A Snapshot of the Middle Market

Today we are excited to announce our partnership with ACG Global. Together, we hope to accelerate growth in the middle market for both companies and deal professionals. As we announce this partnership, we wanted to review some of the positive and negative trends of the middle market…

Overall, the US middle market comprises over 200,000 companies, employs nearly 45 million people, and generates one-third of private sector GDP. In other words, it is equivalent to the world’s fifth largest economy, says the recent Middle Market Indicator Report (MMI).

While middle market companies have experienced relatively consistent growth since 2008, recent uncertainties — mostly federal — have slowed some of the progress. Still, the temporary nature of these uncertainties and optimism in the global economy suggest that the middle market could resume growing in 2014.

Below are three key indicators to consider:

Revenues Growing…Slowly

According to the MMI, 56% of mid-market companies reported higher revenues in Q4’13. However, the aggregate increase was only 5.0% in the last quarter. While in the black, the growth is “the slowest rate of increase over the past four quarters.”

The slowing rate of growth could be a contributing factor for why many financial sponsors are commenting on the low-quality of deal flow recently. According to a recent report by KPMG, 32% of survey respondents said that there was a lack of suitable investment opportunities.

Still, these figures and rates are stronger than larger cap markets. As the MMI explained, “These results…outpace the performance of the broader market by a wide differential — underscoring the middle market’s stability and its critical role as a driver in the U.S. economy.” A majority of mid-market businesses (57%) believe they will post increased revenues in 2014.

It is for this reason that 77% of the KPMG respondents “expect their respective deal activity will be valued under $250 million, followed by 12 percent who anticipate their acquisitions will be valued between $250 and $499 million.”

Consistent Rise in Employment

Thanks to the jobs report last Friday, employment statistics are top of mind for many economists and investors. While the overall report painted an underwhelming portrait, the middle market has been unusually consistent in its employment growth.

In Q4’13, 39% of middle market companies reported they added new employees, which was “consistent with results over the previous four quarters.” 12% of respondents indicated they would try and grow their workforce by >10% in the next 12 months, whereas a total 10% of companies are planning a reduction in their workforce.

The mean job growth was 2.5%, down from the 2.7% growth last year, but was fairly consistent across the entire middle market: companies between $10 – $50 million posted a 2.3% growth in employees, companies between $50 – $100 million posted a 2.1% growth in employees, and companies between $100 million – $1 billion posted 2.2% growth in employees.

Despite the mean job growth, 52% of companies reported the ability to attract, train, and retain talent as a key challenge currently facing their business. As more companies look for partners, rather than a simple infusion of capital, positioning your firm as an opportunity to bring new talent to the team could resonate strongly with the right company and CEO.

Federal Uncertainty Slows Action

Like deal professionals, middle market business owners are susceptible to the challenges of federal uncertainty. The leading concern for the entrepreneurial cohort is the Affordable Care Act (ACA). As the report explained, “The impact of healthcare legislation continues to be the largest concern, with 88% of all respondents saying that healthcare costs are at least somewhat challenging and more than half saying they are highly challenging.”

If not the ACA specifically, federal policy also fills business owners with uncertainty. According to the report, nearly 60% of middle market companies say that federal policy uncertainty has impacted their business planning. Because of the uncertainty, 63% of respondents indicated they are more likely to cut costs than hire new employees.

Other more general concerns include the ability to maintain margins (53%), the cost of doing business (59%), and the ability to expand into new markets domestically (54%). Understanding these current challenges can make for a more meaningful partnership.