Large, publicly traded companies in the US tend to attract the lion’s share of media, academic and public policy attention. We read and watch something about Facebook, Amazon, Google, Boeing, GE or other Fortune 500 companies on a daily basis.
With all the attention being paid to the large-cap, multinational public companies, U.S. middle market firms tend to fly under the radar. The lack of emphasis and support for middle market enterprises is not unique to the US. One of the few markets where this is not the case is Germany, which celebrates its so-called “Mittelstand” companies. These businesses account for more than 60% of the country’s jobs and are highly regarded as investors in facilities, equipment and talent.
In fact, middle market companies are vital contributors to most developed countries’ GDP, and providing more support for such companies in the US is both a significant challenge and a compelling opportunity. Middle market businesses should be recognized by investors and policy makers for what they truly are – powerful engines of the US economy – and more can and should be done to help these businesses thrive and grow through the application of capital, operational expertise and a sharp strategic focus.
The powerhouse US middle market
The economic impact of middle market companies must not be underestimated. There are roughly 200,000 companies in the U.S. with revenues from $10 million to $1 billion, most of which are closely held or family controlled. Such businesses produce roughly one-third of US GDP. They are also strong drivers of economic opportunity; even in the years spanning the financial crisis, from 2007 to 2010, such companies added some 2 million jobs. And while they may be small in comparison to the better known mega-caps, middle market companies invest heavily in innovation, devoting 8% of revenue to R&D.
Within the middle market universe, there are 32,000 private businesses with between $50 million and $1 billion in annual revenue, or about 16 times more than the number of equivalent public companies.
Yet, despite their collective economic might, individual middle market companies face daunting challenges, including difficulties in hiring and retaining talent, controlling costs, and fending off competition from larger entities. In addition, on a strategic level, middle market businesses often need help to determine how to maintain profitable growth while keeping pace with changing market conditions and customer demands.
Understanding challenges and providing solutions
Supporting middle market companies is not only about providing capital, but also about affording access to much-needed operational and strategic resources. Family-controlled businesses, especially, may face challenges such as training the next generation of leadership, attracting talented executives beyond the founding family, and responding to changes in customer demands, markets and supply chains. The fact that an estimated $30 to 40 trillion in wealth will be passed on from the baby boomer generation to their millennial heirs over the next 25 to 30 years in the US alone suggests that many family-owned mid-market businesses will need assistance coping with management transitions and other strategic issues.
A particular need of middle market companies is to identify and execute growth strategies. Outside investors can add real value by engaging actively with the management of middle market companies in which they have invested, in order to provide guidance on strategic actions such as: geographic, channel or product expansion; partnerships and joint ventures; and capital planning. Merger and acquisition opportunities – which may have been beyond the reach of management previously – represent another area in which investors in middle market companies can positively impact growth.
But selecting the right outside investor can be difficult and owners, especially families, need to focus on the value-added partnership that outside investors can bring to the table including networking opportunities, strategy planning, technology expertise and overall business efficiency and growth planning. An investment partner should bring a range of expertise to the table including a very strong track record of professionals who have successfully built middle market companies across a range of industries. In an age where capital has become a commodity, alignment around values rather than valuation alone is increasingly important to the successful outcome of engaging private equity.
The tendency in the US to overlook middle market enterprises is extremely short-sighted, as it fails to appreciate the major contributions made by these companies in terms of economic activity, job creation, and investment in innovation. Policy makers and academic researchers can certainly do a better job of understanding the vital role of middle market companies. More importantly, investors should recognize the compelling opportunity to provide middle market businesses with the financial and intellectual capital they need to grow in value, and thereby strengthen their contributions to the US economy.