Where can the middle market find capital?

• Author: Huggins, Nancy J.

The 1980s was a fortuitous decade for middle-market companies. They were well-positioned, because they were big enough to take advantage of the rapidly growing international marketplace, but small enough to innovate and to move quickly to take maximum business advantage of emerging opportunities. And they had sufficient clout to attract and compensate personnel with first-class technical and managerial skills. Not a bad formula for success.

Even with the U.S. economy in recession., prospects for middl-emarket companies are not dim. Middle-market companies have historically been relatively successful at surviving even the worst of economic times. Although large companies recovered faster from the recessions of 1980 to 1982 and 1985 to 1986, mid-sized companies which I define as those with assets ranging from $25 million to $500 million-sliffered less and many were profitable throughout the slowdowns.

However, the business cycle is not necessarily the key success factor for those in the middle market. Success for these firms is equally influenced by regulatory, financial, and market factors. And, Unfortunately, in the 1990s these companies may be caught in the middle. That is, they are too large to be exempt from tighter environmental., financial, labor, and social policy regulations, yet too small to spread the cost of meeting these stricter rules across a diversified revenue base. The squeeze is likely to come in the form of higher operating costs. One notable example is benefit costs, particularly health care costs, which are estimated to have risen a surprising 7 percent in 1990. As mid-sized companies were among the primary recipients of the benefits of Reaganera deregulation, the reregulation anticipated in the 1990s is quite likely to have a disproportionately negative effect on these companies.

Closed doors, open windows

One of the biggest challenges to middle-market companies in today's environment is credit availability. Capital markets in the 1980s were quite open to middle-market companies, from bank financing, the junk-bond market, and private placements to a generally booming equity market. Yet negative developments in the financial markets in recent months now leave some mid-sized companies with limited financing options.

With tighter capital standards creating havoc in the weakened banking sector and with bank regulators more zealous in the light of the savings and loan crisis, many commercial banks have had no choice but to contract loan growth. Larger companies, which generally can tap the commercial paper market, have not felt the credit crunch that middle-market companies have, as quantified in recent surveys. Sadly, this development comes at a time of falling...