Q3'17 MIDDLE MARKET INDICATOR ACG WEBINAR October 25, 2017 THE MARKET THAT MOVES AMERICA FINDINGS FROM THE NCMM S Q3'17 INDICATOR SURVEY Thomas A. Stewart, Executive Director The National Center for the Middle Market
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
Q3'17 MIDDLE MARKET INDICATOR EXECUTIVE SUMMARY THE MIDDLE MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN REVENUE GROWTH AND JOB CREATION, WITH GROWTH ABOVE HISTORICAL AVERAGES 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 REMAIN NEAR RECORD HIGHS; GLOBAL CONFIDENCE HAS REBOUNDED 4 Source: 3Q 17 Middle Market Indicator Report 6
Q3'17 U.S. MIDDLE MARKET EXECUTIVE SUMMARY SURVEY IN FIELD SEPT. 4-15, 2017 REVENUE GROWTH 7.0% PAST 12 MONTHS EMPLOYMENT GROWTH 6.4% PAST 12 MONTHS CAPITAL INVESTMENT CONFIDENCE 74% GLOBAL ECONOMY 4.37% S&P 500 6.0% NEXT 12 MONTHS 1.2% SMALL BUSINESS 2.8% LARGE BUSINESS 4.7% NEXT 12 MONTHS 70% WILL INVEST 83% NATIONAL ECONOMY 88% LOCAL ECONOMY Source: 3Q 17 Middle Market Indicator Report 7
Q3'17 MIDDLE MARKET INDICATOR REVENUE GROWTH PAST 12 MONTHS 16.0% 7.0 % U.S. MIDDLE MARKET 9.3 % PE-OWNED FIRMS 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 4.37 % S&P 500* 0.0% -2.0% -4.0% -6.0% Source: 3Q 17 Middle Market Indicator Report *3Q numbers include only companies who have reported. U.S. MIDDLE MARKET S&P 500 PE-OWNED 8
PERFORMANCE GAINS ARE WIDE AND DEEP 3Q 2017 3Q 2016 Performance improved Performance was unchanged Performance deteriorated 68% 60% 27 34 5 6 Source: 3Q 17 Middle Market Indicator Report 9
Q3'17 MIDDLE MARKET INDICATOR INDUSTRY REVENUE GROWTH 9.8% 7.0% 6.5% 6.5% 6.7% 6.1% 9.2% 4.9% 6.9% 9.2% 8.6% 5.3% 3.2% 2.9% 7.2% 5.8% Source: 3Q 17 Middle Market Indicator Report 10
Q3'17 MIDDLE MARKET INDICATOR REVENUE GROWTH FORECAST NEXT 12 MONTHS 6.0 % U.S. MIDDLE MARKET 16.0% 14.0% 12.0% 10.0% 7.9 % PE-OWNED FIRMS 8.0% 6.0% 4.0% 2.0% 0.0% Source: 3Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET PE-OWNED 11
Q3'17 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH PAST 12 MONTHS 6.4 % U.S. MIDDLE MARKET 14.0% 12.0% 10.0% 1.2% SMALL BUSINESS 2.8% LARGE BUSINESS 8.0% 6.0% 8.1 % PE-OWNED FIRMS 4.0% 2.0% 0.0% Source: 3Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET SMALL LARGE PE-OWNED FIRMS 12
Q3'17 MIDDLE MARKET INDICATOR INDUSTRY EMPLOYMENT GROWTH 7.3% 6.9% 5.7% 5.3% 4.8% 4.7% 6.3% 3.7% 5.2% 3.1% 7.5% 4.4% 9.1% 7.0% 5.3% 4.0% Source: 3Q 17 Middle Market Indicator Report 13
Q3'17 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH FORECAST NEXT 12 MONTHS 4.7 % U.S. MIDDLE MARKET 6.0 % PE-OWNED FIRMS 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: 3Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET PE-OWNED FIRMS 14
CONFIDENCE, INVESTMENT PLANS, AND CHALLENGES 15
Q3'17 MIDDLE MARKET INDICATOR ECONOMIC CONFIDENCE Confidence Is Very Strong Across the Board 90% 80% 70% 60% 50% 40% 30% 20% 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 3Q'17 GLOBAL ECONOMY 74% 76% PE-OWNED U.S. ECONOMY 83% 86% PE-OWNED LOCAL ECONOMY 88% 87% PE-OWNED GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY Source: 3Q 17 Middle Market Indicator Report 16
Q3'17 MIDDLE MARKET INDICATOR CAPITAL INVESTMENT PLANS Firms Plan to Invest 80% 75% 70% 65% 60% 55% 50% 45% 40% 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 3Q'17 Source: 3Q 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% 0% 2.5% 2.2% 2.3% 2.8% 3.1% 2.3% 2.4% 2.6% 1.9% 2% 1.7% 1.6% 1.2% 1.1% 2.6% 3.1% 3.4% 2.3% 2.1% 2.1% 4.3% 3.2% 3.2% 2% 2.8%
Q3'17 MIDDLE MARKET INDICATOR CHALLENGES BUSINESS AND STAFF/EMPLOYEES ARE TOP OF MIND FOR MIDDLE MARKET LEADERS BUSINESS STAFF/EMPLOYEES COSTS 22% 65% 59% STAFF/EMPLOYEE S BUSINESS COSTS 21% 51% 48% BUSINESS GOVERNMENT COMPETITION COSTS ECONOMY 25% 25% 18% 18% 41% BUSINESS GOVERNMENT 22% COMPETITION 22% ECONOMY 16% COSTS 14% 34% Source: 3Q 17 Middle Market Indicator Report 19
7 HELP WANTED: THE TALENT GAP 20
ACROSS THE COUNTRY, FIRMS REPORT HIRING DIFFICULTIES Share of U.S. employers reporting hiring difficulties 32% 45% Hiring and retaining qualified employees is the top concern for CFOs for the first time in 21 years over government policies, cost of benefits, economic uncertainty, data security. 2015 2016 Duke University Fuqua School of Business Quarterly Survey, Q2 2017 Source: Manpower Group, 2016-2017 Talent Shortage Survey, 2017. Career Builder estimate
MIDDLE MARKET COMPANIES FEEL THE TALENT PINCH INTENSELY 77% Of middle market executives consider the ability to attract, train, and retain talent somewhat/highly challenging. 49% Of middle market executives feel they do not have a sufficient number of people to fill key leadership positions. 31% Of middle market executives struggle to attract people for toplevel management positions. 37% Of middle market executives say that a lack of talent is constraining their growth. 22
ALMOST ALL INDUSTRIES FEEL TALENT-CONSTRAINED LACK OF TALENT CONSTRAINING ABILITY TO GROW Total Middle Market Services Wholesale Trade Retail Trade Manufacturing Construction Financial Services Health care Yes 37 46 44 20 29 46 33 49 No 63 54 56 80 71 54 67 51 Source: NCMM and Brookings: Help Wanted, 2017
THE TOP WORKFORCE CHALLENGES FOR MIDDLE MARKET COMPANIES Candidates lack necessary skills 44% Competition from other employers 40% Low number of applicants 39% Lack of work experience 32% Outside budget range 30% Lack needed credentials 25% Source: NCMM Middle Market Indicator 2Q 2017
THE SHARE OF JOBS REQUIRING HIGH AND MEDIUM SKILLS HAS SKYROCKETED Share of U.S. employment by digital skill level 5 40 30 48 55 23 2002 2016 Source:Brookings Low Medium High
MOST IN DEMAND: FULL-TIME OPERATIONS EMPLOYEES New Hires by Function Operations Marketing and sales IT Manufacturing Human resources Finance Other New Hires by Employee Type Full time Part time Hourly Contractor Temporary/seasonal Other 47% 36% 25% 21% 18% 8% 9% 10% 3% 3% 1% 69% 74% Source: NCMM Middle Market Indicator 2Q 2017
TALENT PLANNING AND ITS IMPORTANCE How Important? Total Middle Market 10%+ Growth How well and what impact Extremely/Very 71% 81% Somewhat 21% 15% Not very / Not at all 8% 4% How Well Done? A 14% 22% B 46% 47% C 28% 23% D 11% 6% F 2% 2% 69% 43% Source: NCMM Mastering Talent Planning 2017 27
FIVE STEPS COMPANIES CAN TAKE ON THEIR OWN Recruiting: Have an ongoing process (59% recruit only when they have an opening) Career pathing, mentoring: Set a process for advancement (only 39% do) Partner: Use educational and training organizations to upskill employees and find new ones (just 30% do) Only 35% of vacancies are filled from within Internships: Fewer than half of manufacturers offer, vs. 65% in healthcare Training: Build it into daily routines and work (45% train only when needed ) Source: NCMM and Brookings: Help Wanted, 2017 *Percentage of executives citing as one of top three challenges
BEYOND THE MIDDLE MARKET: FIVE WORKFORCE AGENDA ITEMS GING DUCATION MMIGRATION PIOIDS BERIZATION
MIDDLEMARKETCENTER.ORG 30