Middle-market investing is a niche estate planning strategy focusing on private equity real estate (PERE) properties considered too big for small businesses to invest in and too small for large corporations to care about.
This strategy is attractive because of its potential to generate high returns. However, depending on the risk-reward profile of the offering, the potential risks can range from low to high.
This article explores the challenges and risks associated with middle markets. It discusses some common issues, such as limited access to capital, management team expertise, and regulatory hurdles.
Potential Challenges in Middle-Market Investing
Middle-market investing offers numerous advantages. However, it also comes with its fair share of challenges and risks. Some common challenges include:
Limited Access to Capital
Smaller projects and properties may have limited access to traditional financing options, making it more challenging for investors to secure funding. Most “traditional” financing options refer to loans provided by banks or other financial institutions.
For example, a multi-family property or a mental health facility in the middle market may struggle to obtain financing from large banks due to their smaller scale and perceived higher risk.
To overcome this, investors can explore alternative financing methods such as private lending (borrowing from non-bank lenders), crowdfunding (raising capital through online platforms), or forming partnerships with other investors who can contribute funds.
Management Team Expertise
Middle-market properties may lack experienced management teams, requiring investors to play a more active role in operations or sourcing external expertise.
Management teams are responsible for overseeing day-to-day operations and executing the business strategy. For instance, a mid-sized hospitality property may not have a seasoned management team to handle day-to-day operations effectively, such as marketing, guest services, and maintenance.
To address this, investors should conduct thorough due diligence on management teams and consider providing support through mentorship or hiring industry experts to fill the knowledge gap.
Middle-market investments may face unique regulatory challenges like zoning restrictions or building codes. Zoning restrictions refer to local laws that dictate the types of structures that can be built on a property while building codes outline the standards for construction and safety.
For example, a healthcare facility focusing on mental health might encounter specific regulations affecting patient privacy and safety, such as the Health Insurance Portability and Accountability Act (HIPAA) compliance. Investors must navigate these challenges by staying informed about local regulations, working closely with legal advisors, and being prepared to adapt their investment strategies accordingly.
In conclusion, middle-market investing presents unique challenges for investors:
- Limiting access to capital
- Working with management teams with minimal experience
- Encountering regulatory hurdles
Informed investors can navigate these obstacles effectively by exploring alternative financing methods, conducting thorough due diligence on management teams, staying updated on local regulations, and implementing tailored investment strategies.
Additionally, investors can mitigate the risks associated with middle-market investments by recognizing and addressing these challenges early by working with an experienced fund sponsor. They can unlock the potential rewards hidden within this sector and make informed decisions that contribute to a diversified and successful investment portfolio.
Accredited Investors: Individuals or entities that meet specific financial criteria set by regulatory authorities, allowing them to invest in private securities offerings.
Alternative Financing Methods: Non-traditional ways of raising capital for investments, such as private lending, crowdfunding, or partnerships with other investors.
Building Codes: Rules and regulations governing the construction, alteration, and maintenance of buildings to ensure safety and compliance with local standards.
Crowdfunding: A method of raising capital through online platforms by soliciting small amounts of money from a large number of people, typically via the internet.
Due Diligence: A comprehensive appraisal of an investment opportunity, including the examination of management teams, financials, and potential risks, to determine its viability.
Health Insurance Portability and Accountability Act (HIPAA): A US federal law that establishes data privacy and security provisions for safeguarding medical information.
Limited Access to Capital: The difficulty faced by some businesses in obtaining financing from traditional sources like banks or financial institutions.
Management Team Expertise: The skills, knowledge, and experience of a company’s management team responsible for overseeing daily operations and executing business strategies.
Middle-Market Investing: Investment in companies or projects that are positioned between small businesses and large corporations, often characterized by untapped potential and unique challenges.
Private Lending: Borrowing money from non-bank lenders, such as individuals or private companies, as an alternative to traditional financing options.
Regulatory Hurdles: Challenges faced by businesses or investments due to local, state, or federal regulations, such as zoning restrictions or building codes.
Zoning Restrictions: Local laws govern how the land can be used, often dictating the types of structures allowed on a specific property or the allowable uses for a particular location.
Accepting Investments Now:
Watch: Caliber Opportunistic Growth Fund III
Watch: Caliber Core+ Growth & Income Fund
Watch: Caliber Qualified Opportunity Zone Fund II
Click here to review our assets.
Caliber (NASDAQ: CWD) is a leading vertically integrated alternative asset management firm whose purpose is to build generational wealth for investors seeking to access opportunities in middle-market assets. Caliber differentiates itself by creating, managing, and servicing proprietary products, including middle-market investment funds, private syndications, and direct investments which are managed by our in-house asset services group. Our funds include investment vehicles focused primarily on real estate, private equity, and debt facilities. We market our services through direct sales to private investors, wholesaling to investment advisers, direct sales to family offices and institutions, and through in-house client services. Additional information can be found at Caliberco.com.
Click here to see Caliber’s current property portfolio.
If you would like to speak to someone about diversifying your retirement accounts, contact us at [email protected] or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
If you would like to learn more about Opportunity Zone Investing, Caliber has put together a special guide that cuts through the myths and misconceptions and outlines the benefits, the risks, and the upcoming deadlines you must know to be able to participate. Get access to the guide here.
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.