libor rate component of yields is
10bp higher in 2Q17 at 1.30% so far. Also
contributing to wider yields is the mix of deals.
While reﬁnancings and repricings continue to
dominate, their share of the total is a lot smaller
than in the ﬁrst half of the year. Reﬁnancings
constitute 55% of the ﬁrst‑lien institutional
tranches tracked for yield calculations so far in
July. This is down from 69% in 1Q17 and 63% in
2Q17. On the other hand, M&A deals comprise
40% of the total so far this year, up signiﬁcantly
from 22% and 28% in 1Q17 and 2Q17, respectively.
Join us on September 14th to tackle issues facing the loan market today at TRLPC’s 23rd Annual Loan
& CLO Conference
Contact: Diana Diquez
The Pulse of Private Equity
PE is consolidating, but why now?
It wasn’t by much, but the US private equity ﬁeld
shrank last year for the ﬁrst time in over a decade.
By year‑end, 4,248 PE ﬁrms still had their lights
on, a 1.3% decline from year‑end 2015. Industry
observers have been predicting consolidation since
at least 2009, and the discussion was ampliﬁed in
2011/2012 when ﬁrms were struggling to regain a
foothold on the fundraising trail. As late as 2013,
the head of a boutique advisory ﬁrm told
Financial News that some PE shops were able to
stay on “life support” and stuck around “for many
more years” than they should have. “Simply given
the dynamics of the fundraising market, the crisis
will lead to consolidation and more casualties.” As
it happened, the money didn’t dry up and the
credit markets loosened, forestalling the inevitable
Fast forward to 2016, when the PE industry ﬁnally
shrank by ﬁrm count but amidst a very strong
fundraising cycle. 2017 totals could end up
rivaling pre‑crisis numbers in terms of capital
raised, and the number of funds hi ing their
targets last year (record high 93%) and the average
time to close those funds (record low 12.3 months)
don’t oﬀer much of a reason to shut down. Rather,
as we argued in our recent PE Breakdown Report,
large investors have been buying smaller, niche
ﬁrms to become “one‑stop shops” for limited
partners. We expect those larger players to
continue growing AUM through consolidation
and cementing their places in the industry, but
they may just be ge ing started.
Contact: Alex Lykken
Contact: Steven Miller
Private Debt Intelligence
Direct Lending Drives Private Debt Fundraising Market
Following the record private debt fundraising seen
in Q4 2016, during which 51 funds reached a ﬁnal
close, the number of funds in market seeking
which at $10bn seeks to become the largest special
situations fund ever, have helped drive total
targets to record highs.
investment stood at 293 at that start of 2017.
Further robust fundraising in Q1 saw this number
fall slightly to 283 at the start of April, as more
vehicles closed compared to the number of new
funds coming to market. However, a number of
new funds launched in the second quarter, and at
the mid‑point of the year a record 311 private debt
funds are seeking commitments from investors.
This trend is also apparent in the level of capital
that is being sought. At the start of the year, funds
in market were targeting a total of $131bn, but at
the start of April this had fallen to $112bn. As at
July, new funds coming to market had pushed the
total level of capital being sought to $145bn, a
new record. In particular, the launch of vehicles
such as GSO Capital Solutions Fund III,
This rebound in the fundraising market has been
driven by new direct lending vehicles. At the start
of April, 126 direct lending funds were seeking a
total of $43bn from investors: three months later,
this has risen to 145 such funds, which are
targeting a combined $63bn. Distressed debt
fundraising, which has accounted for a large
proportion of the capital closed in recent quarters,
has not seen new vehicles come to market at such
a rate: 42 funds were targeting $40bn at the start of
2017, compared to 46 funds which are seeking
$36bn as at July. However, some of the largest
funds in market are distressed debt funds, and
recent fundraising trends suggest that even if
more direct lending funds close in coming
quarters, it may be distressed funds which raise
the greater share of capital.
Contact: William Clarke
Source: Cliﬀwater Direct Lending Index and BofA Merrill Lynch US High Yield Eﬀective Yield
The red line in the chart is the *Cliﬀwater Direct Lending Index (CDLI) current yield, which is based on
the investment income of the underlying assets held by public and private BDCs. BDCs invest in middle
market companies, and the Index comprises of more than 6000 middle market loans – with 57% senior
debt, 30% subordinate debt and 9% equity. The blue line displays the BofA Merrill Lynch US High Yield,
which tracks the performance of USD denominated below investment grade corporate debt publically
issued in the US. Increase in high yield depicts dislocations in market, pricing in higher risk. The spread
of CDLI current yield minus BofA ML HY (shaded area in grey) shows the premium of middle‑market
loans over traditional High Yield, gauging a ractiveness of the asset class. The higher premium for
middle‑market, to some extent, depicts the illiquidity for private loans and credit risk associated with
smaller companies. Since early 2016, we have seen a steady surge in the spread, increasing to 423 basis
points as of 18 July 2017, making middle market relatively more a ractive.
* As of 31 March 2017, the CDLI index includes USD 87bn in assets, with more than 6000 loans – approximately 56% senior debt, 31%
subordinate debt, 9% equity and 4% other. BDC eligibility to be included in the Index is at least 75% of total assets represented by direct
loans as of the Index valuation date. All the yields are unlevered. CDLI Index yield is total interest income of all BDCs covered, divided by
their total assets, reported quarterly (9.8% as of 31 March 2017). CDLI data is quarterly while BofA Merrill Lynch HY Eﬀective Yield is
Contact: Jonathan Berke
Senior Financials dips below 50bps
Few would question the supportive role Mario
Draghi has played over the last six years. Under
his presidency, the ECB quickly reversed the ill‑
advised rate hikes in 2011 and subsequently
loosened policy – the reﬁnancing rate has been at
or close to zero since 2014. Extraordinary
measures were taken to stabilize the Eurozone, not
least several quantitative easing programmes.
Yet there was widespread speculation this week
that Draghi would ﬁnally change his stance and
The Markit iTraxx Europe continued to
outperform the Markit CDX.NA.IG, tightening by
0.5bps to 52bps. Perhaps more notable was the
change in ﬁnancials. The Markit iTraxx Senior
Financials was trading at 49.5bps, a signiﬁcant
move given that the index hasn’t closed below
50bps since January 2 2008.
There are clearly fundamental reasons for the
strong showing by this index. The European
economy is improving and the long overdue
signal a tightening in policy. The tapering of QE,
in particular, was expected by many to be signaled
in the ECB’s policy statement. This could be the
tipping point for a change in sentiment and shake
the credit market out of its soporiﬁc state.
But those that espoused this view point were
disappointed. It was business as usual at the ECB,
with no change in policy and the central bank
reiterating its willingness to boost it bond
purchase programme should economic conditions
deteriorate. Draghi merely stated that a decision
on QE will be taken in the autumn.
So it seems that one of the last hopes for volatility
has been quashed, at least until the end of the
cleanup of the Italian banking industry is
underway. But there are technical factors ‑ driven
by regulation – that are also relevant. IHS Markit
announced last month that Holding Company
entities would be considered for inclusion from
the next roll in September, and it was conﬁrmed
on July 12 that this would happen. This will apply
to UK, Swiss and Dutch banks, where this
structure is prevalent.
The initial announcement certainly coincided with
a tightening in the index, which primarily contains
Operating Company entities for banks in these
jurisdictions. Liquidity is still poor in the HoldCo
entities, but we can expect this to improve as the
Contact: Gavan Nolan
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