Q2'17 MIDDLE MARKET INDICATOR ACG WEBINAR July 26, 2017 THE MARKET THAT MOVES AMERICA F I N D I N G S FROM T H E NCMM S Q2'17 I N D I C ATO R S U RV E Y 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
2 THE MIGHTY MIDDLE MARKET 2
THE NATIONAL CENTER FOR THE MIDDLE MARKET 3 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 Quarterly Middle Market Indicator Share Research & Discuss Trends EDUCATION Research and Expert Perspectives Executive Programs Interactive Benchmarking Tools Webinars www.middlemarketcenter.org 3
THE MIDDLE MARKET INDICATOR 4
MIDDLE MARKET INDICATOR OVERVIEW A Quarterly National Survey Cut by Geography and Industry 5
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 1 2 THE MIDDLE MARKET CONTINUES WITH RECORD HIGH JOB CREATION AND REVENUE GROWTH, FUELED IN PART BY A SURGE IN M&A ACTIVITY 3 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 4 Source: 2Q 17 Middle Market Indicator Report 6
Q2'17 U.S. MIDDLE MARKET EXECUTIVE SUMMARY REVENUE GROWTH 6.7% PAST 12 MONTHS EMPLOYMENT GROWTH 5.7% PAST 12 MONTHS CAPITAL INVESTMENT CONFIDENCE 70% GLOBAL ECONOMY 4.75% S&P 500 5.3% NEXT 12 MONTHS 1.3% SMALL BUSINESS 2.5% LARGE BUSINESS 4.7% NEXT 12 MONTHS 67% WILL INVEST 84% NATIONAL ECONOMY 87% LOCAL ECONOMY Source: 2Q 17 Middle Market Indicator Report 7
Q2'17 MIDDLE MARKET INDICATOR REVENUE GROWTH PAST 12 MONTHS 16.0% 6.7 % U.S. MIDDLE MARKET 9.5 % PE-OWNED FIRMS 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 4.75 % S&P 500* 0.0% -2.0% -4.0% -6.0% Source: 2Q 17 Middle Market Indicator Report *2Q numbers include only companies who have reported. Series2 Series1 Series3 8
THE RISING TIDE CONTINUES TO LIFT ALMOST ALL BOATS 2Q 2017 2Q 2016 Performance improved Performance was unchanged Performance deteriorated 65% 64% 30 30 5 6 Source: 2Q 17 Middle Market Indicator Report 9
Q2'17 MIDDLE MARKET INDICATOR INDUSTRY REVENUE GROWTH Source: 2Q 17 Middle Market Indicator Report 10
Q2'17 MIDDLE MARKET INDICATOR REVENUE GROWTH FORECAST NEXT 12 MONTHS 5.3 % U.S. MIDDLE MARKET 16.0% 14.0% 12.0% 10.0% 4.7 % PE-OWNED FIRMS 8.0% 6.0% 4.0% 2.0% 0.0% Source: 2Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET PE-OWNED 11
Q2'17 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH PAST 12 MONTHS 5.7 % U.S. MIDDLE MARKET 14.0% 12.0% 10.0% 1.3% SMALL BUSINESS 2.5% LARGE BUSINESS 8.0% 6.0% 6.7 % PE-OWNED FIRMS 4.0% 2.0% 0.0% Source: 2Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET SMALL LARGE PE-OWNED FIRMS 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 NEXT 12 MONTHS 4.7 % U.S. MIDDLE MARKET 6.8 % PE-OWNED FIRMS 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: 2Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET PE-OWNED FIRMS 14
CONFIDENCE, INVESTMENT PLANS, AND CHALLENGES 15
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 Q2'17 MIDDLE MARKET INDICATOR ECONOMIC CONFIDENCE Confidence Remains Strong Across the Board 90% 80% 70% 60% 50% 40% 30% 20% GLOBAL ECONOMY 70% 85% PE-OWNED U.S. ECONOMY 84% 89% PE-OWNED LOCAL ECONOMY 87% 91% PE-OWNED GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY Source: 2Q 17 Middle Market Indicator Report 16
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 Q2'17 MIDDLE MARKET INDICATOR CAPITAL INVESTMENT PLANS Firms Plan to Invest 80% 75% 70% 65% 60% 55% 50% 45% 40% Source: 2Q 17 Middle Market Indicator Report PE-OWNED U.S. MIDDLE MARKET 17
COMPANIES FEEL COSTS ARE UNDER CONTROL AND PROFIT MARGINS SAFE 20% Expected Change in Profit Margins Cost Structure 15% 10% 5.9% 5% 2.6% 2.4% 2.5% 2.8% 3.1% 2.4% 2.6% 1.9% 2% 2.6% 3.1% 3.4% 4.3% 3.2% 0% 0% 2014 1Q 1.3% 2014 2Q 2.2% 2.3% 2.3% 2014 3Q 2014 4Q 2015 1Q 1.7% 1.6% 2015 2Q 2015 3Q 1.2% 1.1% 2015 2016 4Q 1Q 2.3% 2.1% 2.1% 2016 2Q 2016 3Q 2016 4Q 2017 1Q 2% 2017 2Q
Q2'17 MIDDLE MARKET INDICATOR CHALLENGES BUSINESS AND STAFF/EMPLOYEES ARE TOP OF MIND FOR MIDDLE MARKET LEADERS BUSINESS 67% STAFF/EMPLOYEES 50% STAFF/EMPLOYEES COSTS 29% 57% BUSINESS COSTS 19% 43% BUSINESS GOVERNMENT 37% 29% BUSINESS GOVERNMENT 31% 27% COMPETITION 22% COMPETITION 18% COSTS ECONOMY 16% 12% COSTS 15% ECONOMY 10% Source: 2Q 17 Middle Market Indicator Report 19
LEADERSHIP SKILLS: WHAT FAST GROWING COMPANIES DO BEST Performance on Leadership Skills (One of Strengths) 10%+ 5% - <10% Growth Rate 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 -- 20 Source: 2Q 17 Middle Market Indicator Report
LEADERSHIP SKILLS: WHAT FAST GROWING COMPANIES NEED MOST Top Leadership Skills Needed (Ranked 1 st -5 th ) 10%+ 5% - <10% Growth Rate 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 -- Source: 2Q 17 Middle Market Indicator Report 21
7 DEAL MAKING: APPETITES AND OBSTACLES 22
THE APPETITE FOR M&A IS ROBUST ESPECIALLY AMONG PE-OWNED FIRMS LIKELIHOOD OF MAKING M&A DEALS IN NEXT 12 MONTHS 38% 53% 32% 38% 38% Total MM PE Not PE Family Not Family 43% 33% 39% 41% 38% 35% 39%
BUYERS SEEK CUSTOMERS, PRODUCTS, TALENT, AND SCALE IMPORTANT WHEN DECIDING TO MAKE ACQUISITION (RANKED 1 ST / 2 ND /3 RD ) PE Not PE Family Not Family Add new markets and customers 34% 68% 64 71 68 68 Diversify product or service portfolio 13% 45% 41 48 45 45 Acquiring new talent/leadership 11% 42% 52 34 37 44 Acquiring a technology, patent, or product 7% 36% 31 38 29 40 Achieving economies of scale 9% 32% 38 28 33 31 Consolidating the competition 7% 30% 21 37 29 31 Acquiring a brand 12% 29% 35 24 41 21 Utilizing liquidity 6% 19% 17 20 18 19 Ranked 1st Ranked 1st/2nd/3rd
SELLERS ARE MOTIVATED BY SUCCESSION AND PROFITABILITY IMPORTANT WHEN DECIDING TO MERGE OR SELL (RANKED 1 ST ) Succession or retirement issues Opportunity to sell at an attractive price Total MM 20% 19% PE Not PE Family Not Family 14 25 40 7 18 20 11 25 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 18% 13% 12% 10% 7% 13 22 18 18 20 8 17 11 13 12 54 18 12 9 5 14 10 5 5 9
COMPANIES ON THE SIDELINES EMPHASIZE PROFITS, ORGANIC GROWTH REASONS NOT LIKELY TO MAKE M&A PE Not PE Family Not Family We are focused on increasing profitability Our strategy is to grow organically at this time There are no attractive opportunities out there 24% 37% 35% 38 37 39 36 38 34 35 36 22 25 26 23 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) 11% 9% 6% 10 11 7 13 15 7 8 10 5 7 5 7 Other 3% 1 4 3 3
WHAT S MOST CONFUSING: STRATEGY, FINDING THE RIGHT PARTNER MOST CONFUSING ASPECT Total MM PE Not PE Family Not Family Getting the strategy right 38% 40 38 35 41 Finding the right target or the right buyer 36% 34 37 37 35 Post-merger integration 22% 24 21 16 25 Valuations too high to consider buying 20% 22 19 23 19 Valuations too low to consider selling 12% 16 10 11 12 Other 7% 8 6 8 6
WHAT S MOST CHALLENGING: PARTNER AND PRICE Issues with M&A PE Not PE Family Not Family 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 45% 44% 35% 32% 30% 28% 24% 21% 16% 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 Other 1% 1 1 1 1
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