THE MARKET THAT MOVES AMERICAFINDINGS FROM THE NCMM’S Q3 '17 INDICATOR SURVEY

T h o m a s A . S t e w a r t , E x e c u t i v e D i r e c t o rT h e N a t i o n a l C e n t e r f o r t h e M i d d l e M a r k e t

Q3'17 MIDDLE MARKET INDICATOR | ACG WEBINAR | October 25, 2017

THE MIGHTY MIDDLE MARKET2

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THE NATIONAL CENTER FORTHE MIDDLE MARKET

www.middlemarketcenter.org

The National Center for the Middle Market is a collaboration between The Ohio State University’s Fisher College of Business, SunTrust Banks Inc., Grant Thornton, and Cisco Systems. 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.

MIDDLE MARKET RESEARCH & DATA EXPERTISE & OUTREACH

EDUCATION

Quarterly Middle Market Indicator

Research and Expert Perspectives

Interactive Benchmarking Tools

Executive Programs

Webinars

Share Research & Discuss Trends

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THE MIDDLE MARKET INDICATOR

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MIDDLE MARKET INDICATOROVERVIEW

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A Quarterly National Survey Cut by Geography and Industry

Q3'17 MIDDLE MARKET INDICATOREXECUTIVE SUMMARY

• THE MIDDLE MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN REVENUE GROWTH AND JOB CREATION, WITH GROWTH ABOVE HISTORICAL AVERAGES

• THE MIDDLE MARKET CONTINUES WITH RECORD HIGH JOB CREATION AND REVENUE GROWTH, FUELED IN PART BY A SURGE IN M&A ACTIVITY

• EXPECTATIONS FOR GROWTH AND JOB CREATION IN THE COMING YEAR ARE ALSO STRONG

• CONFIDENCE IN THE U.S. AND LOCAL ECONOMIES REMAIN NEAR RECORD HIGHS; GLOBAL CONFIDENCE HAS REBOUNDED

Source: 3Q’17 Middle Market Indicator Report

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Q3'17 U.S. MIDDLE MARKETEXECUTIVE SUMMARY

CAPITAL INVESTMENT

70%WILL INVEST

CONFIDENCE

74%GLOBAL ECONOMY

83%NATIONAL ECONOMY

88%LOCAL ECONOMY

REVENUE GROWTH

7.0%PAST 12 MONTHS

6.0%NEXT 12 MONTHS

EMPLOYMENT GROWTH

6.4%PAST 12 MONTHS

4.7%NEXT 12 MONTHS

1.2%SMALLBUSINESS

2.8%LARGEBUSINESS

Source: 3Q’17 Middle Market Indicator Report7

4.37%S&P 500

SURVEY IN FIELD SEPT. 4-15, 2017

Q3'17 MIDDLE MARKET INDICATORREVENUE GROWTH

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

U.S. MIDDLE MARKET S&P 500 PE-OWNED8

Source: 3Q’17 Middle Market Indicator Report*3Q numbers include only companies who have reported.

PAST 12 MONTHS

7.0%U.S. MIDDLE MARKET

9.3%PE-OWNED FIRMS

4.37%S&P 500*

PERFORMANCE GAINS ARE WIDE AND DEEP

Source: 3Q ‘17 Middle Market Indicator Report9

3Q 2017 3Q 2016

Performance improved 68% 60%

Performance was unchanged 27 34

Performance deteriorated 5 6

Q3'17 MIDDLE MARKET INDICATORINDUSTRY REVENUE GROWTH

Source: 3Q’17 Middle Market Indicator Report10

9.8%

6.7%

6.9%

3.2%

7.0%

2.9%

9.2%

6.1%

5.8%

5.3%

4.9%

6.5%

7.2%

8.6%

9.2%

6.5%

Q3'17 MIDDLE MARKET INDICATORREVENUE 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

6.0%U.S. MIDDLE MARKET

7.9%PE-OWNED FIRMS

NEXT 12 MONTHS

Source: 3Q’17 Middle Market Indicator Report11

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

U.S. MIDDLE MARKET LARGESMALL PE-OWNED FIRMS

PAST 12 MONTHS

6.4%U.S. MIDDLE MARKET

8.1%PE-OWNED FIRMS

Q3'17 MIDDLE MARKET INDICATOREMPLOYMENT GROWTH

1.2%SMALLBUSINESS

2.8%LARGEBUSINESS

Source: 3Q’17 Middle Market Indicator Report12

Q3'17 MIDDLE MARKET INDICATORINDUSTRY EMPLOYMENT GROWTH

Source: 3Q’17 Middle Market Indicator Report13

7.3%

4.8%

5.2%

9.1%

6.9%

7.0%

3.1%

4.7%

4.0%

4.4%

3.7%

5.3%

5.3%

7.5%

6.3%

5.7%

Q3'17 MIDDLE MARKET INDICATOREMPLOYMENT GROWTH FORECAST

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

U.S. MIDDLE MARKET PE-OWNED FIRMS

4.7%U.S. MIDDLE MARKET

6.0%PE-OWNED FIRMS

NEXT 12 MONTHS

Source: 3Q’17 Middle Market Indicator Report14

CONFIDENCE, INVESTMENT PLANS, AND CHALLENGES

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Q3'17 MIDDLE MARKET INDICATORECONOMIC CONFIDENCE

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20%

30%

40%

50%

60%

70%

80%

90%

3Q '1

24Q

'12

1Q '1

32Q

'13

3Q '1

34Q

'13

1Q '1

42Q

'14

3Q '1

44Q

'14

1Q '1

52Q

'15

3Q '1

54Q

'15

1Q '1

62Q

'16

3Q'1

64Q

'16

1Q'1

72Q

'17

3Q'1

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GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY

U.S. ECONOMY

83%86% PE-OWNED

LOCAL ECONOMY

88%87% PE-OWNED

GLOBAL ECONOMY

74%76% PE-OWNED

Source: 3Q’17 Middle Market Indicator Report

_____________________________________Confidence Is Very Strong Across the Board

Q3'17 MIDDLE MARKET INDICATORCAPITAL INVESTMENT PLANS

40%

45%

50%

55%

60%

65%

70%

75%

80%

3Q '1

24Q

'12

1Q '1

32Q

'13

3Q '1

34Q

'13

1Q '1

42Q

'14

3Q '1

44Q

'14

1Q '1

52Q

'15

3Q '1

54Q

'15

1Q '1

62Q

'16

3Q'1

64Q

'16

1Q'1

72Q

'17

3Q'1

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PE-OWNED U.S. MIDDLE MARKETSource: 3Q’17 Middle Market Indicator Report

_________________Firms Plan to Invest

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COMPANIES FEEL COSTS ARE UNDER CONTROL AND PROFIT MARGINS SAFE

2.5%

2.8%

3.1%2.4% 2.6%

1.9% 2% 2.6% 3.1% 3.4%

5.9%

3.2% 3.2%

2.2%

2.3%

2.3% 1.7% 1.6% 1.2% 1.1% 2.3% 2.1% 2.1%

4.3%

2%2.8%

0%

5%

10%

15%

20%Profit Margins Cost Structure

Expected Change in

Q3'17 MIDDLE MARKET INDICATORCHALLENGES

BUSINESS AND STAFF/EMPLOYEES ARE TOP OF MIND FOR MIDDLE MARKET LEADERS

Source: 3Q’17 Middle Market Indicator Report19

41%25%25%

18%18%

BUSINESSGOVERNMENTCOMPETITION

COSTSECONOMY

65%

59%

22%

BUSINESS

STAFF/EMPLOYEES

COSTS

STAFF/EMPLOYEES

BUSINESS

COSTS21%

48%

51%

BUSINESS

GOVERNMENT

COMPETITION

ECONOMY

COSTS 14%

16%

22%

22%

34%

HELP WANTED:THE TALENT GAP

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ACROSS THE COUNTRY, FIRMS REPORT HIRING DIFFICULTIES

Share of U.S. employers reporting hiring difficulties

32%

45%

20162015Source: Manpower Group, “2016-2017 Talent Shortage Survey,” 2017. Career Builder estimate

Hiring and retaining qualified employees is the top concern for CFOs for the first time in 21 years … over government policies, cost of benefits, economic uncertainty, data security.

— Duke University Fuqua School of Business Quarterly Survey,

Q2 2017

MIDDLE MARKET COMPANIES FEEL THE TALENT PINCH INTENSELY

Of middle market executives consider the ability to attract, train, and retain talent somewhat/highly challenging.

77%Of middle market executives feel they do not have a sufficient number of people to fill key leadership positions.

49%

Of middle market executives struggle to attract people for top-level management positions.

31%Of middle market executives say that a lack of talent is constraining their growth.

37%

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ALMOST ALL INDUSTRIES FEEL TALENT-CONSTRAINED

Total Middle Market

ServicesManu-fact-uring

Wholesale Trade

Retail Trade

Con-struction Financial

ServicesHealthcare

Yes 37 46 44 20 29 46 33 49

No 63 54 56 80 71 54 67 51

Source: NCMM and Brookings: Help Wanted, 2017

LACK OF TALENT CONSTRAINING ABILITY TO GROW

THE TOP WORKFORCE CHALLENGES FOR MIDDLE MARKET COMPANIES

Source: NCMM Middle Market Indicator 2Q 2017

Candidates lack necessary skills 44%Competition from other employers 40%Low number of applicants 39%Lack of work experience 32%Outside budget range 30%Lack needed credentials 25%

THE SHARE OF JOBS REQUIRING HIGH AND MEDIUM SKILLS HAS SKYROCKETED

Source:Brookings

5523

40

48

530

2002 2016

Low Medium High

Share of U.S. employment by digital skill level

MOST IN DEMAND: FULL-TIME OPERATIONS EMPLOYEES

Source: NCMM Middle Market Indicator 2Q 2017

New Hires by Function

69%

47%

36%

25%

21%

18%

8%

74%

9%

10%

3%

3%

1%

Operations

Marketing and sales

IT

Manufacturing

Human resources

Finance

Other

Full time

Part time

Hourly

Contractor

Temporary/seasonal

Other

New Hires by Employee Type

TALENT PLANNING AND ITS IMPORTANCE

How well and what impactHow Important? Total Middle Market 10%+ Growth

Extremely/Very 71% 81%Somewhat 21% 15%Not very / Not at all 8% 4%How Well Done?

A 14% 22%B 46% 47%C 28% 23%D 11% 6%F 2% 2%

27

43%

Source: NCMM Mastering Talent Planning 2017

69%

FIVE STEPS COMPANIES CAN TAKE ON THEIR OWN

Source: NCMM and Brookings: Help Wanted, 2017 *Percentage of executives citing as one of top three challenges

Partner: Use educational and training organizations to upskill employees and find new ones

(just 30% do)

Training: Build it into daily routines and work (45% train

“only when needed”)

Recruiting: Have an ongoing process (59% recruit only when

they have an opening)

Internships: Fewer than half of manufacturers offer, vs. 65% in

healthcare

Career pathing, mentoring: Set a process for advancement

(only 39% do)

Only 35% of vacancies are filled from within

BEYOND THE MIDDLE MARKET: FIVE WORKFORCE AGENDA ITEMS

GING

MMIGRATION

BERIZATION PIOIDS

DUCATION

MIDDLEMARKETCENTER.ORG30