Private middle-market companies move boldly toward double-digit growth

Aware but undaunted by risks on the horizon, private middle-market companies predict significant growth.

Economists’ predictions of an impending economic downturn may be shaking the confidence of some market-watchers, but private middle-market companies, like their public middle-market counterparts, appear undaunted. Rather than experiencing diminishing confidence in their future financial performance, private companies seem emboldened, as their revenue growth projections more than doubled from 2018. They see both global and domestic economic growth prospects improving in the coming year.

Private companies are perfectly aware of risks forming on the horizon. Yet, they intend to drive confidently, maintaining healthy M&A appetites even as they focus on technology investments to help them build agility and resilience.

Private companies pursue double-digit growth

According to the EY Global Capital Confidence Barometer, 59% of private company executives surveyed say that their organizations expect double-digit growth in 2019. These findings are supported by a similar confidence across a range of macroeconomic fundamentals. Almost three in four private company executives surveyed expect their optimism toward corporate earnings, short-term market stability, credit availability and equity valuations to improve at both global and local levels in the year to come.

Private companies with revenues between US$100m and US$250m are even more bullish, with 71% expecting double-digit growth. Geographically, growth projections vary: US private companies lead the way with 84% saying they expect growth of 11% or above, whereas 41% of Asia-Pacific executives have such growth expectations. European middle-market companies sit somewhere in between, with 56% anticipating growth in the double digits. We expect US confidence largely stems from favorable US tax policies and budget stimulus, the combined outcome of which has been the largest stimulus package in non-recession times.

Some would argue that this wave of economic confidence may be signaling that we’ve reached an economic peak and that tougher times lie ahead. Only time will tell. In the meantime, private companies are devising capital expenditure and operational expenditure strategies to achieve their double-digit growth objectives.

Private companies maintain a healthy M&A appetite

To help accelerate their growth, 43% of private company executives say their companies will be pursuing M&A in the next 12 months. More than half (55%) say they will be focusing on cross-border opportunities. Private company executives list their top investment destinations as the US, the UK, Germany, China and Canada.

Executives have their eyes on several key global and organizational risks

Despite their optimism, private companies are aware of the potential challenges that lie over the horizon. Although one in three cite a slowdown in economic activity as a key risk, private companies appear to be more concerned about geopolitical uncertainty, tariffs and supply chain disruption, with 46% seeing these as key risks in 2019 versus 22% in 2018. Because of their concern about these issues, 16% of private company executives cite an increase in production costs in the next year as their most significant challenge to their company’s growth plans, up from 12% a year ago.

Companies significantly increase their investment in technology to build resilience

One of the ways private companies are attempting to address these challenges and build resilience is by investing in technology. Almost all private company executives (96%) say their organizations will be making significant investments in technology in the coming year.

One in four now say they will use technology, artificial intelligence (AI) and automation in their talent strategies — four times higher than in 2018. Private company executives are taking advantage of technology to add flexibility to their talent agenda and maximize their use of the gig economy in addressing talent gaps.

Private companies will also use AI to increase personalization of product and service offerings, as well as improve customer services. Seventy percent say they will be developing their AI capabilities in-house, partly to address compatibility with legacy systems and partly as a means of gaining a competitive advantage.

Significantly, the percentage of private companies investing in technology for risk management, including cybersecurity, is also up, more than doubling from 7% in 2018 to 18% in 2019.

In the months ahead, private companies will drive growth strategies while building resilience

Over the next 12 months, we anticipate that private companies will make developing new products or services and expanding their business into domestic markets and adjacent sectors key priorities as they strive to meet their revenue growth targets.

At the same time, we expect ongoing investment in new and emerging technologies that will help private companies remain agile and responsive to key global and organizational risks.