Disruption is Coming for the Middle Market

By: Eric D. Starr :: February 19, 2018

At a recent Fintech Conference in NYC, I listened to many pundits speak about the future. One after another suggested that we are in the late innings of the economic recovery with more difficult times ahead for lenders and borrowers alike. As we all know about predictions, whether the weather or the economy, there’s just as good a chance they’re right, as they are wrong. But whether the economy falters or gains, just as the Magic 8 Ball states, “the picture points to growing complexity.”*

Disruption is key to change

Many organizations operating today within the traditional financial sector are striving to employ fintech solutions that create disruption through innovation. Today’s fintech revolution is about a customer experience movement that uses technology as the undercurrent to achieve measurable results.

Disruption speaks to real change, not just an improved experience or more options. To date, much of the change in the financial marketplace has come from agile consumer and small business lenders. But what about the middle market?

Defining the middle market

In an article entitled “Why the Middle Market Matters – Now More Than Ever,” Dave Maney, Economaney.com, spoke about the contributions mid-sized businesses make to our economy, stating “the middle market is to the U.S. economy as what North America was to Christopher Columbus: a giant, incredibly important, heretofore ‘undiscovered’ but now unavoidable and centrally important part of the world’s landscape.”

There are nearly 200,000 U.S. companies that fall into the definition of middle-market, accounting for $10 trillion annually of the $30 trillion U.S. private sector gross receipts. They are in construction, healthcare, manufacturing, retail and wholesale trade. They range from fairly young companies supported by financial sponsors and founded on digital innovation to decades-old, family-run businesses that provide tried and true products and services.

But unlike very large companies or small businesses, there actually is very little known about them individually. There is no readily available credit rating or FICO score. With younger companies, their financial histories are much shorter and much less consistent. In others, the balance sheets of the original founders are often entangled with that of their business. And since most are privately held, much of the data is private, making it very difficult to acquire. What we do know is that these companies are reinventing, rediscovering and relaunching with flexibility and agility. And need capital to support their strategies.

Using fintech as a true disruptor

Creating a technology-enabled decision-making process in a market with little data available is a very difficult task. I have been working in fintech since 1990 when I developed my first algorithmic trading model. Of course, fintech at that time was something that was not yet identified as a “thing.” The quantitative analysis, data analytics, and machine learning of yesterday were simply the beginning of the fintech of today.

As middle market lenders, our job is to provide capital to companies and get that money back with a fair, risk-adjusted return, regardless of the cyclical whims of the economy. In order to do that, we need to deploy a robust process for identifying those companies that will prosper from our capital and have the wherewithal to thrive (at best) or survive (at worst) in all economic environments.

Learning from these disruptions, and combining this with all of the information derived from CapX’s almost twenty-year record of success, we are developing a robust, low-touch, credit-analysis process unique to our strategy in our market. We are looking to use new sources of data and underwriting models to analyze prospective customers. We are using technology to improve the speed of the decision-making process. We are simplifying the application process. The end goal? To create a technologically sophisticated system delivering a superior user experience for everyone involved in the process.

Disruption in middle market lending is coming. Unlike those pundits who don’t know the timing of an economic decline, we know precisely when disruption is coming to middle-market lending…yesterday. 

* The Middle Market Center

Eric D. Starr, Partner

As a Partner with CapX Partners, Eric is responsible for developing technology-enabled solutions to drive scale and operational efficiency. His areas of focus include origination, underwriting, portfolio management, and finance. As a business developer, Eric's industry emphasis is on healthcare, energy, technology, and manufacturing.

Prior to joining CapX in 2008, Eric worked as a hedge fund manager and was a member of the risk committee at Forest Investment Management. Previous to...