Pressure on Upper Middle Market Growth?
In The DNA of Middle Market Growth, published in 2018, the Center
conducted an analysis of five years of Middle Market Indicator data.
We were able to isolate seven growth drivers—market expansion,
formal growth strategy, innovating and investing, attracting and
retaining talent, financial management, cost efficiencies, and staff
development—and weight their impact on company growth. In
addition, from work we did for the 2Q 2019 MMI, we are able to
isolate the effect of M&A on overall company growth. Putting those
factors together, we can roughly gauge how changes in company
investments will affect future growth.
The middle market’s pullback from international expansion is likely to
have the biggest impact. A 33% decline in the likelihood of entering new
foreign markets (compared to a year ago) will take one percentage point
of growth away from the middle market—a substantial decline. That is
unevenly distributed, of course: Wholesalers and manufacturers, more
exposed to global markets in the first place, are more likely to reduce
investment overseas and to see their growth slow as a result. So are
companies in the upper middle market (those with revenues between
$100 million and $1 billion).
The reduction in M&A plans—about 18% from a year ago—has less
impact on overall middle market growth than one might expect.
About one-tenth of the middle market’s 7.5% growth in the last
year was inorganic. Cutting M&A by a fifth would, therefore, drop
growth to about 7.3%, all else being equal. But that impact, too, falls
unevenly. In the upper middle market, M&A accounts for about 15%
of top-line growth.
Now, the bigger a middle market company is, the more likely it is
to be global and the more likely it is to make acquisitions. In all
likelihood, those two factors have depressed the performance of
the upper middle market in this quarter. At 6.7%, its growth is,
unusually, well below the growth of the lower (8.0%) and core (8.2%)
middle market. If executives stick to their plans to slow international
expansion and acquire less, these decisions will continue to weigh
on the results of upper middle market firms.