America’s economic recovery lies in the middle market
Thomas Bonney is founder and managing director of CMF Associates, a financial consulting, staffing and recruiting firm based in Philadelphia, PA, that serves private equity, middle-market and small-cap public companies nationally. The views expressed are his own.
In his 1988 Republican National Convention acceptance speech, George Bush championed the tradition of the American community, describing it as “a brilliant diversity spread like stars, like a thousand points of light in a broad and peaceful sky.”
More than 20 years later, this tradition still forms the core of our country’s strength – particularly the “thousand points of light” that comprise our medium-sized, family- and private-equity owned business community. I believe it is this community that will ultimately drive the tailwind of economic recovery and growth.
The economic healing power of these businesses is clear. According to the Small Business Administration, more than 6.7 million of the 27.2 million existing businesses in 2007 were small businesses with less than 500 paid employees. Just one hire by each of these firms would more than replenish the 6.46 million jobs lost since the recession began in December 2007 through June 2009.
Smaller companies continue to forge the strongest track record of job protection. The Labor Department’s Quarterly Business Employment data for Q4 2008 shows that, relative to the size of private sector employment, job losses at large companies were approximately one-third larger than losses in the middle market. Mid-sized companies with 999 employees or less accounted for 10.9% of job losses, while larger companies with 1000+ employees were responsible for 20.7% of job losses.
Middle market American leadership teams generally are innovators. The innovation we see on the ground is qualitative and anecdotal, but indicates a growing desire on the part of a subset of the middle market to begin to play some offense. This is not the sort of data that quickly moves through the labyrinth of channels used to generate state and federal government data that drives Wall Street and dominates media outlets; we expect that our qualitative observations will be validated in quantitative data by Q1 2010.
For instance, smaller companies are already taking the initiative to pick up the pieces of fallen “humpty dumpty” corporations. Many individuals displaced by larger organizations’ job-shedding are choosing to leverage their experience and relationships and start their own organizations which, in turn, will hire more employees. One example is a newly founded consulting firm that identifies orphan pharmaceutical compounds within large pharmaceutical companies, and connects them with middle-market companies whose cost structures are in line with the orphan compounds’ expected revenues.
Additionally, middle-market businesses are beginning to play economic offense in two other meaningful ways:
1. Private equity funds and family business owners are pursuing add-on acquisitions and other mergers — targeting either weaker competitors or complimentary product lines/offerings. Jeffrey Ferro, COO of regional accounting firm Parente Randolph, confirms: “We see an opportunity to solidify our market position and expand into tangential geographic and service offerings; merger and acquisition opportunities are finding us and our recent merger announcement with Beard Miller is indicative of the types of situations we are confidently pursuing.”
2. Middle-market companies are taking the initiative to upgrade the talent on their team. “The competitive environment has gotten significantly tougher,” says Reinhold Hesse, CEO of Massachusetts-based Extrusion Technology. “We have great products, good people and good positioning, but have to up our game to stay competitive. We’ve hired talent in a Chief Marketing Officer and are in the process of hiring a Chief Finance Officer.”
The missing ingredient in the middle-market’s promise for driving economic recovery remains the bank underwriter. Since the initial subprime crisis in August 2007, commercial lenders have not significantly engaged with middle-market businesses — even with groups demonstrating strong cash flow, competitive positions and products/services. The velocity of the middle market’s ability to grow and therefore to generate the tailwind of job creation rests with the confidence of American business leaders and within the memos coming out of local banks’ executive suites and underwriting departments. One motivating factor may be the pressure on individual bankers to deploy capital in order to get their (government-OK’ed) bonus.
The other significant wild card in the ability of middle-market American firms to get on with innovation and growth is the government’s changing role within the DOL, IRS, ERISA, DHS, and other agencies – an outcome that could carry significant positive or negative business implications. The best scenario for middle-market progression is gridlock in Washington, as well as delivery on a pledge George Bush couldn’t keep: “And the Congress will push me to raise taxes, and I’ll say no, and they’ll push, and I’ll say no, and they’ll push again, and I’ll say to them, “Read my lips: no new taxes.”