july 22, 2020 the market that moves america 2020 acg webinar vf_0.pdf · july 22, 2020. the market...
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IN COLLABORATION WITH
Thomas A. Stewart, Executive Director | The National Center for the Middle Market
July 22, 2020
The Market That Moves AmericaFindings from the 2Q 2020 Middle Market Indicator Report
The National Center for the Middle Market
The National Center for the Middle Market is a collaboration between The Ohio State University’s Fisher College of Business and Chubb. 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.
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2
The Mighty Middle Market
U.S. MIDDLE MARKET DEFINED
Annual Revenues Range from
$10MM - $1B
Represents
1/3 of Private Sector GDP and Employment
Accounts for
60% of All New Private-Sector Jobs
Nearly
200,000 in All Industry Segments and GeographiesBusinesses
85%of CompaniesAre Privately Held
Equivalent to the
5th LARGESTglobal economy
More than
$10 trillion in annual revenue
3
2Q 2020 Middle Market Indicator
4
About the Middle Market Indicator
A National Survey Cut by Geography and Industry
5
About NCMM’s Covid-19 Pandemic Research
In March, two weeks after the World
Health Organization declared COVID-19
a pandemic, NCMM surveyed 260
executives of U.S. middle market
companies to take the pulse of the most
critical segment of the American
economy.
All of the survey respondents also
participated in the Q4 2019 Middle Market
Indicator survey, fielded in December
2019.
Participants completed the survey
between March 23 and March 25, 2020.
In June, NCMM fielded its 2Q Middle
Market Indicator survey of 1,000 executives
of U.S. middle market companies. In
addition to collecting the usual trending data
on revenue, employment, investment, and
confidence, this survey
• Reprised the March Covid-19 questions
• Included additional questions about
company response and use of
government and other sources of
support.
Participants completed the survey between
June 1 and June 12, 2020.
Headlines
• For the first time since the inception of the Middle Market Indicator, year-over-year revenue and employment figures both turned sharply negative, as the Covid-19 pandemic interrupted operations and sapped demand. Virtually all measures of company performance are down significantly.
• Private-equity-owned middle market companies were less hard-hit than the segment as a whole, took more aggressive steps to cut headcount, and foresee stronger growth in both revenue and hiring in the year to come.
• Economic confidence is very low. Short-term expectations have bounced back from March lows, but the overall level of activity in the next three months is not strong. Executives now believe recovery will take longer than they first thought.
• Companies see a return to positive revenue growth in the year ahead, while hiring will remain flat. Big-ticket investment items have by and large been put aside, but innovation and digital transformation will continue strongly. PE-owned companies are more expansion-oriented than the middle market as a whole.
1
2
3
4
6Source: 2Q’20 Middle Market Indicator Report
Overview—Past Performance and Forecasts
CAPITAL INVESTMENT CONFIDENCE
49%GLOBAL ECONOMY
57%NATIONAL ECONOMY
64%LOCAL ECONOMY
REVENUE GROWTH
-3.7%PAST 12 MONTHS
2.0%NEXT 12 MONTHS
EMPLOYMENT GROWTH
-4.4%PAST 12 MONTHS
-0.2%NEXT 12 MONTHS
-9.17%SMALLBUSINESS
-10.0%LARGEBUSINESS
-11.1%S&P 500 52%
WILL INVEST
7Source: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: Revenue Growth Trend
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
U.S. MIDDLE MARKET S&P 500 PE-OWNED9
PAST 12 MONTHS
-3.7%U.S. MIDDLE MARKET
-1.7%PE-OWNED FIRMS
-11.1%S&P 500*
8Source: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: Revenue Growth Distribution
10
9% 13% 13%
42%14%
16% 14%
19%
16%18%
13%
3%
24%
25%23%
7%
38%28%
36%32%10%+
1% to 4%
Revenue Decreased
Revenue Increased
5% to 9%
No change
2Q ‘20
74%
Past Year Revenue Growth
2Q ‘19
77%
4Q ‘19
42%
3Q ‘19
71%
Source: 2Q’20 Middle Market Indicator Report
2Q ’20 MMI: Revenue by Industry
0.9%
-2.3%
-4.9%
-4.2%
4.3%
1.2%
0.9%
2.9%
2.3%
1.4%
2.6%
6.6%
-7.0%
-3.6%
-1.5%
0.9%
12Source: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: Employment
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
U.S. MIDDLE MARKET LARGE SMALL PE-OWNED FIRMS
-9.17%SMALLBUSINESS
-10.0%LARGEBUSINESS
PAST 12 MONTHS
-4.4%U.S. MIDDLE MARKET
-5.7%PE-OWNED FIRMS
13Source: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: Employment by Industry
-0.2%
-2.3%
-4.9%
-4.2%
1.3%
3.0%
-3.7%
-2.2%
-2.5%
1.3%
-1.0%
-5.9%
2.4%
-0.5%
0.3%
1.3%
14Source: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: Employment Growth Distribution
11% 14% 14%
32%
34%40% 38%
43%10%
8% 8%
5%
15%15% 13%
7%30%23% 27%
12%
10%+
1% to 4%
Workforce Decreased
Workforce Increased
5% to 9%
No change
2Q’20
24%
2Q ‘19
55%
Past Year Employment Growth
4Q ‘19
48%
3Q ‘19
46%
15Source: 2Q’20 Middle Market Indicator Report
Economic confidence is very low
Confidence in Economy
36%
22%
29%33%
40%
48%48%
56%57%55%54%53%54%58%
49%47%51%50%
56%
65%
77%
70%74%75%
82%
75%80%
73%70%69%
55%
68%
45%49%
59%
49%48%51%
57%
64%62%64%65%68%67%
73%
80%
73%72%67%
73%69%
72%
81%
90%
84%83%86%
87%
86%88%86%80%82%
76%
83%
60%57%
71%67%66%
71%74%
79%77%76%82%
77%74%
81%83%80%80%
76%81%79%80%
86%
88%
87%88%88%94%
90%93%
89%88%89%85%
89%
69%64%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20121Q
20131Q
20141Q
20151Q
20161Q
20171Q
20181Q
20191Q
2019 1Q2019 2Q
Global Economy US Economy
Local Economy
GLOBAL ECONOMY
49%53% PE-OWNED
U.S. ECONOMY
57%64% PE-OWNED
LOCAL ECONOMY
64%64% PE-OWNED
Record low
Source: 2Q’20 Middle Market Indicator Report
Economic Confidence: Very and Extremely Only
0
5
10
15
20
25
30
35
40
45
50
2Q2019 4Q2019 2Q2020
Global
Very Confident Extremely Confident
0
5
10
15
20
25
30
35
40
45
50
2Q2019 4Q2019 2Q2020
Local
Very Confident Extremely Confident
0
5
10
15
20
25
30
35
40
45
50
2Q2019 4Q2019 2Q2020
U.S.
Very Confident Extremely Confident
The Next Three Months
Overall, job cuts may have stabilized
25%
57%
18%
Total Middle Market
31%
52%
17%
PE-Owned
CHANGE IN WORKFORCE, NEXT THREE MONTHS
Increase Stay the same DecreaseSource: 2Q’20 Middle Market Indicator Report; Covid-19 and the Middle Market, 2Q2020
2Q MMI: One Company in Five Expects Cut Payrolls More
Source: 2Q’20 Middle Market Indicator Report
Size of laborforce
4Q’19 2Q’20
Too small;
need to hire
22 19
Just about right
73 66
Too big 5 15
49
42
30
37
25
7 8 9 10
18
0
10
20
30
40
50
60
1Q2019 2Q2019 3Q2019 4Q2019 2Q2020
WORKFORCE SIZE, NEXT 3 MONTHS
Workforce Will Increase Workforce Will Decrease
Next three months: Short Term Index rebounds
100
7063
53
75 7060
81
108
91 9180
96 100
79 74 7569
49
70
1
69
0
50
100
150
20151Q
20152Q
20153Q
20154Q
20161Q
20162Q
20163Q
20164Q
20171Q
20172Q
20173Q
20174Q
20181Q
20182Q
20183Q
20184Q
20191Q
20192Q
20193Q
20194Q
20201Q
20202Q
MM Short Term Index
Short Term Index is calculated by taking expected net positive change in business climate plus expected net positive change in demand plus expected net positive change in sales over the next 3 months
Source: 2Q’20 Middle Market Indicator Report
Short-term: Next quarter’s sales +/-Short Term Outlook
(Next 3 Months)
20151Q
20152Q
20153Q
20154Q
20161Q
20162Q
20163Q
20164Q
20171Q
20172Q
20173Q
20174Q
20181Q
20182Q
20183Q
20184Q
20191Q
20192Q
20193Q
20194Q
20201Q
20202Q
Increased Sales 53 44 42 38 46 42 41 43 52 49 49 46 51 55 46 46 44 48 42 47 28 47Decreased Sales 5 9 8 9 5 5 8 5 4 6 5 10 3 5 6 6 6 8 11 11 38 17
0%
20%
40%
60%
Source: 2Q’20 Middle Market Indicator Report
Short term: Negatives subsideShort Term Outlook
(Next 3 Months)
20151Q
20152Q
20153Q
20154Q
20161Q
20162Q
20163Q
20164Q
20171Q
20172Q
20173Q
20174Q
20181Q
20182Q
20183Q
20184Q
20191Q
20192Q
20193Q
20194Q
20201Q
20202Q
Less Favorable Business Climate 8 11 10 10 9 8 11 7 5 7 7 9 6 7 8 8 10 12 17 12 30 22Decreased Demand 4 6 7 7 4 4 8 5 4 5 5 7 3 5 5 6 7 7 11 9 30 16Decreased Sales 5 9 8 9 5 5 8 5 4 6 5 10 3 5 6 6 6 8 11 11 38 17
0%
20%
40%
60%
Source: 2Q’20 Middle Market Indicator Report
Short-term: Positives hold steadyShort Term Outlook
(Next 3 Months)
20151Q
20152Q
20153Q
20154Q
20161Q
20162Q
20163Q
20164Q
20171Q
20172Q
20173Q
20174Q
20181Q
20182Q
20183Q
20184Q
20191Q
20192Q
20193Q
20194Q
20201Q
20202Q
More Favorable Business Climate 31 25 20 16 21 19 22 28 38 28 27 30 27 29 22 22 25 23 16 26 36 39Increased Demand 43 34 32 30 33 33 30 35 42 41 41 38 40 42 38 32 36 37 35 37 35 46Increased Sales 53 44 42 38 46 42 41 43 52 49 49 46 51 55 46 46 44 48 42 47 28 47
0%
20%
40%
60%
Source: 2Q’20 Middle Market Indicator Report
Short-term: Putting it together Short Term Outlook
(Next 3 Months)
20151Q
20152Q
20153Q
20154Q
20161Q
20162Q
20163Q
20164Q
20171Q
20172Q
20173Q
20174Q
20181Q
20182Q
20183Q
20184Q
20191Q
20192Q
20193Q
20194Q
20201Q
20202Q
More Favorable Business Climate 31 25 20 16 21 19 22 28 38 28 27 30 27 29 22 22 25 23 16 26 36 39Less Favorable Business Climate 8 11 10 10 9 8 11 7 5 7 7 9 6 7 8 8 10 12 17 12 30 22Increased Demand 43 34 32 30 33 33 30 35 42 41 41 38 40 42 38 32 36 37 35 37 35 46Decreased Demand 4 6 7 7 4 4 8 5 4 5 5 7 3 5 5 6 7 7 11 9 30 16Increased Sales 53 44 42 38 46 42 41 43 52 49 49 46 51 55 46 46 44 48 42 47 28 47Decreased Sales 5 9 8 9 5 5 8 5 4 6 5 10 3 5 6 6 6 8 11 11 38 17
0%
20%
40%
60%
Source: 2Q’20 Middle Market Indicator Report
Resilience and recovery
2Q’20 MMI: Long Term Revenue Growth Forecast
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
U.S. MIDDLE MARKET PE-OWNED
2.0%U.S. MIDDLE MARKET
3.7%PE-OWNED FIRMS
FORECAST REVENUE GROWTH FOR TWELVE MONTHS FROM …
Source: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: Long-term Employment Growth Forecast
FORECAST EMPLOYMENT GROWTH FOR 12 MONTHS FROM …
-0.2%U.S. MIDDLE MARKET
0.7%PE-OWNED FIRMS
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
U.S. MIDDLE MARKET PE-OWNED FIRMS
Source: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: Investment Appetites Have Vanished
40%
45%
50%
55%
60%
65%
70%
75%
U.S. MIDDLE MARKET
WHAT WOULD YOU DO WITH AN EXTRA DOLLAR?
INVEST VS. HOLD CASH
Source: 2Q’20 Middle Market Indicator Report
Rainy-Day Funds Have Grown Fast
17
13
14
8413
9
18
3Save It-Hold as Cash
Save It--for Making Investments
CapEx--Plant & Equipment
CapEx--Facilities
Acquisitions
Add to HR--More Personnel
Add to HR--Training &DevelopmentIT
Other
32
1610
54
7
9
14
U.S. MIDDLE MARKET, DEC 2019 U.S. MIDDLE MARKET, JUNE 2020
WHAT WOULD YOU DO WITH AN EXTRA DOLLAR TO INVEST?
30%
48%
Source: 2Q’20 Middle Market Indicator Report
PE Rainy-Day Funds Are Still Growing
25
18
126
5
7
11
150
Save It-Hold as Cash
Save It--for Making Investments
CapEx--Plant & Equipment
CapEx--Facilities
Acquisitions
Add to HR--More Personnel
Add to HR--Training & Development
IT
OtherSource: 2Q’20 Middle Market Indicator Report
14
13
15
7613
9
19
PE-OWNED, JUNE 2020PE-OWNED, DEC. 2019
WHAT WOULD YOU DO WITH AN EXTRA DOLLAR TO INVEST?
27%
43%
5
An Extra Dollar: Priorities
32 20 16 15 14
Cash Reserves War Chest/Acquisitions People Hard Assets ITSource: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: Most Expansion Plans Are Sharply Curtailed
0
10
20
30
40
50
60
Add a New Plant orFacility
Introduce a NewProduct or Service
Enter a New DomesticMarket
Enter a NewInternational Market
Make an Acquisition
Extremely / Very Likely in the Next 12 Months
1Q2019 2Q2019 3Q2019 4Q2019 2Q2020
Source: 2Q’20 Middle Market Indicator Report
2Q’20 MMI: PE Expansion Plans Hold Up Better
0
10
20
30
40
50
60
Add a New Plant orFacility
Introduce a NewProduct or Service
Enter a New DomesticMarket
Enter a NewInternational Market
Make an Acquisition
Extremely / Very Likely in the Next 12 Months
1Q2019 2Q2019 3Q2019 4Q2019 2Q2020
Source: 2Q’20 Middle Market Indicator Report
Digital Transformation: Where Covid-19’s Bite Isn’t Bad
Positive impact % No impact % Negative
impact % Net of + and -
Revenue 21 22 57 -36
Supply chain 15 37 47 -32
Growth initiatives 21 28 52 -31
Demand 26 21 54 -28
Business operations 19 25 46 -27
Capital spending 16 42 42 -26
Employment 20 35 45 -25
Hours 19 38 43 -24
Working capital/cash 18 40 42 -24
Access to capital 18 53 29 -11
Digital transformation 27 48 25 +2
IMMEDIATE IMPACT OF COVID-19 ON VARIOUS MIDDLE MARKET COMPANY ACTIVITIES AND INITIATIVES
Source: 2Q’20 Middle Market Indicator Report; Copvid-19 and the Middle Market 2Q2020
As uncertainty fades (a bit), concern about employees and customers grows brighter
MOST DIFFICULT ASPECTS OF RUNNING BUSINESS IN CURRENT ENVIRONMENT
Ongoing uncertainty
Employee communication, engagement, productivity
Customer relationships and engagement
Continuity of operations
Working capital management/cash
Fostering company culture
51%
9%
9%
15%
12%
4%
25%
40%
39%
47%
31%
11%
Most Difficult Second/Third Most Difficult
34%
16%
18%
14%
11%
5%
32%
43%
39%
37%
27%
18%
66%
59%
57%
51%
38%
23%7%
43%
62%
48%
49%
76%
MARCH JUNE
Source: Copvid-19 and the Middle Market 2Q2020
A majority plan significant changes in how they operate
56%29%
15%When Organizing the Workplace for
the Safety of Employees
50%
30%
19%When Serving Customers for the Safety of
Them and Employees
LIKELIHOOD OF MAKING SIGNIFICANT AND LONG-LASTING CHANGES
LIKELY CHANGES
Social Distancing -- Limited Personal Contact -- Virtual Engagement -- Personal Protective Equipment -- Cleaning and Sanitation -- Remote Access -- Reduced Staff On Site
Extremely/very likely Somewhat likely Not very/not at all likely
Source: Copvid-19 and the Middle Market 2Q2020
The middle market is running at 2/3 of capacity
0% - company is notcurrently operating
2%10%
15%
26%
29%
18%
1% -25%
26% -50%
51% -75%
76% -99%
100% - company is fully operational
Average Business Capacity 67%
AVERAGE CAPACITY
Retail 56%
Wholesale 65%
Healthcare 65%
Services 70%
Manufacturing 73%
Financial services 74%
Construction 80%
Source: Copvid-19 and the Middle Market 2Q2020
Resilience: a longer road back
0
5
10
15
20
25
30
March 2020
Immediately < 1 month 2.-3 months4-6 monthws 7-12 months >1 year
0
5
10
15
20
25
June 2020
Immediately < 1 month 2.-3 months4-6 monthws 7-12 months >1 year
TIME NEEDED TO RETURN TO FULL CAPACITY WHEN PANDEMIC COMES UNDER CONTROL
23%
39%
Source: Copvid-19 and the Middle Market 1Q and 2Q2020
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