When we set out to study the US mid-market eight years ago, we knew it was important; it accounts for a third of private GDP, so it must be. What we didn’t fully understand is that the 200,000 companies with revenues of $10 million-$1 billion that make up the mid-market are the most dynamic part of the US economy, too. They account for about 60 percent of job growth, they consistently deliver top-line growth that’s higher than big or small companies, and they’re resilient. They have survival rates comparable with big companies and a lot more runway for growth.
Just in the last 12 months, for example, mid-market company revenue grew on average 8.5 percent, compared with 2.2 percent for the companies in the S&P 500. That’s a bigger than usual difference, but it’s the kind of thing we see every quarter when we measure mid-market performance.
The employment picture is similar: 6.4 percent for mid-market, 1.0 percent for small business, and 2.3 percent for big business. We estimate that over the last eight years, mid-market companies have delivered about 60 percent of net new private sector jobs.
But this story is relatively little known. Partly that is because 85 percent of mid-market companies are private, so there are few stock market stories to tell. Big business titans and upstart entrepreneurs get all the news ink, while family businesses and private equity firms often stay below the radar, doing the work.
Private equity plays a substantial role in the mid-market. More than a quarter of the mid-market has PE ownership, and those companies do very well. According to our data, mid-sized companies in private equity portfolios grow about one-and-a-half or two percentage points faster than the mid-market as a whole and add jobs at a similarly higher rate. Indeed, private equity is itself a contributor to the dynamism of the mid-market.
Mid-market private equity investors tend to be more interested in sponsoring growth than in financial engineering. Private equity plays a role in many family business transitions, or it comes in to help a strong company scale faster than it otherwise would. Private equity isn’t just present in the mid-market; it makes its presence felt.
Signs of change
Will the mid-market continue to post these extraordinary gains in revenue and employment? Like everyone else, we have been poring over data trying to understand whether this long economic expansion will continue, flatten, or fade. Our Middle Market Indicator, which surveys 1,000 executives each quarter, gives us a unique view into what these leaders are seeing, saying and doing.
They see strong results, but also storm clouds. The revenue figures we cited above are near-record numbers. Only a handful of companies – about one in 20 – say business is deteriorating. On the downside, tariffs are hurting retailers, wholesalers and most manufacturers, and a small but growing number say the business climate is deteriorating and demand is weakening. But overall, business is good.
They say they’re going to be cautious. Mid-market executives are prudent, pay-as-you-go types even in the best of times, but their wariness is growing. Every quarter, we ask executives what they would do with an extra dollar: whether they would invest it or save it. In the last six months, the number who say they would put it by has jumped from 29 percent to 37 percent. Private equity-owned companies are even more savings oriented. They also say that their confidence in the economy, while strong, is not as strong as it was a year ago.
But what they do has not changed, not at this point. For example, in the last 12 months, 19 percent added a new plant or facility. Over the previous four quarters, that number was 17 percent, 21 percent, 20 percent and 20 percent. Looking forward, executives’ expansion plans (to enter new markets, open new facilities, and introduce new products or services) are actually more aggressive than they were last year or the year before that.
What do these insights tell us about the economy? The physicist Niels Bohr joked: “It is very hard to predict, especially the future,” but in the next quarter we’ll be looking closely at three areas. The first is hiring.
As a rule, mid-market companies hire in response to growth rather than in anticipation of it. They always forecast fewer job increases than they make. A year ago, for example, they predicted a 4.8 percent increase in headcount, but delivered 6.4 percent. If companies start hewing to their forecasts and holding the line on hiring, that will be a sign that business is slowing down. The second is investment: Will the aggressive expansion plans stay in place? Or will leaders delay, diminish, or discontinue them?
The third number we will watch closely is the mix of winners and losers. In the last 12 months, 68 percent said overall performance improved, 26 percent said it was unchanged and 6 percent said it deteriorated. In the last two quarters, we’ve seen about a five-point shift from ‘improved’ to ‘unchanged’, but the ‘deteriorated’ number has stayed essentially the same. An increase in that number would be worrisome. Partly cloudy or partly sunny, it’s hard to know what the business forecast should be. That mixed message has implications for PE firms. First, don’t let economic ambiguity tie your hands. Uncertainty paralyses the unprepared, but it should energise the educated. There is no bad time to buy good companies; capital is cheap; and some sellers may be more anxious than they should be.
Second, an unsettled economic environment increases the value of the rigorous, data-driven management that the best PE firms bring to companies in their portfolios. We don’t mean loading companies down with debt, rather, more hard-nosed working capital management and more emphasis on lean operations; all the blocking and tackling of good, efficiency-oriented management, will be even more valuable if the economy falters. In rough seas, you want a tight ship.