FireSide: The middle market—Beyond the limit of public equities

Public small and mid-cap fundamentals have diverged the broader U.S. middle market. We look at how investors can get true exposure to the heart of the U.S. economy.

About this episode

How can we be bullish on the middle market when the Russell 2000 chronically underperforms the S&P 500? It’s a question that investors often ask when considering middle market private equity—and a perfect opportunity to demystify some of this sector’s unique qualities.

Join Chief U.S. Economist Lara Rhame and Executive Director of Research Andrew Korz as they examine how the Russell 2000 falls short in mirroring the strong fundamentals and robust growth in middle market PE, and how innovative new vehicles are helping investors access its potential opportunities.

Transcript excerpt

Lara Rhame: Welcome back to FireSide, a podcast from FS Investments. I’m Lara Rhame, Chief U.S. Economist, and I’m excited for today’s podcast because here at FS Investments, we spend a lot of time thinking about the middle market. A large swath of our alternative strategies is hitched to this powerful engine of growth in the U.S. economy. But increasingly, I get the question, how can we be bullish on the middle market when the Russell 2000, which is the publicly traded index that includes similarly sized small- and mid-cap firms, chronically underperforms? And as so often happens, I get asked a question, I turn around, I ask Andrew, and he responds with a thoughtful, informative and incredibly clear piece of research that blows me away every time.

So today I wanted to walk through that work and the answer. And Andrew, I feel like you barely need an introduction. We’ve been podcasting a lot recently, which has been great for everybody. But—Andrew Korz is an Executive Director on our Research team. He’s a thought leader on commercial real estate, private debt and for many years, now equities.

So, Andrew, welcome.

Andrew Korz: Hey, Lara. It’s great to be here. I think this is a really interesting topic that hasn’t been discussed a ton. So, I’m excited for the discussion.

Lara Rhame: Yeah, and I thought the answer would be shorter or rather one dimensional—it’s got many dimensions to it. That’s the better way to say it.

I’m going to just zoom out a little bit and ask why we’re talking about this. Obviously, the S&P 500 is the traditional asset bellwether. You know, April notwithstanding, right, it’s performed really well over the years. Even today, it’s up, you know, five-and–half percent year to date.

And I think we know the challenge. I know we’re going to go into detail on that a little bit more, but even with this correction in April (not even technically a correction, I guess, but “downtick”), we’re still trading at expensive, over 20X price-earnings ratio. Why would we want to do a whole podcast on the Russell 2000?

Andrew Korz: It’s a great question. And to your point, that part of the market, that small and mid-cap part of the public markets has really underperformed for the better part of the last decade.

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Andrew Korz, CFA

Executive Director, Investment Research

Lara Rhame

Chief U.S. Economist + Managing Director

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