What’s next for the middle market in the remainder of 2022? This month’s deep dive from Tatum goes far and wide for answers, balancing the latest analyses, data and forecasts with firsthand insights from Joe Zuyus, vice president and senior managing partner, healthcare at Tatum.
Here’s what’s on tap for the middle market — and what it portends for organizations and leaders alike.
overview: 2022 middle market performance
If there’s one thing we know for certain about middle-market companies, it’s that they consistently buck broader economic trends. Look no further than our two most recent moments of large-scale economic destabilization for proof:
- In the wake of the Great Recession of 2008, middle-market companies returned to profitability faster than their peers both smaller and larger, emerging as the primary drivers of U.S. job growth.
- With the onset of the global pandemic, similarly, while middle-market companies had to lick their wounds like everyone else, they also outperformed the S&P 500 by leaps and bounds.
Today, we’re seeing a similar story play out: Despite inflationary pressures, for example, the Middle Market Business Index rose from 126.3 to 130.6 between Q1 and Q2 this year. What’s more, in the first two months of 2022, middle-market companies reported healthy year-over-year earnings growth of nine percent, alongside still more robust revenue growth of 18 percent, with these sectors leading the way:
- consumer: 20.3 percent year-over-year revenue growth, 14.2 percent year-over-year earnings growth
- technology: 18.7 percent, 9.4 percent
- healthcare: 13.2 percent, 8.7 percent
- industrials: 11.7 percent, 1.5 percent
Looking ahead, then, even within the context of an increasingly heated debate about if and when a recession will hit, the forecast for the middle market remains relatively optimistic. For example, most analysts anticipate that middle-market companies will see something in the ballpark of 10 percent growth through year-end 2022. And not insignificantly from an executive leadership standpoint, employment growth in the middle market, which last year exceeded that of both small businesses and large enterprises, appears to be in good shape as well.
“In talking to clients in the middle market and private equity firms,” Joe said, “I can tell you that it’s still very frothy out there. We’re still seeing a lot of demand.”
challenges on the horizon
Obviously, there are things to be worried about: tightening labor markets, ongoing supply chain disruptions, worrying geopolitical instability, to name a few. But the performance of the middle market has seldom been determined by structural or macro-level factors alone — and more traditional economic indicators, such as the monthly BLS job numbers, have little to do with its overall health or performance. The middle market’s reputation for resilience and agility has not been won lightly, but rather proven time and again.
That said, let’s look at a few specific challenges that could impact middle-market companies, as well as the U.S. economy in general, on the road ahead.
M&A activity and executive leadership
From the standpoint of M&A activity, what might be the twin impact of inflation and rising interest rates? Multiple compression is one possible answer. But it’s hard to say how things will shake out from there. For example, some PE leaders might interpret it as a buying opportunity. Others may decide to hold out in hope of securing better terms later on.
For now, it’s still too soon to say — all of that is mostly speculation. But coming off of a year in which middle-market deals hit an all-time high, it’s unlikely that middle-market activity is going to cool in a major way in the foreseeable future.
What may change, however, is the availability of viable executive leadership to help steer the boat.
Here’s Joe: “Everyone is dealing with the pain of the labor market right now, which remains incredibly competitive and active. As a result, a lot of experienced leaders are shying away from interim opportunities — they’re worried that taking an interim engagement might disqualify them from the, say, six or seven interviews for permanent positions that they already have lined up.”
He went on, “At the same time, companies clearly recognize the value of having skilled, highly experienced executives at the helm — and that’s true whether we’re in a recession or in a boom.”
As a result, Joe warns that executive expectations around compensation are increasing as well. “It’s not uncommon for these CFOs and other executives to be looking at multiple offers,” he noted.
Joe’s advice for companies, given that context? “You should strike while the iron is hot.”
The Russian invasion of Ukraine is an ongoing humanitarian crisis, first and foremost. To what extent does it change the outlook for the middle market — and the U.S. economy at large?
Perhaps surprisingly, this is an area where there’s fairly widespread consensus: That is, whatever else comes to pass, the U.S. economy remains buoyant enough to absorb the fallout from Russia’s invasion, most notably in the form of higher energy prices, without spiraling into a recession. Among the more obvious reasons to have confidence in this forecast is the fact that the U.S. is now effectively self-sufficient when it comes to oil.
Today, spiking oil prices simply mean that U.S. producers are profiting, but the purchasing power remains in the U.S. We aren’t about to see a replay of the 1970s, in other words.
Energy considerations aside, the Russian invasion of Ukraine will continue to impact the overall volume of transactions. In fact, an estimated 100 companies have reportedly tabled deals as a direct consequence of the invasion. Still, for middle-market companies eyeing acquisition targets and other high-potential growth opportunities, even a challenge of this scale should not prove to be insurmountable.
Joe weighed in: “When COVID-19 happened, a lot of business analysts acted like the world was over. Instead, everything really heated up. So we can’t predict the future, and my advice is just to stick to your fundamentals, stick to your processes and continue to get better. Because even if there is a recession or a slowdown, that’s still going to be what sets you apart.”
With the World Bank warning about the risk of potential stagflation on a global scale, it may seem naive to treat the middle market as a world apart — because, of course, it isn’t. But it is resilient, battle-tested and ready for what’s coming, as it has demonstrated time and again.
“There’s no denying that inflation is the biggest thing impacting the U.S. economy right now,” Joe added. “But what that means, in terms of actual economic impact, is anyone’s guess. What I can tell you is that my clients are still moving forward, and there’s still a ton of hiring going on in the interim and CFO spaces. The climate is very active, and executive hiring remains extremely robust.”
With that in mind, if your company is gearing up for change right now — and needs to bring in a seasoned interim leader in order to drive growth — get in touch with Tatum to find out all of the ways we can help.