You’ve heard of the middle-child syndrome: The family focus often goes to the older overachiever or the vulnerable youngest sibling, leaving the middle child fighting for attention. The situation translates into business: Fortune 500 companies are the darlings of Wall Street and the bread and butter for traditional lenders, while startups charm venture capitalists and angel investors—leaving midsize companies screaming for financial attention.

Middle-market companies are defined as businesses with annual revenues of $10 million to $500 million. As of January 2006, there were 113,056 such businesses in the United States, with more than three-fifths occupying the smaller end of the middle market. These figures indicate that mid-caps are a significant part of the business landscape. Yet, when it comes to financing, they often get squeezed out of the picture.

Owners of mid-market companies can lack the resources and time needed to identify and initiate strategies to reduce overhead and improve finances so that they can grow their businesses. There is, however, some good news on the horizon. A handful of alternative investment firms have taken notice of the plight of middle-child businesses and are doing something about it. This new breed of financier is capitalizing on opening the private equity market to individuals who don’t meet the typical accredited investor mandate ($1 million in assets and an annual income of $200,000). As a result, alternative investment firms are gaining strength and filling the gap left by changes in traditional lending.

The Changing Face of Finance
Until the late 1980s and early ’90s, the finance industry held to traditional ways of doing business, using banks as the only means for a business loan. Bound by less federal oversight back then, banks were smaller and more regionally focused, with the ability to establish and maintain long-term personal relationships with business owners.

But amid the turmoil caused by the savings and loan crisis, the banking industry changed. With new federal regulations and state legislation came the emergence of megabanks. Larger nonbank finance companies also merged, intensifying the competitive nature within the finance industry.

These banks and financiers carved out niches in the new order of business finance. Big lenders now focus on companies with larger revenues, while the community banks that still exist tend to lend to businesses with smaller balance sheets. What’s missing? Help for the businesses in the middle—and their investors.

How Mid-Market Companies—and Investors—Benefit
Over the past 100 years, the growth of the economy and the associated role of investment strength have endured the bank consolidation cycle, commercial finance company cycle and various scandals and corporate crises. Today, with an unprecedented amount of cash available, the cycle shows an upswing in the popularity of alternative investment firms, which is good news for mid-market companies because these institutions are focused on meeting their needs.

In the private equity arena, alternative investment managers have liquidity, which alone is a strong benefit for mid-caps. Working with an alternative investment firm inherently allows these companies a level of greater flexibility because the regulations and limits that hamstring traditional lenders do not shackle these firms. In addition, the managers working in the alternative investment industry are typically some of the best and brightest, who left regulated institutions to pursue their passions for innovative commercial finance.

Moreover, alternative investments cut a broad swath across a number of nonpublic categories such as private equity, hedge funds, venture capital, commodities and so on. Typically open only to institutional and high-net-worth investors, alternatives have earned higher returns than public equity markets over the past several years. That kind of outcome has understandably raised alternatives’ profiles as attractive investment options.

Within that niche, one model that has commonly been reserved for big-fund companies with deep pockets is the “one-stop shop.” In that model, both borrower and investor needs are addressed. Fund mangers such as KKR and Blackstone are well-known examples, serving businesses with revenues in the billions. Of course, that would leave the majority of mid-market companies once again lacking.

Fortunately, over the past decade, visionary financial managers have taken that concept and adapted it to serve the needs of businesses with $200 million and less in revenue. For individual investors who fall outside of the high-net-worth parameter, these alternative investment firms offer clearly defined products while operating with a relationship-centric mindset that provides transparency to borrowers.

Some of these one-stop alternative investment firms provide investor products that range from debt and equity funds to innovative hybrid funds—all of which may require risk tolerance, but could generate significant and noteworthy returns. For the borrowers, collateral and returns are matched to investor funds, generating the type of transparency and confidence in the system that frees business owners to concentrate on growth and sustainability.

Mid-caps can also take heart in further customization offered by private equity partners. In many firms, the lending and investment divisions alike offer expertise in industry niches, such as healthcare and energy, so the solutions that are generated are not one-size-fits-all, but take into account an industry’s challenges and opportunities. For instance, alternative investment companies can offer solutions for equipment sale and leasebacks, subordinated debt, term and bridge loans, equity applications, reverse mergers, purchasing shares of ownership, etc. Plus, these companies often have deep, established relationships with other financing partners, which allows them to negotiate and structure deals that would be insurmountable for a mid-market business owner.

Moreover, using open-ended investment structures, private equity firms can address both debt and equity investment. Fund management firms marry the high returns from private equity investments to the more flexible terms of an open-end fund. After much shorter tie-up periods (one to four years versus five to 10 years for a closed-end fund), investors have the ability to liquidate their holdings by selling their interests back to the fund. This option is gaining strength in the investment community. For example, Ospraie Management in New York recently launched a $750 million hybrid fund that will make private equity investments with an open-end structure, and others are following suit, with investors responding very positively.

One Stop Today Opens the World to Tomorrow
Today’s options in business finance and investment have evolved from our nation’s original banking models that emphasized individual understanding and a hands-on approach. In a more complex and regulated environment, alternative investment firms are able to bridge the gap for mid-market companies that larger financial institutions cannot. By bringing a one-stop approach to both corporations and investors, these alternative investment firms are making their footprint in history. By ensuring that mid-caps are not obscured by their flashier brothers and sisters, and instead have access to the same kind of high-quality financial advising, structuring and investing, these firms position them to thrive in the global marketplace.