How Capital Can Accelerate Your Growth Strategy

Mid-market companies may have passed their first growth stage, but their leaders should still consider raising capital to fund the next era — including expansion or the transformation of their business into a more sophisticated model.

Rich Anderson, managing director of Moss Adams Capital LLC, wrote on his blog that mid-market companies may be seeking capital for infrastructure investment, new information systems, hiring management or personnel, or expanding to an overseas market. In addition, the owners of these companies may need capital for personal purposes, such as a partial or complete buyout of other shareholders.

Anderson notes that the accessibility and price of capital varies depending on the state of the capital markets and your company’s demonstrated growth and potential. Capital sources available include senior capital from banks, commercial lenders, asset-based lenders, term lenders, and others, as well as junior capital from private equity firms and mezzanine debt funds.

Growth Through Acquisition

One way to accelerate growth via the use of capital is through acquisitions, Anderson said. Buying another company can quickly bring more product offerings, service expertise, manufacturing and marketing capabilities, or open up opportunities in new geographic markets.

“Acquisitions can provide a more immediate return on investment by bringing existing sales, assets, infrastructure, and management,” he says.

Inorganic growth through acquisitions can significantly boost the bottom line, said Bain & Co. leaders in the firm’s M&A practice. Publicly traded companies that were active in M&A from 2000 through 2010 consistently outperformed those that stayed away from deals, according to their analysis. Firms that engaged in any M&A activity averaged 4.8% annual total shareholder return, compared with 3.3% for those that were inactive.

Materiality mattered — a lot, the group wrote. Companies that did a lot of deals outperformed the average most often when the cumulative value of their acquisitions over the 11-year period amounted to a large percentage of their market capitalization.

The most successful companies were those that had a repeatable M&A model, according to the Bain & Co. leaders. Firms that acquired frequently and at a material level recorded nearly two-percentage points higher total shareholder return than the average.

“The research supporting these numbers is robust, and it points the way to a powerful tool for growth,” the leaders said. “If your company has a successful strategy, you can use the balance sheet to strengthen and extend that strategy. M&A can help you enter new markets and product lines, find new customers and develop new capabilities. They can help you boost your earnings and turbocharge your growth.”

Growth Through Private Equity Investment

One powerful way to obtain capital is through private equity investment. According to a 2014 survey of about 1,000 senior executives of midmarket companies by The National Center for the Middle Market, PE-backed businesses generated a mean revenue growth rate of 9.2% over the trailing 12 months, compared with 6.5% for non-PE backed companies and 7.5% for the respondents’ businesses as a whole.

“What we’ve learned from our research and others is that when private equity firms acquire or take an interest in middle market [companies], capital spending goes up,” Thomas A. Stewart, the center’s executive director, said in an emailed statement to Wall Street Journal.

“Presumably, the fruits of these investments have fueled stronger results in both top-line growth and job creation for PE-backed middle market companies,” Stewart said.

Private equity firms can greatly boost a mid-market firm’s organic growth by also helping the business transition to a more sophisticated model, according to the white paper, “Driving Growth: How Private Equity Investments Strengthen American Companies,” by the Private Equity Growth Capital Council.

“Today, private equity investment firms rely on their unique experience, talent, energy, and entrepreneurial skills to significantly improve fundamental business processes and operations,” the authors wrote. “They achieve results by bringing to the table capabilities, clarity, culture, and capital. Their focus on performance, unfettered by the short-term demand to raise earnings per share and exceed the expectations of public equity analysts, has become a potent force driving economy-wide improvements in corporate productivity.”