PE owned mid-market revenue growth outstrips peers -study

As LPs like the California Public Employees’ Retirement System say they will focus on smaller funds, National Center for the Middle Market (NCMM) executive director Tom Stewart discusses the attractions and challenges of the mid-market.

Data published by the National Center for the Middle Market (NCMM) shows that mid-market companies owned by private equity generated more revenue growth over the past 12 months than their non-private equity-owned counterparts.

The revenues of mid-market companies owned by private equity grew by 9.09 percent over the past year, compared with 6.32 percent for non-private equity-owned companies.

The NCMM predicts revenue growth for the next 12 months for private equity-owned companies will be 5.36 percent, compared with 3.45 percent for non-PE-backed companies.

Of the 332 PE-backed companies surveyed on methods to seek innovation, 48 percent said they plan on hiring new talent, 39 percent indicated they would pursue research and 22 percent said they plan on making acquisitions.

Following statements from large limited partners such as the New York State Retirement System and the California Public Employees’ Retirement System that they will focus on smaller funds, NCMM executive director Tom Stewart discusses the attractions and challenges of the mid-market.

Q. Why do you think bigger funds and their limited partners are looking at the mid-market now?

A. It could well be that LPs are not seeing returns at the financial engineering kind of deal-making levels so they’re going to the people who are producing solid organic growth.

It makes sense considering that’s where the growth is. With every recovery, the rate of growth flattens over time; it’s the law of large numbers.

So, if that’s the case, then tailwinds are going to be less powerful and you’re going to have to generate your own growth rather than [rely on] macroeconomic growth. And in that case, you would want to shift your portfolio to the fastest growing parts of the economy and those would be in the middle, particularly because you minimise the risk. It makes sense that you would want to go to a smaller size [fund] with fast-growing companies.

Q. What, other than organic growth, could be a factor in making the mid-market attractive to investors?

A. Mid-market companies’ preferred mode of financing growth is retained earnings. It’s an interesting sector and they’re conservative. They hold a lot of cash, I think both for offence and defence: offence because that’s how they want to buy or build a new plant, for example, and defence because if I’m in trouble, my line of credit may not be as good as a big company. Like a camel, I want to carry my own water through the desert. That’s sort of an interesting sweet spot.

The mean age of the mid-market company is 31, so it’s a generation and a half old. They’ve been around, they have resilience, they’ve got financial discipline and maybe could be more aggressive in reaching out for opportunity. It’s a nice target.

And the mid-market has been steadily paying down debt. They don’t like debt: we asked, what’s your ideal level of debt? They said, none.

Q. What challenge(s) does the middle market face?

A. Talent is an interesting example. We could grab 10 random people off the street and fill this wall with ‘what it’s like to work for Google.’ But what’s it like to work for a mid-market company? How do you create a great employee value proposition?

With these sorts of issues attracting talent in these areas, some mid-market companies feel that they’re at a disadvantage. Some others feel they actually make a great talent pool by taking people who hated working for the big guys and want to work for a CEO that knows their names, their children’s names.