THE MARKET THAT MOVES AMERICA FINDINGS FROM THE NCMM’S Q2'17 INDICATOR SURVEY Thomas A. Stewart, Executive Director The National Center for the Middle Market Q2'17 MIDDLE MARKET INDICATOR | ACG WEBINAR | July 26, 2017
THE MARKET THAT MOVES AMERICA FINDINGS FROM THE NCMM’S Q2 '17 INDICATOR SURVEY T h o m a s A . S t e w a r t , E x e c u t i v e D i r e c t o r T h e N a t i o n a l C e n t e r f o r t h e M i d d l e M a r k e t
Q2'17 MIDDLE MARKET INDICATOR | ACG WEBINAR | July 26, 2017
THE MIGHTY MIDDLE MARKET
2
2
THE NATIONAL CENTER FOR THE MIDDLE MARKET
www.middlemarketcenter.org
The National Center for the Middle Market is a collaboration between The Ohio State University’s Fisher
College of Business, SunTrust Banks Inc., Grant Thornton, and Cisco Systems. It exists for a single
purpose: to ensure that the vitality and robustness of Middle Market companies are fully realized as
fundamental to our nation’s economic outlook and prosperity. The Center is the leading source of
knowledge, leadership, and innovative research on the middle market economy, providing critical data
analysis, insights, and perspectives for companies, policymakers, and other key stakeholders, to help
accelerate growth, increase competitiveness and create jobs in this sector.
MIDDLE MARKET RESEARCH & DATA EXPERTISE & OUTREACH
EDUCATION
Quarterly Middle Market Indicator
Research and Expert Perspectives
Interactive Benchmarking Tools
Executive Programs
Webinars
Share Research & Discuss Trends
3
3
THE MIDDLE MARKET INDICATOR
4
MIDDLE MARKET INDICATOR
OVERVIEW
5
A Quarterly National Survey Cut by Geography and Industry
Q2'17 MIDDLE MARKET INDICATOR
EXECUTIVE SUMMARY
• FOLLOWING A RECORD-SETTING FIRST QUARTER, THE MIDDLE
MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN REVENUE
GROWTH AND JOB CREATION
• THE MIDDLE MARKET CONTINUES WITH RECORD HIGH JOB
CREATION AND REVENUE GROWTH, FUELED IN PART BY A SURGE
IN M&A ACTIVITY
• EXPECTATIONS FOR GROWTH AND JOB CREATION IN THE COMING
YEAR ARE ALSO STRONG
• CONFIDENCE IN THE U.S. AND LOCAL ECONOMIES HIT RECORD
HIGHS; GLOBAL CONFIDENCE HAS REBOUNDED
Source: 2Q’17 Middle Market Indicator Report
1
2
3
4
6
Q2'17 U.S. MIDDLE MARKET
EXECUTIVE SUMMARY
CAPITAL INVESTMENT
67% WILL INVEST
CONFIDENCE
70% GLOBAL ECONOMY
84% NATIONAL ECONOMY
87% LOCAL ECONOMY
REVENUE GROWTH
6.7% PAST 12 MONTHS
5.3% NEXT 12 MONTHS
EMPLOYMENT GROWTH
5.7% PAST 12 MONTHS
4.7% NEXT 12 MONTHS
1.3% SMALL BUSINESS
2.5% LARGE BUSINESS
Source: 2Q’17 Middle Market Indicator Report 7
4.75% S&P 500
Q2'17 MIDDLE MARKET INDICATOR
REVENUE GROWTH
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Series2 Series1 Series38
Source: 2Q’17 Middle Market Indicator Report
*2Q numbers include only companies who have reported.
PAST 12 MONTHS
6.7% U.S. MIDDLE MARKET
9.5% PE-OWNED FIRMS
4.75% S&P 500*
THE RISING TIDE CONTINUES TO LIFT
ALMOST ALL BOATS
Source: 2Q ‘17 Middle Market Indicator Report
9
2Q 2017 2Q 2016
Performance improved
65% 64%
Performance was unchanged
30 30
Performance deteriorated
5 6
Q2'17 MIDDLE MARKET INDICATOR
INDUSTRY REVENUE GROWTH
Source: 2Q’17 Middle Market Indicator Report
10
Q2'17 MIDDLE MARKET INDICATOR
REVENUE GROWTH FORECAST
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
U.S. MIDDLE MARKET PE-OWNED
5.3% U.S. MIDDLE MARKET
4.7% PE-OWNED FIRMS
NEXT 12 MONTHS
Source: 2Q’17 Middle Market Indicator Report 11
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
U.S. MIDDLE MARKET LARGE
SMALL PE-OWNED FIRMS
PAST 12 MONTHS
5.7% U.S. MIDDLE MARKET
6.7% PE-OWNED FIRMS
Q2'17 MIDDLE MARKET INDICATOR
EMPLOYMENT GROWTH
1.3% SMALL BUSINESS
2.5% LARGE BUSINESS
Source: 2Q’17 Middle Market Indicator Report 12
Q2'17 MIDDLE MARKET INDICATOR
INDUSTRY EMPLOYMENT GROWTH
Source: 2Q’17 Middle Market Indicator Report 13
Q2'17 MIDDLE MARKET INDICATOR
EMPLOYMENT GROWTH FORECAST
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
U.S. MIDDLE MARKET PE-OWNED FIRMS
4.7% U.S. MIDDLE MARKET
6.8% PE-OWNED FIRMS
NEXT 12 MONTHS
Source: 2Q’17 Middle Market Indicator Report 14
CONFIDENCE, INVESTMENT PLANS,
AND CHALLENGES
15
Q2'17 MIDDLE MARKET INDICATOR
ECONOMIC CONFIDENCE
16
20%
30%
40%
50%
60%
70%
80%
90%
1Q
'12
2Q
'12
3Q
'12
4Q
'12
1Q
'13
2Q
'13
3Q
'13
4Q
'13
1Q
'14
2Q
'14
3Q
'14
4Q
'14
1Q
'15
2Q
'15
3Q
'15
4Q
'15
1Q
'16
2Q
'16
3Q
'16
4Q
'16
1Q
'17
2Q
'17
GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY
U.S. ECONOMY
84% 89% PE-OWNED
LOCAL ECONOMY
87% 91% PE-OWNED
GLOBAL ECONOMY
70% 85% PE-OWNED
Source: 2Q’17 Middle Market Indicator Report
_____________________________________
Confidence Remains Strong Across the Board
Q2'17 MIDDLE MARKET INDICATOR
CAPITAL INVESTMENT PLANS
40%
45%
50%
55%
60%
65%
70%
75%
80%
1Q
'12
2Q
'12
3Q
'12
4Q
'12
1Q
'13
2Q
'13
3Q
'13
4Q
'13
1Q
'14
2Q
'14
3Q
'14
4Q
'14
1Q
'15
2Q
'15
3Q
'15
4Q
'15
1Q
'16
2Q
'16
3Q
'16
4Q
'16
1Q
'17
2Q
'17
PE-OWNED U.S. MIDDLE MARKETSource: 2Q’17 Middle Market Indicator Report
_________________
Firms Plan to Invest
17
COMPANIES FEEL COSTS ARE UNDER
CONTROL AND PROFIT MARGINS SAFE
0% 1.3%
2.5% 2.8% 3.1% 2.4% 2.6%
1.9% 2% 2.6%
3.1% 3.4%
5.9%
3.2% 2.6% 2.4%
2.2% 2.3% 2.3% 1.7% 1.6% 1.2% 1.1%
2.3% 2.1% 2.1%
4.3%
2% 0%
5%
10%
15%
20%
20141Q
20142Q
20143Q
20144Q
20151Q
20152Q
20153Q
20154Q
20161Q
20162Q
20163Q
20164Q
20171Q
20172Q
Profit Margins Cost Structure
Expected Change in
Q2'17 MIDDLE MARKET INDICATOR
CHALLENGES
BUSINESS AND STAFF/EMPLOYEES ARE TOP OF MIND FOR MIDDLE MARKET LEADERS
Source: 2Q’17 Middle Market Indicator Report 19
37%
29%
22%
16%
12%
BUSINESS
GOVERNMENT
COMPETITION
COSTS
ECONOMY
67%
57%
29%
BUSINESS
STAFF/EMPLOYEES
COSTS
STAFF/EMPLOYEES
BUSINESS
COSTS 19%
43%
50%
BUSINESS
GOVERNMENT
COMPETITION
COSTS
ECONOMY 10%
15%
18%
27%
31%
LEADERSHIP SKILLS: WHAT FAST
GROWING COMPANIES DO BEST
Source: 2Q’17 Middle Market Indicator Report
20
Performance on Leadership Skills (One of Strengths)
Growth Rate
10%+
5% -
<10%
1% -
<5% 0%
Negativ
e
Setting strategic direction 23 33 24 24 21
Driving planning and execution 32 32 38 41 31
Developing talent 35 19 26 15 8
Communication 34 41 25 39 30
Delegating / empowering the team 39 42 28 33 16
Balancing risk and opportunity 26 30 35 44 37
Communicating vision and values 36 20 30 19 21
Creating a sustainable enterprise 23 27 42 23 21
Sharpening customer focus 41 33 14 22 21
Sparking innovation 40 20 17 15 13
Strengthening emotional intelligence 26 10 17 23 56
Encouraging diversity 27 34 15 25 --
Other -- -- 69 100 --
LEADERSHIP SKILLS: WHAT FAST
GROWING COMPANIES NEED MOST
Source: 2Q’17 Middle Market Indicator Report 21
Top Leadership Skills Needed (Ranked 1st-5th)
Growth Rate
10%+
5% -
<10%
1% -
<5% 0% Negative
Setting strategic direction 58 69 65 56 55
Driving planning and execution 54 56 59 54 73
Developing talent 53 55 58 57 52
Communication 52 46 58 49 51
Delegating / empowering the team 52 46 53 58 40
Balancing risk and opportunity 48 49 45 48 61
Communicating vision and values 46 52 41 41 61
Creating a sustainable enterprise 32 38 35 44 41
Sharpening customer focus 32 27 25 34 36
Sparking innovation 32 34 32 23 20
Strengthening emotional intelligence 19 17 14 17 7
Encouraging diversity 22 12 13 16 3
Other 1 -- 1 3 --
DEAL MAKING:
APPETITES AND OBSTACLES
7
22
THE APPETITE FOR M&A IS ROBUST—
ESPECIALLY AMONG PE-OWNED FIRMS
38%
53%
32% 38% 38%
Total MM PE Owned Not PE Owned Family Owned Not Family Owned
LIKELIHOOD OF MAKING M&A DEALS IN NEXT 12 MONTHS
43% 33% 39% 41% 38% 35% 39%
BUYERS SEEK CUSTOMERS, PRODUCTS,
TALENT, AND SCALE
24
IMPORTANT WHEN DECIDING TO MAKE ACQUISITION (RANKED 1ST/ 2ND/3RD)
Add new markets and customers
Diversify product or service portfolio
Acquiring new talent/leadership
Acquiring a technology,
patent, or product
Achieving economies of scale
Consolidating the competition
Acquiring a brand
Utilizing liquidity
PE
Owned
Not PE
Owned
Family
Owned
Not
Family
Owned
64 71 68 68
41 48 45 45
52 34 37 44
31 38 29 40
38 28 33 31
21 37 29 31
35 24 41 21
17 20 18 19
Ranked 1st Ranked 1st/2nd/3rd
34%
13%
11%
7%
9%
7%
12%
6%
68%
45%
42%
36%
32%
30%
29%
19%
SELLERS ARE MOTIVATED BY
SUCCESSION AND PROFITABILITY
25
PE
Owned
Not PE
Owned
Family
Owned
Not Family
Owned
14 25 40 7
18 20 11 25
13 22 18 18
20 8 17 11
13 12 54 18
12 9 5 14
10 5 5 9
IMPORTANT WHEN DECIDING TO MERGE OR SELL (RANKED 1ST)
20%
19%
18%
13%
12%
10%
7%
Succession or retirement issues
Opportunity to sell at an
attractive price
Competition
Focus on core, sell off non-core
business
Declining revenue or
profitability
Becoming part of a larger/more
recognized brand
Access to deeper pockets, more
capital
Total MM
COMPANIES ON THE SIDELINES
EMPHASIZE PROFITS, ORGANIC GROWTH
26
REASONS NOT LIKELY TO MAKE M&A
37%
35%
24%
11%
9%
6%
3%
We are focused on
increasing profitability
Our strategy is to grow
organically at this time
There are no attractive
opportunities out there
We don’t have access
to capital for M&A
We are still digesting
recent M&A activity
We are constrained from M&A
by other factors (e.g. regulation,
industry structure)
Other
PE
Owned
Not PE
Owned
Family
Owned
Not Family
Owned
38 37 39 36
38 34 35 36
22 25 26 23
10 11 7 13
15 7 8 10
5 7 5 7
1 4 3 3
WHAT’S MOST CONFUSING: STRATEGY,
FINDING THE RIGHT PARTNER
27
MOST CONFUSING ASPECT
38%
36%
22%
20%
12%
7%
Getting the strategy right
Finding the right target or
the right buyer
Post-merger integration
Valuations too high to
consider buying
Valuations too low to
consider selling
Other
Total MM PE
Owned
Not PE
Owned
Family
Owned
Not
Family
Owned
40 38 35 41
34 37 37 35
24 21 16 25
22 19 23 19
16 10 11 12
8 6 8 6
WHAT’S MOST CHALLENGING:
PARTNER AND PRICE
28
PE
Owned
Not PE
Owned
Family
Owned
Not
Family
Owned
39 48 49 42
39 47 34 50
37 34 42 31
32 31 26 35
30 29 28 31
32 25 22 32
29 21 34 18
26 18 12 27
24 11 19 15
1 1 1 1
Issues with M&A
45%
44%
35%
32%
30%
28%
24%
21%
16%
1%
Finding the right partners
Achieving the right valuation
Protecting/considering employees
Maintaining culture during the
integration
Tax considerations
Access to capital
Convincing owners (e.g.,
including family members)
Convincing the board or
leadership team
Finding the right advisors
Other
THE NCMM’S NEW CYBERSECURITY
RESOURCE CENTER
Dedicated to helping middle market companies
manage cyber risks
http://cybersecuritycenter.middlemarketcenter.org/
MIDDLEMARKETCENTER.ORG 30