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THE MARKET THAT MOVES AMERICA FINDINGS FROM THE NCMM’S Q1 '16 INDICATOR SURVEY 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
Q1'16 MIDDLE MARKET INDICATOR WEBINAR | May 17, 2016
THE MIGHTY MIDDLE MARKET
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THE NATIONAL CENTER FOR THE MIDDLE MARKET
www.middlemarketcenter.org
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
EDUCATION
Quarterly Middle Market Indicator
Research and Expert Perspectives
Interactive Benchmarking Tools
Executive Programs
Webinars
Share Research & Discuss Trends
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THE MIDDLE MARKET INDICATOR
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MIDDLE MARKET INDICATOR OVERVIEW
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A Quarterly National Survey Cut by Geography and Industry
Q1'16 MIDDLE MARKET INDICATOR EXECUTIVE SUMMARY
• THE MIDDLE MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN REVENUE GROWTH AND JOB CREATION; P.E.-OWNED COMPANIES ARE PERFORMING MORE STRONGLY THAN THE MIDDLE MARKET OVERALL
• WHILE YEAR-ON-YEAR GROWTH IS HIGH AND JOB CREATION REMAINS STABLE, THE MIDDLE MARKET APPEARS TO HAVE ENTERED A PERIOD OF STABILIZATION
• CONFIDENCE IN LOCAL AND NATIONAL ECONOMIES HAS TICKED UP; INVESTMENT INTENTIONS REMAIN FAIRLY STEADY
• TALENT HAS EMERGED AS THE BIGGEST LONG-TERM CHALLENGE FACING MIDDLE MARKET COMPANIES, AND EXECUTIVES ARE INCREASINGLY WILLING TO PAY WORKERS MORE
Source: 1Q’16 Middle Market Indicator Report
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Q1'16 U.S. MIDDLE MARKET EXECUTIVE SUMMARY
CAPITAL INVESTMENT
63% WILL INVEST
CONFIDENCE
51% GLOBAL ECONOMY
73% NATIONAL ECONOMY
81% LOCAL ECONOMY
REVENUE GROWTH
6.3% PAST 12 MONTHS
4.6% NEXT 12 MONTHS
EMPLOYMENT GROWTH
3.6% PAST 12 MONTHS
2.7% NEXT 12 MONTHS
2.1% SMALL BUSINESS
2.2% LARGE BUSINESS
Source: 1Q’16 Middle Market Indicator Report 7
Q1'16 MIDDLE MARKET INDICATOR REVENUE GROWTH
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
US MIDDLE MARKET S&P 500 PE-OWNED 8 Source: 1Q’16 Middle Market Indicator Report
PAST 12 MONTHS
6.3% U.S. MIDDLE MARKET
7.8% PE-OWNED FIRMS
GROWTH FORECAST ADJUSTED FOR CONSERVATIVE BIAS
Source: 3Q’15 Middle Market Indicator Report
6.9 6.1
5.5
7.0
5.8 5.8 5.5 5.0
6.5 6.6
7.5 7.2 7.4 6.6
7.2 7.6 6.9 6.7
5.7
5.2 4.8
3.7
5.2 4.9 5.1 4.4 4.3 4.5
5.8 5.5 6.0
5.3 5.1
4.1
0%
5%
10%
15%
Actual Revenue Growth Projected Revenue Growth
Estimate Based on Average Historical Understatement
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Q1'16 MIDDLE MARKET INDICATOR INDUSTRY REVENUE GROWTH
Source: Dun & Bratstreet 10
Q1'16 MIDDLE MARKET INDICATOR REVENUE GROWTH FORECAST
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
U.S. MIDDLE MARKET PE-OWNED
4.6% U.S. MIDDLE MARKET
6.4% PE-OWNED FIRMS
NEXT 12 MONTHS
Source: 1Q’16 Middle Market Indicator Report 11
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
U.S. MIDDLE MARKET LARGESMALL PE-OWNED FIRMS
PAST 12 MONTHS
3.6% U.S. MIDDLE MARKET
4.9% PE-OWNED FIRMS
Q1'16 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH
2.1% SMALL BUSINESS
2.2% LARGE BUSINESS
Source: 1Q’16 Middle Market Indicator Report 12
Q1'16 MIDDLE MARKET INDICATOR INDUSTRY EMPLOYMENT GROWTH
Source: 1Q’16 Middle Market Indicator Report 13
Q1'16 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH FORECAST
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
U.S. MIDDLE MARKET PE-OWNED FIRMS
2.7% U.S. MIDDLE MARKET
3.5% PE-OWNED FIRMS
NEXT 12 MONTHS
Source: 1Q’16 Middle Market Indicator Report 14
WHAT INGREDIENTS ARE FOUND IN PRIVATE EQUITY’S SECRET SAUCE?
Source: Q1 2016 Middle Market Indicator 15
► Picking winners
► Leveraging the portfolio
► Relieving financial constraints
► Professionalizing management
CONFIDENCE, INVESTMENT PLANS, AND CHALLENGES
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Q1'16 MIDDLE MARKET INDICATOR ECONOMIC CONFIDENCE
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20%
30%
40%
50%
60%
70%
80%
90%
1Q '1
22Q
'12
3Q '1
24Q
'12
1Q '1
32Q
'13
3Q '1
34Q
'13
1Q '1
42Q
'14
3Q '1
44Q
'14
1Q '1
52Q
'15
3Q'1
54Q
'15
1Q'1
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GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY
U.S. ECONOMY
73% 73% PE-OWNED
LOCAL ECONOMY
81% 84% PE-OWNED
GLOBAL ECONOMY
51% 54% PE-OWNED
Source: 1Q’16 Middle Market Indicator Report
Q1'16 MIDDLE MARKET INDICATOR CAPITAL INVESTMENT PLANS
0%
10%
20%
30%
40%
50%
60%
70%
80%
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
PE-OWNED U.S. MIDDLE MARKET
Source: 1Q’16 Middle Market Indicator Report
FIRMS PLAN TO INVEST.
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THE MIDDLE MARKET SEES ECONOMIC EXPANSION CONTINUING
Source: 1Q’16 Middle Market Indicator Report
2% 9%
36%
49%
4%
Predicted 2016 U.S. Economic Performance
Strong Growth (3% or more)
Moderate Growth (1-3%)
Little change (-1% to 1%)
Slowdown (-1% to -3%) Severe downturn (-3% or more)
53%
11%
In retail: 62%
In manufacturing: 50%
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WHAT COULD GO WRONG?
Source: 1Q’16 Middle Market Indicator Report
Level of Threat to U.S. Economy Over the Next 12 Months (Total Middle Market)
50% 50%
48% 47% 46% 45%
42% 42% 41% 40%
37% 37% 37%
35% 32%
24%
36% 31%
31% 37%
32% 37%
39% 36% 41%
39% 44%
41% 38% 41%
41% 46%
14% 18% 21%
16% 22% 17% 20%
22% 19%
21% 19%
22% 24% 24%
27% 30%
Serious Threat(Top 2)
Middle Box Not a Threat(Bottom 2)
Slowing global economic growth
Political uncertainty in the U.S.
Volatility in Chinese stock markets
International political instability
Slowing industrial output in China
Weak consumer spending
Downturn in foreign stock markets
Damaged global oil industry
Turbulence in capital markets
Weakening emerging economies
Weak business investment
Fed action on interest rates
Negative interest rate environment in Europe
Slump in commodity prices
Potential growth in unemployment rate
Strengthening U.S. dollar
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Q1'16 MIDDLE MARKET INDICATOR CHALLENGES
TALENT AND REGULATION ISSUES ARE TOP OF MIND FOR MIDDLE MARKET LEADERS
Source: 3Q’15 Middle Market Indicator Report 21
Q1'16 MIDDLE MARKET INDICATOR CURRENT WORKFORCE CONDITIONS
Source: 1Q’16 Middle Market Indicator Report
83%
6% vs. 5% 12%
Just about right
Excessive based on current market conditions
Insufficient for current market conditions
SIZE OF CURRENT WORKFORCE
13%
46%
32%
9% Less productive thanother companies
Just as productive asother companies
Somewhat moreproductive than othercompanies
Much more productivethan other companies
PRODUCTIVITY OF CURRENT WORKFORCE
The overwhelming majority of MM firms feel their workforce is the right size for current market conditions, and about half say their workers are more productive than workers at other companies in the same industry.
8%*
37%
38%
18%
80%
15%*
*Q4’15 22
MIDDLE MARKET EXECUTIVES ARE MORE OPEN TO WAGE INCREASES
Source: 3Q’15 Middle Market Indicator Report
Top 2 Areas Under Consideration for Improving Talent Retention
52%↑
44%↑
37%
25%
25%↑
9%
43%
34%
26%
28%
18%
7%
44%
36%
30%↑
29%
21%↑
9%↑
Salaries
Flexible work arrangements
Training / education
Health insurance
Vacation time
Maternity/paternity policies
2016 1Q 2015 4Q 2015 3Q23
SALESFORCE EFFECTIVENESS
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STRONG SALES MANAGEMENT DRIVES MIDDLE MARKET SUCCESS
Source: The Force Is With You 25
CLEAR OPPORTUNITIES EXIST TO IMPROVE SALES FORCE EFFECTIVENESS
Source: The Force Is With You 26
FLAGSHIP RESEARCH FOCUSING ON KEY CHALLENGES
MIDDLEMARKETCENTER.ORG 28