Financing mid-cap growth can be critical when middle-market companies are constantly faced with new issues of development. Talentia tells you about the basics to master.
1. What is at stake?
Mid-cap companies face specific difficulties due to their size. They are too large to benefit from financing and support solutions for SMEs yet too small to fully self-finance their growth.
2. Mid-cap companies at a glance
According to the French Law on Modernization of the Economy (Loi de Modernisation de l’Economie), a mid-cap company, also called a middle-market company, is a firm that does not belong to the SME category. Smaller in size, it has fewer than 5,000 employees. Also, resource requirements apply: its annual turnover does not exceed €1,5 billion or its balance sheet total does not exceed €2 billion.
3. Mid-cap companies in figures
A solid 5,700 mid-sized companies have been identified in France, representing a total of 3.258 million jobs according to the French National Institute for Statistics and Economic Studies (INSEE).
The INSEE also reveals that 1,482 middle-market companies are under foreign control, accounting for 26% of the total.
According to a 2019 report from the Observatoire du financement des entreprises, middle-market companies are characterized by their industrial orientation. 34.5% of their employees work in the industrial sector compared to 32% of them in trade, transportation, accommodation, and catering.
In a 2020 survey issued by BPI France (standing for French Public Investment Bank), 34% of managers are over 60 years old and 18% of them are over 65 years old .
Middle-market companies across the EU-4 (UK, Germany, France, and Italy) generate 30% of private-sector income and employ about a third of the workforce in each country. They thereby bring about 1,111 billion euros to the GDP of the EU-4.
4. Mid-cap growth requires some specific needs to be met
Access to finance is a recurring problem. This need for financing is inseparable from the notion of growth, which is driven by 4 common requirements.
- Meeting the need for working capital which represents the company’s short-term financing needs to ensure the continuity of its business.
- Ensuring the firm’s long-term future by investing in Research and Development.
- Supporting the company’s growth by developing its infrastructure and production tools to conquer new markets.
- Carrying out mergers and acquisitions to broaden the spectrum of activities, or achieve the critical size needed to gain market share in a competitive sector; accelerating revenue growth opportunities.
5. Financing mid-cap growth is about picking the right financing
- Self-financing
The operating cash flows of middle-market companies are largely sufficient to self-finance investments (both tangible and intangible assets) as the latter only absorb half of the cash flows according to the Banque de France estimates.
- Bank credit
The share of bank credit financing still stands high in the growth strategies of middle-market companies. However, it has been declining significantly over the last ten years. Bank loan take-up rates are generally higher for mid-sized companies than for SMEs. Moreover, mid-sized companies benefit from interest rates that are significantly lower.
- Euro PP
For short- and medium-term financing, middle-market companies may use the negotiable debt securities market. From a medium- and long-term perspective, mid-sized companies can resort to the Euro PP (Euro Private Placements) market. More than 70 issues on the European private placement market were completed in 2019, for an estimated total of nearly €5 billion.
- Fundraising / Private Equity
Fundraising consists in relying on external investors to provide the funds required for the development of a company. When funds are raised, investors enter the company’s capital. The term private equity refers to investment in private companies.
- Going public
Also known as an Initial Public Offering, going public takes the form of a transfer of shares to institutional and private investors. The IPO remains a complex process that nevertheless allows growth to be financed by significant capital inflows.
6. What about tomorrow?
The pandemic surely had a significant impact on mid-cap companies without endangering their growth in the long run. According to the Banque de France, one out of every two middle-market companies states that they have applied for credit lines in Q4 of 2020. Among the companies that have chosen this type of financing, nearly 52% have used their drawdown facility during the last three months compared to 56% in the previous quarter. At the same time, mid-cap companies also financed themselves on the private debt market.
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