5 minute read 15 Apr 2019
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Middle-market companies show high ambitions with bullish growth projections

Authors

Ryan Burke

EY Global Growth Markets Leader

Global leader helping companies grow and profit in this transformative age. Passionate about eradicating child illiteracy and raising neurodiversity awareness. Father of two.

Loletta Chow

EY Global China Overseas Investment Network Leader, EY Belt & Road Task Force Leader and EY Asia-Pacific Growth Markets Leader

Seasoned in China outbound investment and Belt and Road Initiative.

Guillaume Cornu

EY EMEIA Growth Markets Leader, Western Europe & Maghreb Restructuring Leader and France, Maghreb & Luxembourg TAS Leader

Proud and motivated teams help us to win in the market. Building close, trusted relationships to help the next generation of businesses transform and succeed. My family is my happiest priority.

5 minute read 15 Apr 2019

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Despite today’s uncertain times, confidence continues to grow as middle-market executives anticipate double-digit growth in 2019. 

We may be entering a period of renewed uncertainty, but you wouldn’t know it based on the growing confidence middle-market executives have in their prospects for 2019. Geopolitical issues? Trade tensions? A forecast economic downturn? These issues do not appear to be slowing middle-market executives down.

It’s not that they’re ignoring them. In fact, they identify a potential economic downturn as one of the key risks they face. Yet, they prefer to remain positive as they take advantage of ongoing global and local economic growth, opportunities to leverage M&A judiciously, and using technology to improve agility and gain a competitive edge.

Read more about growth prospects for middle-market companies in the following geographies:

Middle-market executives push full-steam ahead with double-digit growth plans

According to the EY Global Capital Confidence Barometer, 58% of middle-market executives surveyed say that their companies expect double-digit growth in 2019 — more than double the percentage in 2018. Their confidence sits atop a foundation of positive economic growth and strong macroeconomic fundamentals — more than 90% expect global and local economic growth to increase over the next 12 months; while more than 80% anticipate confidence in corporate earnings, short-term market stability and credit availability to improve.

Are the markets peaking? Are we at the summit with tougher times ahead? Certainly, there are signs that have economists and analysts expressing concern, but even so, middle-market executives are taking a full-steam ahead approach for now.

Interestingly, the smaller the middle-market company, the higher its confidence. 71% of growth companies between US$100m and US$250m say they anticipate double-digit growth, 42% of those suggest they see a growth rate of 16% or more in the coming year.

Geographically, the winds have shifted in the US’s favor, with 80% of US middle-market companies expecting double-digit growth. This contrasts with our 2018 survey, where the geographic drivers of growth tilted East, and the Asia-Pacific region led the way in growth opportunities. In our recent survey, only 39% of middle-market executives in the Asia-Pacific region have double-digit growth plans. Europe, meanwhile, sits in the middle, with 57% saying they expect growth in the double digits.

Middle-market executives are clear-eyed about the risks that lie ahead

For all of their confidence in their growth opportunities in 2019, middle-market executives acknowledge that there are also risks. While the percentage of middle-market executives concerned about a slowdown in economic activity impacting their growth plans has dropped (from 42% in 2018 to 33% in 2019), executives still see it as a top priority risk. The IMF downgrade of its growth forecast for the fourth time in 12 months (3.9% in July 2018, 3.7% in October 2018, 3.5% in January 2019 and most recently 3.3% in April 2019), may certainly be playing a role in keeping an economic slowdown on their risk radar.

Meanwhile, where many middle-market companies have traditionally viewed geopolitical risk simply as a cost of doing business, 19% now see geopolitical risk as a threat. Equally, 19% see as a key risk supply chain disruption, which may stem from global trade tensions and for example, from the retaliatory tariffs between the US and China, and the US and the European Union. According to EY’s Trade Barrier Impact Survey (October 2018), “84% of US executives impacted by tariffs are reviewing or have already made changes to their procurement strategy, global manufacturing footprint or global warehouse strategy/network design.”

Unsurprisingly, technology-driven competition has middle-market companies worried as well, with 31% identifying disruption from technologically-advanced competitors or competition from new entrants as significant challenges to growth. As sectors converge, and disruption from unexpected competitors continues to escalate, we expect these technology-focused competitive concerns to continue.

Growth risk

33%

of respondents believe slowing economic activity, both global and local, could impact growth plans.

Middle-market companies invest in technology to improve agility and resilience

As a hedge against technology-driven competitors, and to improve their agility and resilience against risks that could negatively impact their growth plans, almost all middle-market companies (97%) indicate that they are planning a significant investment in technology in the year ahead. Investment spend appears to be split between acquisition and in-house development however when it comes to artificial intelligence (AI), the emphasis is now definitely on the latter.

Two years ago, when we asked survey respondents about their intended use of AI, 74% said they would never adopt it. One year later, 73% expected to deploy it within two years and now, in our most recent survey, more than 70% say they are planning to develop and deploy AI in-house.

Part of the push towards in-house AI development may be the need to come up with bespoke solutions that integrate with legacy systems. However, middle-market companies also see in-house AI as a means of gaining competitive advantage.

The emphasis of this technology development is spread equally across multiple priorities — creating new products and services, improving internal efficiencies, enhancing the customer experience and bolstering data access and analysis — the one area that stands out is risk reduction (including cybersecurity). In 2018, only 7% of middle-market executives said they would be investing in technology that reduced risks. This year, the percentage has more than doubled, with 19% now looking to invest in technologies that can help them manage and mitigate their cyber risks.

Middle-market executives turn to M&A to tackle disruption and accelerate growth

For many middle-market executives, M&A appears to be a means to acquire capabilities, tackle disruption and exploit fast-growth opportunities. 47% of middle-market executives say they expect their companies to pursue M&A over the next 12 months, with 90% anticipating that the M&A market will improve during the same time frame.

M&A activity

47%

of respondents expect to actively pursue M&A in the next 12 months.

Looking at where middle-market companies are planning to invest their money, again, geographic appetite has tilted from East back to West with middle-market executives identifying the US as their top destination, followed by the UK, despite the ongoing uncertainty around Brexit. Perhaps to hedge their bets against a still possible, if now unlikely, hard Brexit, middle-market companies also see Germany and France as top destinations of choice. However, despite mixed recent economic indicators, China still appears (at no.4) in the top five most attractive destinations for M&A investment.

In terms of sector focus, technology companies (54%) seem to have the biggest appetite for dealmaking, followed by telecommunications (49%) and industrials (49%).

Looking ahead, middle-market companies will continue to build resilience even as they keenly pursue fast growth

As we look ahead, we anticipate that middle-market executives will focus on achieving their ambitious growth plans through a combination of seizing fast-growth opportunities through M&A, and strengthening financial discipline, managing their supply chains and implementing AI.

In finding the right balance between growth and investment, middle-market companies could achieve their aggressive growth rates, improve their agility and build resilience while navigating uncertain times ahead. 

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Chapter 1

Asia-Pacific companies look farther afield for growth

Asia-Pacific middle-market companies step beyond domestic borders to drive their business growth.

Middle-market companies in the Asia-Pacific region continue to pursue their growth ambitions, but they are looking farther afield than in previous years to achieve them. 

  • In this year’s survey, 39% of Asia-Pacific executives indicate that they are expecting double-digit growth, an almost equal percentage to last year. While this sentiment is lower than global expectations, economic fundamentals suggest that Asia-Pacific executives remain confident, with 87% expecting global and domestic prospects to improve over the next 12 months. This is a significant improvement from the 61% who felt the same way a year ago. Further, 72% express optimism that corporate earnings, short-term market stability and credit availability will improve domestically in the year ahead. This belief may, in part, reflect growing optimism in the resolution of the China-US trade negotiations.

    If we drill down a little, we find that Asia-Pacific middle-market companies between US$100 and US$250m are the most buoyant in their projections, with 62% planning for growth above 10% and 42% aiming for 16% growth and above.

  • Asia-Pacific executives indicate that transactions are an important part of their growth strategy, with 42% expecting to pursue M&A in the next 12 months.

    Intention to transact

    42%

    expect to pursue M&A in the next 12 months.

    For 67% of these, cross-border dealmaking appears to be a primary consideration, which is well above the global middle-market average of 55%. This appears to align with Asia-Pacific executives’ top strategic priorities of geographic expansion into both domestic and overseas markets.

    This said, when it comes to M&A, they appear to mostly want to stick to targets in their region, with China, Australia, Japan and India appearing in the top five investment destinations.

  • Although Asia-Pacific middle-market executives are optimistic in terms of growth, survey results suggest that certain challenges ahead are top-of-mind. Thirty-two percent say a slowdown in economic activity would be a key risk to their growth plans. Meanwhile, 44% say geopolitical uncertainty and supply chain disruption could curtail expansion plans; and 34% see threats amid disruption from technologically-advanced competitors and new market entrants.

    With elections in several Asia-Pacific countries this year, middle-market executives in the region may be anticipating the risks and taking proactive measures to build resilience and prepare for the range of circumstances that may unfold.

  • Almost all executives in the region surveyed indicated that they would be making significant investments in technology as a means to build agility and resilience.

    Technology investment

    99%

    plan to invest in technology in the next year.

    One in four intend to use technology, AI and automation to improve the effectiveness of their talent strategies. In fact, Asia-Pacific companies, more than any other region, intend to deploy AI for better and faster talent recruitment and onboarding. More than three-quarters (77%) say they will be developing these AI capabilities in-house. Asia-Pacific executives may be hoping that technology can help them to identify and hire talent, which they ranked as the second most significant challenge to their growth plans behind disruption from more technologically advanced competitors.

    For almost one in five (19%), risk reduction is top-of-mind, a significant jump from 2018, when only 4% of executives in key Asia-Pacific economies registered it as an important consideration.

  • As we look ahead, positive sentiment around macroeconomic fundamentals globally and domestically, and 39% of respondents expecting double digit growth, both point to continued confidence among Asia-Pacific middle-market executives.

    However, as some executives from this region can be more cautious by nature, we expect them to continue building resilience to prepare for the challenges that may lie ahead. Technology will play a key role in driving talent strategies, improving operational efficiency and managing risk, while transactions will help them future-proof their portfolios.

By Loletta Chow, EY Asia-Pacific Growth Markets Leader

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Chapter 2

European middle-market executives expect growth prospects to improve

Confidence is high in the European middle market with 92% of executives expecting global and domestic growth prospects to improve.

European middle-market companies are feeling bullish about their financial performance and their ability to achieve double-digit growth. More than any other region, European middle-market executives plan to use M&A to help them achieve their objectives. However, even as they pursue their growth plans, they plan to build resilience within their organizations by making better use of technology and closing the talent gaps.

  • The results of our latest Capital Confidence Barometer reveal that European middle-market executives are positive about their growth prospects. In fact, the percentage of those expecting 11% growth or higher in 2019 (57%) has more than doubled since 2018.

    Confidence in near-term growth

    57%

    expect growth of 11% or higher in 2019.

    As we drill down further we find that smaller companies with revenues between US$100m and US$250m show even more confidence, with 67% reporting revenue growth targets of 11% or more.

    This positive sentiment is further reflected in key market fundamentals, as 87% of European middle-market executives express confidence in corporate earnings, short-term market stability, credit availability and stock market outlook at both global and domestic levels.

    While European middle-market executives are confident in their growth prospects, they continue to keep their eye on the danger of slowing economic activity in the latter part of 2019. Brexit uncertainty continues to keep the UK economy on tenterhooks. Germany is forecasting weaker growth in 2019, and Italy’s economic situation remains delicate. With this in mind, one-third of executives report a slowdown in economic growth at the greatest external threat to growth.

  • With their sights set on 11% growth and above, 53% of European middle-market executives are relying on M&A to help them get there. This represents a significantly higher appetite for M&A than US (38%) and Asia-Pacific (42%) middle-market executives.

    More than half of European middle-market executives say they plan to stick close to home in their pursuit of M&A targets, with the UK, Germany and France representing three of the top five investment destinations. The US and Russia round out the list.

  • Although an economic slowdown is of concern, a looming talent crisis appears to be a bigger challenge for European middle-market executives than among their global peers. In fact, our results support another EY survey, Building a Better Working Europe, where European companies admitted their struggle to recruit and retain talent with digital skills.

    In response to their talent shortages, nearly half (43%) of European middle-market executives in our survey report that they plan to hire more contractors, freelancers, and part-time staff. Globally, 31% expect to do the same. Conversely, only 4% of European middle-market executives plan on hiring more full-time staff.

    Hiring plans

    43%

    plan to hire more contractors, freelancers and part-time staff.

    Noteworthy is the relative ambivalence European middle-market executives have toward technology, automation and artificial intelligence (AI) in their talent strategy. Only 20% plan on using technology to improve their talent strategy, versus 25% globally. This may reflect a lack of digital skills in the European market. However, Europeans also seem have different priorities when it comes to technology investment, with 20% focusing on risk reduction, including cyber threats.

  • Like their Asia-Pacific counterparts, 99% of European middle-market executives report that they plan to make significant investments in technology in 2019. While priorities are evenly split across reducing risks, improving the customer experience, improving internal efficiencies, creating new services or products and improving financial data access and analysis, the priority that stands out is risk reduction, including cyber risks. With 20% reporting a sizeable investment in this area in 2019, this represents a nearly threefold increase from 2018.

    Meanwhile, although fewer European middle-market executives plan on using technology for their talent strategies than other regions, almost one in five say they plan on using automation and AI to improve talent recruitment and onboarding.

  • As European executives strive to achieve their growth ambitions, they will also have to find ways to build resilience within their own organizations by addressing their talent gaps.

    Although European middle-market executives appear more inclined to take advantage of the gig economy to solve talent shortages in the short term, as talent and technology agendas start to converge, they may want to consider more actively deploying technology, automation and AI beyond talent recruitment and onboarding.

    A robust talent strategy that leverages technology throughout all aspects of talent management could increase agility and resilience at a time when European middle-market companies need it most.

By Guillaume Cornu, EY EMEIA Growth Markets Leader

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Chapter 3

US middle-market companies lead the way in growth ambitions

US middle-market companies continue to be bullish on growth, but they are building resilience in anticipation of challenges ahead.

The winds of growth have turned around, shifting their trajectory from East back to West as the US has become the main driver of global growth among middle-market companies in 2019.

  • In our latest survey, 80% of US middle-market executives say they are expecting double-digit growth in 2019 — six times higher than the 12% who reported double-digit growth projections in 2018 and 22% higher than all of this year’s global middle-market respondents. Despite rumblings from economists and analysts of a looming downturn, US companies see little evidence of a slowdown within their respective markets. As a result, US middle-market companies seem more comfortable than their global peers to push full steam ahead.

    Growth prospects

    80%

    expect double-digit growth

    US companies at the lower end of the middle-market spectrum (US$100m to US$250m) are particularly bullish, with 94% expecting double-digit growth, and more than half aiming for 16% growth or higher. While these numbers may seem too good to be true, they are supported by key fundamentals, with 98% expressing increased confidence in global and domestic prospects, and 88% expecting corporate earnings, short-term market stability and credit availability to improve. Anecdotally, we are hearing the same confidence in the conversations we are having with our clients.

  • There’s been a wealth of speculation in the news media lately that the US is heading for a slowdown. So, while US middle-market companies are overwhelmingly confident about their growth projections, they are more acutely aware of the challenges that lie ahead than they may have been before. Concerns around the impact of slowing economic activity is up slightly from 29% in 2018 to 31% this year.

    Where we’ve seen a real difference, however, is in the areas of geopolitical and trade risks. In our recent survey, 14% identified regulation and trade or tariff uncertainty to be a key strategic growth risk, up from just 5% a year ago, while 17% are focusing primarily on geopolitical uncertainty. Heightened awareness of these risks likely stems from issues such as US-China trade tensions, the yet-to-be-ratified United States-Mexico-Canada trade agreement and the associated tariffs that have resulted, as well as the ongoing Brexit situation.

    Technology-driven competition, either from technologically advanced competitors or from new market entrants, is also a worry for 29%. Given our clients’ laser focus on disruptive innovation, we’re surprised this number isn’t even higher.

  • While US middle-market executives are confident, they are still building agility and resilience through strategic organic and inorganic investments in technology. Operationally, 93% of US middle-market companies intend to invest heavily in technology, most notably tech that will create new products or services, improve the customer experience or advance internal efficiencies.

    Technology

    93%

    intend to invest heavily in technology

    Given that US companies tend to drive innovation through customer-centricity, it makes sense that 44% identify creating new products and services and improving the customer experience as their top areas of investment. Specifically, one in four executives is keen to deploy artificial intelligence (AI) to improve the customer experience. Interestingly, of those looking to use AI for this purpose, 93% say they’ll be building the capability in-house, largely to gain a competitive advantage.

    For 38% of US middle-market companies, mergers and acquisitions (M&A) will form a key part of their growth strategy, primarily as a means to help them boost their new product and service development efforts, as well as expand into adjacent sectors. In terms of where they expect to spend their M&A investment dollars, they’re looking local first and foremost, as well as considering investments in the UK, Germany, China and Canada.

  • As we look ahead to the rest of 2019, we expect US middle-market companies will continue to lead the way in their assertive pursuit of double-digit growth.

    At the same time, they are mindful of the potential challenges on the horizon. As such, we expect US middle-market executives will continue to build resilience by investing in and using more technology, AI and automation for talent management, product and service offerings, and risk reduction.

By Lee Henderson, EY Americas Growth Markets Leader

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Summary

The EY Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas. 

About this article

Authors

Ryan Burke

EY Global Growth Markets Leader

Global leader helping companies grow and profit in this transformative age. Passionate about eradicating child illiteracy and raising neurodiversity awareness. Father of two.

Loletta Chow

EY Global China Overseas Investment Network Leader, EY Belt & Road Task Force Leader and EY Asia-Pacific Growth Markets Leader

Seasoned in China outbound investment and Belt and Road Initiative.

Guillaume Cornu

EY EMEIA Growth Markets Leader, Western Europe & Maghreb Restructuring Leader and France, Maghreb & Luxembourg TAS Leader

Proud and motivated teams help us to win in the market. Building close, trusted relationships to help the next generation of businesses transform and succeed. My family is my happiest priority.