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Growth is the name of the game for middle market companies in 2015

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Growth is the name of the game for middle market companies in 2015

“Opening the throttle” for growth.

If we are to believe middle market leaders, happy days are here again.

According to a recent survey by Deloitte Growth Enterprise Services, middle market leaders are ready to “open the throttle” by investing in growth-related initiatives including M&A, investment in technology, and increased hiring.

“We’ve not only seen the highest level of confidence in the economy from these executives since we started the survey back in 2011,” says Roger Nanney, Vice Chairman of Deloitte and national managing leader for Deloitte Growth Enterprise Services, “but maybe more importantly we see a lot more action in terms of steps companies are taking to begin to take advantage of this optimism, both in terms of growing their businesses and investing for the future.”

The results of the survey are indeed impressive.  Reflecting some of the broader, positive economic headlines recently – GDP growth, employment levels, consumer spending and consumer confidence – middle market executives are clearly pumped up and ready to ride the wave of good feelings.

For instance, more than half of those surveyed expect their growth in 2015 to exceed 10%.  Perhaps more startling is that fully 24% believe year-on-year growth will exceed 26% or higher. Given the struggles and uncertainty of the last 6 years, it would appear that dawn has finally broken and it’s “morning in America” again.

That last phrase isn’t unintentional, by the way.  Middle market companies are clearly focused primarily on domestic growth, with 94% of growth during 2014 being generated within the US.

Fully 24% believe year-on-year growth will exceed 26% or higher.

“I think we can expect from the mid-market a continued focus on the US,” Nanney says. “It’s pretty clear when you sort through the survey and look at the trends of the surveys over the last several years.

“However, having said that, one of the things that you see in the survey as well is that mid-market executives do tend to look at the global environment and the global economy as an opportunity.”

The domestic focus makes sense, at least in terms of broader global economic trends.  For instance, both the World Bank and the International Monetary Fund have reduced their forecasts for global growth significantly…with the US being essentially the only bright spot.  From a previous PRESIDENT&CEO article:

According to the World Bank, the global economy is still struggling to gain momentum.

In its Global Economic Prospects report, issued Tuesday, the World Bank reported that annual global growth in 2014 was lower than initially expected, continuing a trend of such disappointments. Growth picked up slightly to 2.6%, from 2.5% in 2013, but the divergences in various regions was the true story.

The United States and the United Kingdom have seen an upsurge in activity, while the EuroZone and Japan continue to sputter – largely due to the hangover from the financial crisis and structural obstacles. China, on the other hand, is undergoing what the Bank calls a “carefully managed slowdown.”

Overall, the report projects that global growth is expected to rise to 3.0% in 2015, and average about 3.3% through 2017. The 2015 projection is lower than the 3.4% growth rate forecasted in June. 

So, at least for the moment, the US seems to be the place to be.

Obstacles to growth

For quite some time, middle market executives have viewed government-related issues as the largest obstacles to growth (beyond a general worry about overall demand).  This survey confirmed this trend, although at lower levels than before.  In fact, economic issues, such as the European debt crisis and slow growth in Europe and China, are top-of-mind for middle market leaders.  From the report:

Despite widespread challenges the middle market is facing in finding skilled workers, 63% of the companies in the survey are planning to increase their workforces in the next 12 months, including 13% who plan increases of 10% or more.

Asked to list the top obstacles to U.S. growth, government budget challenges claimed the top spot from rising health care costs, which was cited by 51% of the respondents. The European debt crisis was among the issues attracting more concern, as 27% now see economic weakness on the continent as a potential obstacle, up from just 16% one year ago.

“The biggest risk to U.S. growth now comes from the slow pace of growth elsewhere, especially in Europe and China,” says [Deloitte’s Chief Global Economist Ira] Kalish.

Mid-market businesses also are keeping a wary eye on the real estate market. After a period of gains since the depths of the recession, home price growth has slowed in many major metropolitan areas, and a quarter of the respondents believe a weak housing market may inhibit economic growth, up from 16% one year ago.

Asked to cite obstacles to their company’s growth, the uncertain economic outlook again ranked No. 1 but the issue was cited by only 40% of the respondents this time versus 50% one year ago. Concerns about health care costs dropped significantly here as well, with 24% of the executives now citing the issue as an obstacle compared to 36% last fall. Rolling back health care reform is now viewed as a needed step by only a quarter of respondents, down from 41% last year.

“We’re not without out challenges,” Nanney continues.  “When you look at the responses in the survey, while things like health care and the regulatory environment have been challenges in the past and continue to be, the respondents see those receding a bit and what’s emerging is more of the ‘skills gap’ in the talent arena and keeping up with technology and the advantages you can gain from making the right investments at the right time with these new technology platforms.”

The talent gap

A recurring, and increasingly acute, theme in discussions with middle market leaders is the “talent gap” – the difficulty of middle market businesses to identify sufficiently skilled workers to fill urgent needs and provide a foundation for growth.  It’s a particularly vexing obstacle to growth given the fact that, while the headline unemployment rate is falling to near-structural full employment, the labor participation rate is at historically low levels, and indeed has fallen further recently.  Deloitte’s survey confirmed the trend.

What’s worse is that the survey found that middle market companies have been, and will continue to be in the coming year, looking to expand their workforce, and the dearth of qualified employees is a challenge.  For instance, the report indicates that more than a quarter of companies surveyed say their company increased its full-time domestic workforce by 5-10% over the past 12 months, more than double the rate of Deloitte’s spring survey, and a sizable contingent report hiring at greater rates. In many cases, full-time jobs are replacing part-time positions. Looking ahead, more than half of the respondents say they expect to hire more full-time employees in the coming year, compared to just over one-third one year ago. Despite widespread challenges the middle market is facing in finding skilled workers, 63% of the companies in the survey are planning to increase their workforces in the next

12 months, including 13% who plan increases of 10% or more.

“What organizations are finding is that, for the first time in a long time, they are having to really invest organically to source talent,” says William Pelster, a principal with Deloitte Consulting LLP. “In the past, companies were able to go out and recruit people to fill their needs. Now, they need to take a longer, more strategic view around training and development.”

“It may be optimistic on my part,” says Nanney, “but it sure appears to me that mid-market executives are taking matters into their own hands to address the skills gap. As an example, the highest response around how you’re dealing with your talent issues was that they’re moving in-house training to the top of the list.  So they’re addressing the skills shortage by hiring people who may not be qualified for the jobs they need but they’re focusing their investments around training to develop not only qualified employees but developing leaders for the future.”

M&A is picking up

After what seems like an eternity, transactional activity appears to finally be picking up steam in the middle market.  According to the survey, 37% of companies reported completing three or more M&A transactions in the past year, 46% say it’s likely they will purchase another company in the coming year.

“This is the strongest M&A market that we’ve seen since the dot-com era,” says Kevin McFarlane, a managing director of Deloitte Corporate Finance LLC. “Management teams of large corporations and owners of middle-market companies alike have become increasingly comfortable that there is some stability in the market upon which they can determine the best course of action for their respective

enterprises. This, coupled with the steady increase in equity markets, low interest rate environment and pent-up supply of acquisition targets, are all fueling the high level of transaction activity.”

So, on many fronts, it appears that 2015 is shaping up to being a fantastic year for the middle market.  While obstacles remain (when don’t they?), the environment for middle market companies, particularly in the US, has finally turned the corner, and the throttle is wide open.

To read the report, click here.


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