Alternative Investment and Financing: Why Middle-Market Companies Find Capital Beyond the U.S.

In the world of alternative investments, middle-market companies are increasingly seeking capital outside of the U.S. for a variety of reasons. These companies, which typically generate between $10 million and $1 billion in revenue, are leveraging international investors and financing structures to fuel their growth, mitigate risk, and diversify their capital sources.

Why Middle-Market Companies Look Beyond the U.S.

1. Access to New Markets and Global Expansion

As middle-market companies scale, many look outside the U.S. to expand their reach into global markets. For instance, Shift Technologies, a used car e-commerce platform, raised international funds to help grow in the UK and European markets. Foreign investors often bring valuable market knowledge, local expertise, and connections that help U.S. companies navigate international regulations and customer preferences.

2. Diversification of Capital Sources

Relying solely on U.S. investors can limit a company’s access to funding. By attracting foreign capital, companies like Stitch Fix have been able to diversify their funding base and reduce dependence on any single group of investors. In 2017, Stitch Fix secured investment from Target's corporate venture capital fund, which helped them scale beyond the U.S. and open operations in the U.K. Diversifying funding sources is crucial for businesses in an unpredictable financial environment.

3. Favorable Foreign Investment Incentives

Certain foreign markets offer incentives that make them more attractive to U.S. companies. For example, Cirrus Aircraft, a U.S.-based aircraft manufacturer, received a significant investment from China Aviation Industry General Aircraft (CAIGA) in 2011. With China’s growing interest in the aviation industry, this deal provided Cirrus with much-needed capital and an entry point into a rapidly expanding market. Similarly, tax incentives and favorable regulations in other countries often make foreign capital a more appealing option for U.S. firms.

4. Currency and Risk Mitigation

For middle-market companies, currency fluctuations and political instability in the U.S. can present risks. Seeking foreign capital can help mitigate these risks by diversifying the company’s funding across multiple currencies and economies. For instance, e-commerce company Spreetail secured capital from international investors, including those from Canada and Europe, to hedge against potential risks from a strong U.S. dollar. Diversifying across global markets reduces exposure to regional financial shocks and provides companies with greater stability.

5. Access to Specialized Capital

Sometimes, companies need specialized capital that’s difficult to find in the U.S. Foreign investors, such as those in Zappos’ early years, can provide more than just funding—they bring sector-specific expertise and guidance on how to scale successfully. This is especially true for tech companies or industries with high growth potential, where investors from markets like Asia and Europe have unique knowledge or access to specialized funds.

6. Attractive Valuation and Less Stringent Regulations

Foreign markets often present less stringent regulations and can offer more attractive valuations for middle-market companies. Blue Apron raised capital from international investors, including firms in Asia, because they found that these investors were more willing to back the company at a higher valuation compared to the U.S. market. In addition, the regulatory environment in some countries may be less complex, making it easier for companies to access funding.

7. Strategic Partnerships and Global Connections

Middle-market companies often seek capital from international investors to build valuable partnerships that can help them grow. Veeva Systems, a cloud-based software company for the life sciences sector, secured international funding to expand into European and Asian markets. By partnering with investors who understand the global life sciences space, Veeva was able to scale quickly and gain credibility in these new regions.

Why These Tactics Are Important for Risk Mitigation

Incorporating international capital strategies into a company’s financing structure is a powerful way to reduce risk. By diversifying the sources of funding, middle-market companies can protect themselves against financial downturns, currency fluctuations, and other economic uncertainties. Global capital markets provide a cushion against domestic market volatility, which can be a game-changer for companies navigating uncertain economic conditions.

Furthermore, these strategies allow companies to tap into expertise and market knowledge from across the globe. Whether it’s regulatory insight, customer base expansion, or industry-specific capital, international investors can bring much-needed advantages that go beyond just financial backing.

Why the U.S. Market Remains Appealing for International Investors

For international investors, the U.S. remains a key market in their portfolio construction and manager selection. The U.S. offers a stable regulatory environment, a well-established legal system, and access to some of the world’s most dynamic markets. The potential for high returns is significant, particularly in middle-market sectors where companies are in a growth phase and may offer attractive valuations.

Moreover, the U.S. economy, with its diverse sectors and large consumer market, presents ample opportunities for foreign investors looking to diversify their portfolios. Many of these investors are drawn to the U.S. for the same reasons that U.S. companies look abroad: access to new opportunities, scalability, and a strong return on investment.

As the global economy continues to change, middle-market companies will increasingly seek capital beyond the U.S. to support their growth strategies, manage risk, and access specialized funding. For investors, the U.S. market presents a compelling opportunity to build a diversified portfolio with access to high-growth companies in a stable and transparent financial environment.

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