The mid-market: Glimpsing better days ahead

Covid-19 has left mid-market companies struggling like the rest, but the National Center for the Middle Market's Thomas A Stewart and Doug Farren see light at the end of the tunnel.

In the nine years we have been studying the US mid-market, never before has the economic environment presented the types of universal challenges seen with the covid-19 pandemic. As most of the world essentially shut down in late March 2020, mid-market companies felt the jolt pretty much across the board – sinking revenues, slashed payrolls, delayed investment, record-low confidence levels and unforeseen challenges.

Just in the past 12 months, for example, mid-market company revenue declined by 3.7 percent compared with growth of 7.5 percent in the same period a year earlier. That is the first time in the 33 Middle Market Indicator surveys conducted by the National Center for the Middle Market where there has been negative growth. But the pain has been felt across the entirety of the business world and, remarkably, the mid-market seems to have suffered less than others have. The S&P 500 took a much harder revenue hit; it shrank nearly 14 percent. The year-over-year employment picture is similar: -4.4 percent for the mid-market, -9.1 percent for small business and -10 percent for big business.

Positive signs

Nevertheless, this story offers some positive signs for recovery. Mid-market companies have taken a gut punch but are starting to dust themselves off and think about how to get back to the work of driving the US economy. Recall that 85 percent of these companies are privately held. Within those are substantial portions of family businesses as well as private equity-owned companies. As we have seen in the past, a certain resilience will drive most of these companies forward.

Private equity plays a substantial role in the mid-market. More than a quarter of the mid-market has private equity ownership – and those companies are doing somewhat better. According to our data, average revenue at mid-sized companies in private equity portfolios declined almost three full percentage points less than non-private equity-owned companies. They were also more aggressive in reducing headcount, with an average decline of 5.7 percent in the previous 12 months. 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 is not just present in the mid-market; it makes its presence felt.

Determined leadership

What causes the mid-market to think positively despite these terrible results from the pandemic? The NCMM has a strong historical data set at our disposal and has a proxy for the attitudes and actions of these companies coming out of the financial crisis of 2008-09. Make no mistake, these are much different circumstances than a decade prior, but through our regular survey of 1,000 executives across the country, we can see evidence of a determination to get back on track.

First is the overall resilience of mid-market companies. Despite record-low levels of economic confidence, just 17 percent of executives expect next quarter’s sales to be down. Demand for products and services is estimated to be essentially flat from the prior 18 months. Overall, the expected time to get back to full operating capacity is over six months, but there is light at the end of the tunnel. A potential obstacle is access to capital – just 38 percent say getting the capital they need is easy, compared with 53 percent one year ago.

Second is the benefit of planning and preparedness to lessen impacts and potentially speed recovery efforts. Companies with “excellent” or “good” long-term growth strategies in place are about half as likely to have had a low impact as those less planful. Similarly, companies focused on human capital and talent retention are much less likely to say the pandemic has hit them hard. The same holds true for companies that have invested for the future and develop the right planning processes to react and pivot accordingly. These so-called core equities can vary among those with private equity investment and those without.

Third is the intent to not simply recover, but to change the approach of the business. For example, 27 percent of companies report that the pandemic has had a positive impact on their digital transformation efforts. This is far different than the negative impact in areas such as capital spending (42 percent negative) and growth initiatives (52 percent negative). Businesses also cite the focus on employee communication and engagement as well as long-term changes to customer relationship management as other changes expected to occur in their internal DNA.

These capabilities and characteristics will make it easier to travel the uncertain and challenging road ahead. The mid-market as a whole expects top-line growth of 2 percent in the coming year, while those with private equity investment are even more optimistic with a forecast of 3.4 percent. Private equity-owned companies also expect to be bringing more people back to work, forecasting a slight 0.7 percent employment uptick in the next twelve months, compared with -0.2 percent for the mid-market as a whole. Overall, about a third of the mid-market is much more likely to face a restructuring, and about a quarter expect a transition of senior leadership.

In the challenging times the world has faced, the mid-market has shown that while it is not immune to the external economic challenges facing businesses today, it has the fortitude and confidence to dig out of the abyss towards a brighter future ahead.